Money Matters - Simplified

NetEase Plays to Win in China

 Leave it to NetEase.com (Nasdaq: NTES) to show the smaller online gaming companies how it's done.

The Chinese Web-based gaming pioneer came through with another monster quarter last night. Net revenue soared 61% to $209.3 million, with net income climbing 49% to $0.67 per ADS. Analysts were only banking on a profit of $0.63 for each depositary share with a top line of $202.7 million.

 

 It's easy to see why the pros undershot reality. This hasn't been a scintillating sector outside of NetEase. Earlier this week, Giant Interactive (NYSE: GA) boosted its net quarterly revenue by a mere 17%, and Perfect World (Nasdaq: PWRD) grew even slower. Last month, Changyou.com (Nasdaq: CYOU) clocked in with a 25% increase in total revenue.

NetEase has a big advantage. It recently became the licensee of Activision Blizzard's(Nasdaq: ATVI) World of Warcraft in China, and the Wrath of the Lich King expansion pack was just released in August. This may not translate into the thick margins of its proprietary online games -- note how earnings didn't grow as quickly as NetEase's top line -- but it's clearly incremental and ambassadorial.

Somebody's going to do it -- so why not NetEase?

However, NetEase is rocking along nicely regardless of Activision Blizzard's fantasy role-playing juggernaut. Despite being several years old, its flagship Fantasy Westward Journeyonline game is as popular as ever. There's also some healthy online advertising sizzle here.

Before it became a major player in China's online gaming realm, NetEase was best known for its mainstream online portal. It's doing quite well, with online advertising revenue growing 88% over last year's third quarter. It only represents 11% of NetEase's total revenue, but it clearly outpaced the 62% top-line growth from its bread-and-butter online gaming business.

NetEase closed out the quarter with $1.3 billion in cash on its balance sheet, or roughly $10 per ADS.

One has to wonder why NetEase is stockpiling so much money. It would be nearly enough for it to buy its choice of Giant Interactive, Shanda Games (Nasdaq: GAME), Perfect World, or Changyou.com. It can even set its sights outside of China. A massive share buyback or acquiring a handful of promising upstarts would be other reasonable uses for its growing vault.

Then again, when you're already the best, what's the point in acquiring the best? It's hard to fault NetEase. No one in China plays the gaming game any better.

© 2010 UCLICK L.L.C.