This quarter there has been a spate of industry downgrades, but I decided to hang in to see how the newest game product (Tianxia) works out in December.

But traders ought to read as much as possible about this company because it is the highest risk one in the Cara 100. So, I am making a couple industry research reports available here.

Re NetEase.com Inc, Rochdale Research states:

COMPANY DESCRIPTION

NetEase.com Inc., founded in 1997, operates an interactive online and wireless community in China. The company is a provider of Chinese language content and services through its online games, wireless value-added services and Internet portal businesses. The Company's revenues are primarily generated from its fee-based premium services like online gaming and wireless services as well as from selling advertisements on its Websites. The Company's online games business focuses on offering multi-player online role-playing games (MMORPGs) to the Chinese market.

The Company competes with Shanda Interactive Entertainment Limited, Softworld, Joypark, Actoz, Ncsoft, The9.com and Waei International.

For the quarter ending September 30, 2006, NETEASE.COM INC -ADR had revenue of $ 69.41 MM compared with $ 57.12 MM in the same quarter of 2005.

INVESTMENT CONSIDERATIONS

• We rate NETEASE.COM INC -ADR a HOLD. Our estimated "Fair Value" for the stock is $17.00. Fair Value indicates our assessment of the stock's potential over the next 12 months. While we believe the company's business model is sound, our estimate of the company's Intrinsic Value indicates that the company's stock is fairly priced at its current trading price. Current shareholders should exercise caution in adding to their position, and prospective investors should consider waiting for lower prices to initiate an investment in NETEASE.COM INC -ADR.

• We believe the company's business model is very good. We base this assessment on the company's ability to use shareholder capital to create real economic value. NETEASE.COM INC -ADR has made effective use of its assets and generally earns good returns on shareholder capital. Further, we believe that these results are indicative of a good competitive position.

Credit Suisse research highlights the recent quarter:

â—? 3Q06 dil. EPS were US$0.286, up 7% QoQ, in line with consensus. But both online game and ad business were below guidance. Net profit was US$39.8 mn or RMB314.8 mn, flat against 2Q06, yet in line with guidance owing to cost control and a lower effective tax rate.

â—? Online game revenue was down 4% QoQ, below guidance, as Fantasy ACU was down 5% QoQ, WJ2 down 12% QoQ due to ingame protest and seasonality. Fantasy will be stabilised but the game passed the peak already. NetEase will launch WJ3 in 3Q07, and will migrate WJ2 gamers to WJ3. Finally, Tianxia will be launched on open beta test in Dec 06. Despite weak brand ad
revenue, management remains positive on brand ad business. We forecast NetEase brand ad revenue growth at 29% YoY in 2007.

â—? 4Q profit guidance implied 14-19% QoQ decline. We cut our 07 dil. EPS estimate by 3% and our target price from US$18 to US$17. Trading at 12.5x ex-cash PER, valuation is undemanding. We maintain our NEUTRAL rating. Tianxia open beta test performance in Dec 06 is critical to NetEase share price in next few months.

Summary from Credit Suisse:

Research reports:

Download CS Nov 8 report on NTES.

Download Rochdale Nov 8 report on NTES.

NetEase.com (ADR) [GICS 45, Cara 100]
(NTES: Yahoo Finance file)
(NTES: StockChart chart)
(NTES: Investertech chart)
(NTES: ADVFN Financial Data)
(NTES: ADVFN Financial Data)