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NetEase

Nasdaq:NTES
Snowflake Description

Outstanding track record with excellent balance sheet.

The Snowflake is generated from 30 checks in 5 different areas, read more below.
NTES
Nasdaq
$47B
Market Cap
  1. Home
  2. US
  3. Software
2017/12/16
Company description

NetEase, Inc. operates an interactive online community in the People’s Republic of China. More info.


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3 Month History
NTES
Industry
5yr Volatility vs Market

Value

 Is NetEase undervalued based on future cash flows and its price relative to the stock market?

Value is all about what a company is worth versus what price it is available for. If you went into a grocery store and all the bananas were on sale at half price, they could be considered undervalued.
INTRINSIC VALUE BASED ON FUTURE CASH FLOWS
Here we compare the current share price of NetEase to its discounted cash flow analysis.value.

The discounted cash flow value is simply looking at what the company is worth today, based on estimates of how much money it is expected to make in the future.

How is this discounted cash flow calculated?

  • The current share price of NetEase is above its future cash flow value.
Often investors are willing to pay a premium for a company that has a high dividend or the potential for future growth.
PRICE RELATIVE TO MARKET
We can also value a company based on what the stock market is willing to pay for it. This is similar to the price of fruit (e.g. Mangoes or Avocados) increasing when they are out of season, or how much your home is worth.

The amount the stock market is willing to pay for NetEase's earnings, growth and assets is considered below, and whether this is a fair price.
Price based on past earnings
Are NetEase's earnings available for a low price, and how does this compare to other companies in the same industry?
  • NetEase is good value based on earnings compared to the US Internet industry average.
  • NetEase is overvalued based on earnings compared to the US market.
Price based on expected Growth
Does NetEase's expected growth come at a high price?
  • NetEase is poor value based on expected growth next year.
Price based on value of assets
What value do investors place on NetEase's assets?
  • NetEase is overvalued based on assets compared to the US Internet industry average.
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Value checks
We assess NetEase's value by looking at:
  1. Is the discounted cash flow value less than 20%, or 40% of the share price? (2 checks) ( Click here or on bar chart for details of DCF calculation. )
  2. Is the PE ratio less than the market average, and/ or less than the Internet industry average (and greater than 0)? (2 checks)
  3. Is the PEG ratio within a reasonable range (0 to 1)? (1 check)
  4. Is the PB ratio less than the Internet industry average (and greater than 0)? (1 check)
  5. NetEase has a total score of 1/6, see the detailed checks below.

    Note: We use GAAP Earnings per Share in all our calculations including PE and PEG Ratio.
    Note 2: PEG ratio is based on analysts EPS growth expectations in 1 year (-1.27%).

    Full details on the Value part of the Simply Wall St company analysis model.
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Discounted cash flow (2 Stage Free Cash Flow to Equity)

The calculations below outline how an intrinsic value for NetEase is arrived at by discounting future cash flows to their present value. We use analyst's estimates of cash flows going forward 5 years.

See our documentation to learn about this calculation.

5 year cash flow forecast

Present value of next 5 years cash flows:
CN¥61,767

Terminal Value

Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)

Terminal Value = CN¥20,296 × (1 + 2.47%) ÷ (10.05% – 2.47%)

Terminal value based on the Perpetuity Method where growth (g) = 2.47%:
CN¥274,205

Present value of terminal value:
CN¥169,837

Equity Value

Equity Value (Total value) = Present value of next 5 years cash flows + terminal value
CN¥231,604 = CN¥61,767 + CN¥169,837

Value = Total value / Shares Outstanding (CN¥231,604 / 131)

Discount to Share Price

Value per share (CNY): CN¥1764.48

Exchange rate CNY/USD = 0.151

Value per share (USD): $266.97

Current discount (share price of $355.79): -33.27%



Estimate of Discount Rate

The discount rate, or required rate of return, is estimated by calculating the Cost of Equity.

Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)

Discount rate = 10.05% = 2.47% + (1.007 * 7.53%)



Estimate of Bottom Up Beta

The Levered Beta is the Unlevered Beta adjusted for financial leverage. It is limited to 0.8 to 2.0 (practical range for a stable firm). Note the market value of equity is used not the book value ($46,784,713,804).

Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity))

1.007 = 0.995 (1 + (1- 35%) (1.85%))

Levered Beta used in calculation = 1.007



Assumptions
  1. The risk free rate of 2.47% is from the 10 year government bond rate in USD.
  2. The bottom-up beta is estimated by analysing other companies in the same industry.
  3. The Equity Risk Premium is calculated by subtracting the risk free rate from the market return premium (7.53%) (source: Buffet).
  4. The dividend discount model is automatically used for companies in the following industries: Banks, Insurance, Real Estate Investment Trusts (REITs), Diversified Financial Services and Capital Markets.

Future Performance

 How is NetEase expected to perform in the next 1 to 3 years based on estimates from 30 analysts?

The future performance of a company is measured in the same way as past performance, by looking at estimated growth and how much profit it is expected to make.

Future estimates come from professional analysts. Just like forecasting the weather, they don’t always get it right!
Annual Growth Rate
15.4%
Expected annual growth in earnings.
Earnings growth vs Low Risk Savings
Is NetEase expected to grow at an attractive rate?
  • NetEase's earnings growth is expected to exceed the low risk savings rate of 4.5%.
Growth vs Market Checks
  • NetEase's earnings growth is expected to exceed the US market average.
  • NetEase's revenue growth is expected to exceed the US market average.
Annual Growth Rates Comparison
Analysts growth expectations
Super high growth metrics
High Growth Checks
  • NetEase's earnings are expected to grow by 15.4% yearly, however this is not considered high growth (20% yearly).
  • NetEase's revenue is expected to grow by 18.2% yearly, however this is not considered high growth (20% yearly).
Past and Future Earnings per Share
The accuracy of the analysts who estimate the future performance data can be gauged below. We look back 3 years and see if they were any good at predicting what actually occurred. We also show the highest and lowest estimates looking forward to see if there is a wide range.
Performance in 3 years
In the same way as past performance we look at the future estimated return (profit) compared to the available funds. We do this looking forward 3 years.
  • NetEase is expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be above 20%.

Improvement & Relative to industry
  • Performance (ROE) is expected to be above the current US Internet industry average.
  • A decline in NetEase's performance (ROE) is expected over the next 3 years.
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Future performance checks
We assess NetEase's future performance by looking at:
  1. Is the annual earnings growth rate expected to beat the low risk savings rate, plus a premium to keep pace with inflation?
  2. Is the annual earnings growth rate expected to beat the average growth rate in earnings of the US market? (1 check)
  3. Is the annual revenue growth rate expected to beat the average growth rate in revenue of the US market? (1 check)
  4. Is the annual earnings growth rate expected to be above 20%? (1 check)
  5. Is the annual revenue growth rate expected to be above 20%? (1 check)
  6. Is the Return on Equity in 3 years expected to be over 20%? (1 check)
Some of the above checks will fail if the company is expected to be loss making in the relevant year.
NetEase has a total score of 4/6, see the detailed checks below.

Note 1: We use GAAP Net Income Excluding Exceptional Items for our Earnings in all our calculations.

Full details on the Future part of the Simply Wall St company analysis model.

Past Performance

  How has NetEase performed over the past 5 years?

The past performance of a company can be measured by how much growth it has experienced and how much profit it makes relative to the funds and assets it has available.
Past earnings growth
Below we compare NetEase's growth in the last year to its industry (Internet).
Past Earnings growth analysis
We also check if the company has grown in the past 5 years, and whether it has maintained that growth in the year.
  • NetEase's year on year earnings growth rate has been positive on average over the past 5 years.
  • NetEase's 1 year earnings growth exceeds its 5 year annual average (29.9% vs 25.5%)
  • NetEase's earnings growth has exceeded the US Internet industry average in the past year (29.9% vs 7.4%).
Earnings and Revenue History
NetEase's revenue and profit over the past 5 years is shown below, any years where they have experienced a loss will show up in red.
Performance last year
We want to ensure a company is making the most of what it has available. This is done by comparing the return (profit) to a company's available funds, assets and capital.
  • Strong return on shareholders funds (ROE > 20%) last year.
  • NetEase performed above the US Internet industry average based on Return on Assets (ROA) last year.
  • Performance based on Return on Capital Employed (ROCE) has improved significantly over 3 years.
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Past performance checks
We assess NetEase's performance over the past 5 years by checking for:
  1. Has earnings increased in past 5 years? (1 check)
  2. Has the earnings growth in the last year exceeded that of the Internet industry? (1 check)
  3. Is the recent earnings growth over the last year higher than the average annual growth over the past 5 years? (1 check)
  4. Is the Return on Equity (ROE) higher than 20%? (1 check)
  5. Is the Return on Assets (ROA) above industry average? (1 check)
  6. Has the Return on Capital Employed (ROCE) increased from 3 years ago? (1 check)
The above checks will fail if the company has reported a loss in the most recent earnings report. Some checks require at least 3 or 5 years worth of data.
NetEase has a total score of 6/6, see the detailed checks below.

