2 Reasons Why This is a Top Chinese Stock

Today we're going to cover a company that you may have never heard of before. The stock is called: NetEase.

NetEase is a Chinese tech company that develops PC & mobile games for its users that are primarily located in Asia.

While the company may sound unfamiliar, through partnerships with major international publishing studios, they've released games like Harry Potter, Lord of the Rings, and more!

And while this company has been growing well for the last few years, they just made a major acquisition that's going to change the course of their history forever.

So, let's dive into what it was and what it means for their stock price below 👇 

NetEase Overview:

While the acquisition is extremely promising, we want to preface this entire section with the fact that an acquisition is never the reason we'd invest in a company.

While it's getting us very excited about their long-term possibilities, we need to see that a company has a solid base before even considering an investment. And in the case of NetEase, that base is extremely promising.

While we want to spend the bulk of this analysis on their acquisition, here are some very high-level data points that have us excited about their core business.

1. NetEase widely beat expectations at its last earnings call. Some of the highlights include:

   • NetEase grew operating profits by 28% YoY (year over year). While that's impressive by itself, this was 10% better than what expectations were set at.

   • PC gaming revenue grew by 41% year over year. Beating expectations as well, PC gaming revenue grew by over 30% each quarter for the last 4 quarters. This is extremely strong revenue growth for what is already a large segment of their business (20% of total revenues).

   • Total gaming revenues grew by over 18% year over year. While 18% growth is still very strong, what's even more impressive is that this growth came in the face of a poor macro environment. What we mean by that is that gaming revenue in China overall fell by 15% in the last year in the face of their re-opening process. Once they get back to "normal" these macro pressures should abate -- leaving them with tailwinds in 2023 and beyond!

2. They have some massive game releases coming out this summer and through the rest of the year that should make revenue growth all but impossible. Looking at the games more closely we see that Diablo, Naraka, Harry Potter, & Infinite Lagrange will carry them forward.

And now that you understand slightly more about their core business, let's dive into the whole point of this analysis: The Acquisition.

NetEase's Acquisition:

Hopefully the suspense is built up by now, because it is definitely worth it!

Another company you may have never heard of, NetEase just announced the acquisition of Quantic Dream.

At a high level, the folks over at Quantic Dream are held in an extremely high regard for the technology and games they've built. Some of their most successful releases are: Heavy Rain, Beyond: Two Souls, and Detroit: Become Human.

Mostly PC-based games, Detroit: Become Human, surpassed 6.5M copies sold on PC and PS4 worldwide since 2018. On Bilibili (akin to the YouTube of China), the most popular video on Detroit: Become Human has over 15M views!

But outside of the success of some of their recent launches, the company's financials are doing well too -- with their most recent numbers coming in at over $57M in annual revenue.

But the reason this acquisition is so significant is because this is the first major acquisition NetEase has made outside of Asia. Buying this company will mark their first step towards becoming an international player -- helping them expand into Europe & other new geographies!

Looking more closely at the numbers we see that their revenues from outside of Asia only represents 10% of their total revenues today.

But after acquiring this massive studio, we're projecting for that number to grow from 10% to over 30% in only just a few year's time!

That's because we're expecting NetEase's amazing game development capabilities to form strong synergies with Quantic Dreams and other partner studios.

NetEase's Valuation:

So when combining together their current business with all of their future prospects we see that the stock is actually cheaper than what you might anticipate.

Right now they're trading at roughly 17x next year's P/E and we believe this number has them undervalued.

With current and future titles set to carry them through the end of this year, we believe Q3 numbers and H2 numbers will be stronger than anticipated.

Pair that with the next release of Harry Potter in 2023, and we think NetEase will be in a strong position to grow its share price over the next 12 months!

However, similar to many of the stocks in the tech industry today, NetEase is subject to the same pressures facing the rest of the industry.

While this stock is unlikely to break out in the short term, like many of our picks, this is a name we absolutely love in the long run!

Price Target: $112 (27% upside from current price)

Current Price: $88

Target Date: Q3 2023

Rating: Overweight

Ticker: NTES

Market Cap: $57B

Dividend Yield: 1.77%