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The purpose of this blog is for my personal use. It serves as my personal diary as I investigate Chinese internet/gaming companies for investment purpose. If you have any comments or disagreement, please give me feedbacks.

Wednesday, May 21, 2008

NTES - That $7,298,768 expense?

NTES just release its 1st quarter financial results.

Its revenue blow away the street estimate. Its gross margin hold steady. But its earning barely meets the wall street estimate.

Something is going on.

The biggest reason is the tax issue. I understand the tax issue. The company is paying the government a rate of 25% this quarter. But the real rate is most likely somewhere between 18% and 23%. If more NTES divisions can claim the preferential rate of 15%, the overall company tax rate will be closer to 18%. If less divisions can claim the high tech and new business rate of 15%, the overall tax rate will be closer to 23%.

Therefore, when the government gets its act together, a tax refund in the range of 1.3M (assuming 23% effective tax) to 4.6M (assuming 18% effective tax) will be returned to NTES. That will probably happen either in the 2nd or 3rd quarter.

But I think there is another factor at work here.

If you go to the 1st quarter financial result:

In the section "Netease.com, Inc, Unaudited Condensed Consolidated Statements of Operations", under the part "Other income (expenses)", there is a line item named "Other, net". Under this line item, there is an expense of (7,298,768) in US dollars for 1st quarter 2008.

The same mystery expense in 4th quarter 2007 is 4.3 millions, and in 1st quarter 2007 is 0.1 millions.

In other words, NTES increased this "Other, net" expense by 3 million from quarter to quarter; and it increased this expense by 7.2 millions year to year.

I am not a financial guy. Can some of you smart folks out there help me understand what is this "Other, net" expense?

1 comment:

HenryC said...


Thanks for all the helps. I think I got it.

From the 4th quarter 2007 conference call,

The Citigroup analyst asked about this question.

In addition, in the current quarter conference call, the analyst from Brean Murray, Carret & Co. asked about it again.

This is due to the foreign exchange loss.

For whatever reason, NTES has a lot of money in USD. As RMB appreciate, NTES incurs a loss. NTES says they are actively discussing what to do about these money denominated in USD. Sounds like they will try to get this thing resolved as soon as possible.

Also, the exchange rate had been very flat in the second quarter so far.

So it looks like we will not be see this in the future.

This 7.4 million would have translate to about 6 additional cents of earning per ADS.

Together with the tax refund, it would really make a big difference.


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