Note: We use GAAP Net Income excluding extraordinary items in all our calculations.

Full details on the Past part of the Simply Wall St company analysis model.

Health

 How is NetEase's financial health and their level of debt?

A company's financial position is much like your own financial position, it includes everything you own (assets) and owe (liabilities).

The boxes below represent the relative size of what makes up NetEase's finances.

The net worth of a company is the difference between its assets and liabilities.
Net Worth
  • NetEase is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
  • NetEase's cash and other short term assets cover its long term commitments.
Balance sheet
This treemap shows a more detailed breakdown of NetEase's finances. If any of them are yellow this indicates they may be out of proportion and red means they relate to one of the checks below.
Assets
Liabilities and shares
The 'shares' portion represents any funds contributed by the owners (shareholders) and any profits.
  • Low level of unsold assets.
  • Total debt is covered by total short term assets, assets are 10.3x debt.
Historical Debt
Nearly all companies have debt. Debt in itself isn’t bad, however if the debt is too high, or the company can’t afford to pay the interest on its debts this may have impacts in the future.

The graphic below shows equity (available funds) and debt, we ideally want to see the red area (debt) decreasing.

If there is any debt we look at the companies capability to repay it, and whether the level has increased over the past 5 years.
  • NetEase's level of debt (12.4% of total debt) compared to net worth is satisfactory (less than 40%).
  • The level of debt compared to net worth has increased over the past 5 years (0% vs 12.4% today).
  • Total debt is well covered by annual operating cash flow (233.5%, greater than 20% of total debt).
  • NetEase earns more interest than it pays.
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Financial health checks
We assess NetEase's financial health by checking for:
  1. Are short term assets greater than short term liabilities? (1 check)
  2. Are short term assets greater than long term liabilities? (1 check)
  3. Has the debt to equity ratio increased in the past 5 years? (1 check)
  4. Is the debt to equity ratio over 40%? (1 check)
  5. Is the debt covered by short term assets? (1 check)
  6. Are earnings greater than 5x the interest on debt (if company pays interest at all)? (1 check)
  7. NetEase has a total score of 5/6, see the detailed checks below.


Full details on the Health part of the Simply Wall St company analysis model.

Dividends

 What is NetEase's current dividend yield, its reliability and sustainability?

Dividends are regular cash payments to you from the company, similar to a bank paying you interest on a savings account.
Annual Dividend Income
Dividend payments
0.18%
Current annual income from NetEase dividends. Estimated to be 1.1% next year.
If you bought $2,000 of NetEase shares you are expected to receive $4 in your first year as a dividend.
Dividend Amount
Here we look how much dividend is being paid, if any. Is it above what you can get in a savings account? It is up there with the best dividend paying companies?
  • Paying below low risk savings rate (2.25%).
  • Paying below markets top dividend payers (3.18%).
Annualized Historical and Future Dividends
It is important to see if the dividend for a company is stable, and not wildly increasing/decreasing each year. This graph shows you the historical rate to count toward your assessment of the stock.

