About this Blog

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.

Sunday, June 14, 2009

Conflicting signals from NTES

One can find my previous NTES related article below:

I am still going to go through every NTES’s new game development, as some of you requested. But in the last few days there are two very important news stories that I shall address.

First, from the following two articles:
CEO of NTES sold 2 million shares of stocks. It corresponds to 1.6% of the outstanding share capital and just about one day's worth of trading volume. It definitely is a lot of money. But the CEO still have a lot of shares in NTES, he held 46.3% of the company as of March 2008.

This is definitely not good news. This could be neutral in that he just needed the money now. Maybe he needs the money to start his pig farm. Maybe he needs the money to bride some Chinese government department. It could be many reasons why he just need the money now.

It is also equally possible that he felt NTES’s price represents a top (either short term or long term) and he is trying to cash out before the stock goes down.

I don’t know which case it is. But both represent legitimate cases.

In another development, NTES is currently embroiled in an ugly rumor. A blog reports that a disgruntled NTES employee is accusing NTES of neglect XYQ in favor of its hot new game, Blizzard’s WOW. See the following article:

Of course, it makes no sense. NTES got majority of its revenue from XYQ. Even with the addition of WOW, NTES will get more revenue from XYQ than from WOW. NTES is definitely not going to throw away its cash cow in XYQ.

In China, different game companies sling outrageous accusations against each other (through anonymous sources). This is no different. This accusation is so outrageous that it is not going to stick. But it does require announcement from NTES to dispel the rumor. Sure enough, the CEO of NTES made an official announcement the next day, on 6/11/2009. The following is the announcement from the CEO of NTES:
The announcement said that the rumor is completely false. It turns out that this employee doesn’t even exist. So the story ends there. It has no effect on the stock what so ever. So why am I mentioning about this story. Well, I found gold nugget in the most unlikely places. I just found one. In the second paragraph of his announcement, in order to emphasize how ridiculous the accusation is, he said the following:

“…..I want to tell everybody, at this point in time, every products of our gaming department are at their peak. Our old products are growing stably. In addition, our new products are beyond our expectation. ….”

I find the above statement extremely significant. The CEO of NTES is very media shy. Every statements he had made regards NTES had proven to be true. He would have never make statement like this except for this exceptional case. NTES made $114 millions in 1st quarter 2009. The analysts’ estimate for the 2nd quarter is $120 millions. Therefore, analyst’s estimates only reflect the stable growth of the old games. It doesn’t capture the unexpected strong growth of the new games.

On the surface, this contradicts with the first story (the selling of NTES’s CEO stocks represents a temporary top). Actually, it doesn’t have to be.

I know exactly what the NTES’s CEO means about their new product(s) is(are) beyond expectation. TX2 and XYW are growing fine. But the game he is talking about is the new FF.

I talked about this game in my last three articles. The popularity of this game definitely caught NTES by surprise (Interestingly, I was not surprised). As I mentioned in my previous articles, NTES provided very little marketing prior to the commercialization of the game. After the game goes commercial, as the game becoming more and more popular, NTES is doing major marketing for this game right now.

Starting this week, NTES is putting ads on all major game verticals for new FF. It is sending all its ground sales teams to internet cafes to promote this game.

This represents major expenditure that was not expected. Since new FF is an item-based game. It is not going to starting to make major money until the third quarter. The net effect is in the second quarter, there will be more expense for NTES. On top of that, the majority of WOW’s expense will probably occur in the second quarter.

The net result is there will be big expenses in the second quarter. At this point, no Wall Street analyst mentioned anything about the new FF. The great success of new FF is completely under everybody’s radar screen. Thus, nobody is going to know about this extra expense.

In the intermediate term (starting 3rd quarter 2009) and long term, NTES is going to surprise everybody on the upside. But in the short term, there might be negative surprise in that there might be more expenses than expected for the 2nd quarter.

In a nutshell, by combining the two stories, we can make the following conclusions. If the CEO of NTES just wants some money now, the stock of NTES will have great upside surprise in the intermediate and long term. If the CEO of NTES sold his stock because he is worry about expenses in the 2nd quarter, the stock of NTES will have temporary top in the short term but have great upside surprise in the intermediate and long term.

Thus, in the short term, it is either neutral or negative. But in the long term, this stock is tremendously undervalued.


Anonymous said...

Hi, HenryC, I only find your blog recently but find it extremely informative.

For William's sale of US$73m, my view is he needs money to pay for his accumulator loss. I also think he think NTES stock is at a top. But, he may not be correct.

As for William's words, I don't know why you say each of his words were made true. I remember he used to say TX2 will become a million PCU game. He also said FFF will be a hit game back in 2004. Now 5 years later I don't know if he cares about making that same prediction again.

William works very hard. And he is down to earth, for sure. But it doesn't mean everything he says will pan out. He just works very hard to make it happen.

Anonymous said...

BTW, HenryC, do u know why FFF does not have a section on 17173? Seems very strange. Thx

HenryC said...

Thanks for your kind words. Let me address your questions one at a time.

William Ding did made the prediction that TX2 will become a million PCU game a year ago.

But there is a big difference between prediction and announcing the state of the company.

He is not a god and he is not always right in predicting the future. But he is the CEO of Netease and he ALWAYS knows the state of his company.

In this case, he is stating the current state of his company.

HenryC said...

Netease had a major fallout with Sohu about two years ago. It was over TX2.

The story to too long to talk about it here. If I have time, I might write a story about it later.

Sohu's 17173 had blockade against all NTES's games.

By the way, that feud had been resolved about two days ago.

The reason, NTES is marketing new FF on 17173. Go to 17173.com, you will see the ads for the new FF. As a result, you will also see a special section on new FF in 17173.

Actually, you will see ads for new FF over all major internet gaming sites and internet cafes.

Anonymous said...

Do you know if NTES is getting GAPP approval on WOW? Thanks

Steve said...

Hi, can you comment on the status of TF Online? Do you know whether NTES has received a license to operate this game from Hasbro? If not, wouldnt this alarm you since ATVI has worldwide game rights to the Transformers IP and they are also now partners with NTES on WoW? This game could be blatant copyright infringement by NTES and cause a tremendous rift between ATVI/Hasbro and NTES for not licensing this IP before developing this game.

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