We also check to see if the dividend has increased in the past 10 years.
  • Not paying a notable dividend.
  • Not paying a notable dividend.
Current Payout to shareholders
What portion of NetEase's earnings are paid to the shareholders as a dividend.
  • Not paying a notable dividend.
Future Payout to shareholders
  • Dividends after 3 years are expected to be well covered by net profit (5.1x coverage).
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Income/ dividend checks
We assess NetEase's dividend by checking for:
  1. Firstly is the company paying a notable dividend (greater than 0.5%) - if not then the rest of the checks are ignored.
  2. Current dividend yield, is there one at all, is it higher than the low risk savings rate, and is it above the top 25% of dividend payers? (2 checks)
  3. Have they paid a dividend for 10 years, and during this period has the dividend been volatile (drop of more than 25%)? (1 check)
  4. If they have paid a dividend for 10 years has it increased in this time? (1 check)
  5. How sustainable is the dividend, can NetEase afford to pay it from its earnings today and in 3 years (Payout ratio less than 90%)? (2 checks)
  6. NetEase has a total score of 1/6, see the detailed checks below.


Full details on the Dividends part of the Simply Wall St company analysis model.

Management

 What is the CEO of NetEase's salary, the management and board of directors tenure and is there insider trading?

Management is one of the most important areas of a company. We look at unreasonable CEO compensation, how long the team and board of directors have been around for and insider trading.
CEO
William Ding, image provided by Google.
William Ding
COMPENSATION CN¥0
AGE 45
TENURE AS CEO 12.1 years
CEO Bio

Mr. Lei Ding, also known as William, founded NetEase, Inc. and has been its Chief Executive Officer since November 2005. Mr. Ding founded NetEase Capital in April 2012. Mr. Ding established NetEase and Guangzhou Netease in May 1997 and has been a major force in the development of the Internet in China. He served as the Chief Architect of NetEase.com, Inc. from March 2001 to November 2005. Mr. Ding served as Acting Chief Executive Officer and Chief Operating Officer of Netease Com Inc. from June 2001 to September 2001. He served as the Co-Chief Technology Officer from July 1999 to March 2001 and Interim Chief Executive Officer of NetEase.com, Inc. from July 1999 to April 2000. During NetEase's initial two years of operation, he focused on Internet application systems. In November 1997, he introduced China's first dual language free email service to users, which was a decisive factor in the prevalence and growth of China's Internet industry. He has accumulated rich and varied experience in his professional life in the Internet world. Mr. Ding spent one year at Guangzhou Feijie Co. as a systems analyst, from June 1996 to April 1997, one year at Sybase (China) as a project manager/technical support engineer from May 1995 to May 1996 and two years at China Telecom Ningbo Branch as a technical engineer from June 1993 to May 1995. He served as the Chairman of the Board of Directors at NetEase.com, Inc. until September 2001. Mr. Ding has been a Director of NetEase, Inc. since July 1999. Mr. Ding holds a Bachelor of Science degree in Communication Technology from the University of Electronic Science and Technology of China.

CEO Compensation
  • NetEase has a new CEO, we can't show their compensation history.
Management Team Tenure

Average tenure of the NetEase management team in years:

5.9
Average Tenure
  • The average tenure for the NetEase management team is over 5 years, this suggests they are a seasoned and experienced team.
Management Team

William Ding

TITLE
Founder
AGE
45
TENURE
12.1 yrs

Onward Choi

TITLE
Consultant
AGE
46
TENURE
0.5 yrs

Charles Yang

TITLE
Chief Financial Officer
TENURE
0.5 yrs

Feng Zhou

TITLE
Senior Vice President of Search Operations
TENURE
10.3 yrs

Hui Xiaojun

TITLE
Vice President of Game Development
Board of Directors Tenure

Average tenure and age of the NetEase board of directors in years:

15
Average Tenure
53.1
Average Age
  • The average tenure for the NetEase board of directors is over 10 years, this suggests they are a seasoned and experienced board.
Board of Directors

Michael Leung

TITLE
Director
COMPENSATION
CN¥54K
AGE
63
TENURE
15.4 yrs

William Ding

TITLE
Founder
AGE
45
TENURE
18.4 yrs

Denny Lee

TITLE
Director
COMPENSATION
CN¥12K
AGE
50
TENURE
15.7 yrs

Michael Tong

TITLE
Director
COMPENSATION
CN¥610K
AGE
46
TENURE
18 yrs

Joseph Tong

TITLE
Director
COMPENSATION
CN¥54K
AGE
54
TENURE
14.8 yrs

Lun Feng

TITLE
Director
COMPENSATION
CN¥14K
AGE
58
TENURE
12.4 yrs

Alice Cheng

TITLE
Independent Non-Executive Director
COMPENSATION
CN¥67K
AGE
56
TENURE
10.5 yrs
Recent Insider Trading
  • No 3 month insider trading information.
Who owns this company?
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Management checks
We assess NetEase's management by checking for:
  1. Is the CEO's compensation unreasonable compared to market cap and profit (greater than 0.5% of the company's profit + 0.03% of market cap)? (1 check)
  2. Has the CEO's compensation increased more than 20% whilst the EPS is down more then 20%? (1 check)
  3. Is the average tenure of the management team less than 2 years? (1 check)
  4. Is the average tenure of the board of directors team less than 3 years? (1 check)
  5. NetEase has a total score of 0/6, this is not included on the snowflake, see the detailed checks below.


Note: We use the top 6 management executives and board members in our calculations.

Note 2: Insider trading include any internal stakeholders and these transactions .

Full details on the Management part of the Simply Wall St company analysis model.

Company News

Company Info

Map
Description

NetEase, Inc. operates an interactive online community in the People’s Republic of China. The company operates through Online Game Services; Advertising Services; and E-mail, E-commerce and Others segments. It offers PC-client massively multi-player online role-playing games and mobile games; and distributes its point cards to gamers. The company’s NetEase Websites provide Chinese Internet users a network of Chinese language-based online content channels, as well as community and communication services, including news content, community forums, mobile-based applications, open courses, and interactive online video. It also offers other Web-based applications and services, including a Web directory. In addition, NetEase, Inc. provides online advertising services that include banner advertising, channel sponsorships, direct email, interactive media-rich sites, sponsored special events, games, contests, and other activities; email services to individual and corporate users; and wireless value-added services. Further, the company offers e-commerce services, including Caipiao, an online service that facilitates the processing of end users’ purchase orders for lotteries; Baoxian, an online service for the sale of insurance products; Kaola that sells imported maternity and baby products, skincare and cosmetics, and other general merchandise; Yanxuan, which sells its private label products, including apparel, homeware, kitchenware, and other general merchandise; Wangyibao, an online payment platform; EaseRead, an e-reading apps; Cloud Music, an online music social network; and NetEase Cloud Classroom, an online education platform. Additionally, it provides and Internet finance services, as well as sells game-related accessories. The company was formerly known as NetEase.com, Inc. and changed its name to NetEase, Inc. in March 2012. NetEase, Inc. was founded in 1997 and is based in Beijing, the People’s Republic of China.

Details
Name: NetEase, Inc.
Ticker: NTES
Exchange: NasdaqGS
Founded: 1997
Market Cap: $46,784,713,804
Shares outstanding: 131,259,192
Website: http://www.netease.com
Address: NetEase, Inc.
Building No. 7, West Zone,
Zhongguancun Software Park (Phase II),
Beijing,
100193,
China
Listings
Exchange Symbol Ticker Symbol Security Exchange Country Currency Listed on
NasdaqGS NTES ADR EACH REPR 25 COM STK USD0.0001 Nasdaq Global Select US USD 30. Jun 2000
DB NEH ADR EACH REPR 25 COM STK USD0.0001 Deutsche Boerse AG DE EUR 30. Jun 2000
SWX NTES ADR EACH REPR 25 COM STK USD0.0001 SIX Swiss Exchange CH CHF 30. Jun 2000
WBAG NTES ADR EACH REPR 25 COM STK USD0.0001 Wiener Boerse AG AT EUR 30. Jun 2000
BMV NTES N ADR EACH REPR 25 COM STK USD0.0001 Bolsa Mexicana de Valores MX MXN 30. Jun 2000
BATS-CHIXE NTESZ ADR EACH REPR 25 COM STK USD0.0001 BATS 'Chi-X Europe' GB CHF 30. Jun 2000
Number of employees
Current staff
Staff numbers
16,598
NetEase employees.
Industry
Industry: Internet Software and Services
Sector: Software