NetEase (NTES) The Most Oversubscribed listing since 2017

You’ve probably never heard of NetEase, but I bet you’ve heard of Harry Potter, Lord of the Rings or Marvel and the world’s second-largest mobile game company by revenue knows it. It also has a sideline that is expected to grow revenue at a compound annual growth rate of 31% over ten years!

NetEase (NTES) has been thriving in the Chinese gaming industry and has its eye on international expansion. It boasts an impressive catalogue of in-house developed video and mobile games, four of which sit in the top ten highest-grossing mobile games in China. To give you an idea of the size of the market, in June alone, US$1.65 billion was raked in by video game producers in China. Gaming is their business and business is booming! Not to mention NetEase’s strong research and development capability, which has a considerable list of future games in the pipeline. 

To complement their in-house games offering, NetEase has partnered with global leading game developers Blizzard and Mojang, licensing exclusive rights to publish their most popular games to the Chinese market. If you’re not into playing video games ask someone who is if they’ve heard of any the following titles – Starcraft II, World of Warcraft, Heroes of the Storm, Hearthstone, Diablo III, Overwatch or Minecraft. These are blockbuster names in gaming. The combined catalogue of in-house and popular foreign games generates a robust high margin revenue stream.

NTES Rings the NYSE Bell

NetEase is using this strong gaming cash flow to invest and expand internationally. Added firepower of US$2.7 billion was raised recently in a secondary listing in Hong Kong. (The secondary listing was 360.5 times oversubscribed. How’s that for demand! For comparison Alibaba’s HK listing was only 40 times oversubscribed.) With this added firepower NetEase plans to continue taking stakes in other gaming companies. NetEase has already taken stakes in “Pokemon Go” creator Niantic and Canadian games developer Behaviour Interactive. This strategy has been very lucrative for NetEase’s largest rival, Tencent, and should be easy to replicate.

To develop more popular titles in the global markets NetEase is collaborating with Warner Brothers Interactive Entertainment. “The Lord of the Rings: Rise of War” is currently under development and “Harry Potter: Magic Awakened” was released late last year. In-house developed games have been finding momentum in international markets, as well. The popular game“Knives Out” was the top-grossing game in Japan in May.

Although NetEase derives the bulk of its revenue from gaming it is by no means a one-trick pony. Having completed a recent initiative to streamline the business and increase margins NetEase has focused on three business segments, Gaming, NetEase Cloud Music, and Youdao.

NetEase Cloud Music is a leading music streaming service in China. It boasts 140 million active monthly users and is very popular due to its excellent user experience. It boasts an expansive catalogue of music and artists including 160,000 independent musicians. In addition, yesterday, a multi-year licensing agreement with Universal Music Group was announced. The agreement gives NetEase Cloud Music subscribers full access to Universal’s full collection of recordings. Recent investments by Alibaba and Yunfeng have added cash to leverage an already strong position.

The final piece in the NetEase puzzle is Youdao. Youdao is an online education product that serves adults and K-12 students. It has been a major beneficiary of the recent need for e-learning solutions created by the pandemic shutdowns. Revenue rose 139.8% year over year in the first quarter and is expected to continue to rise at a CAGR of 31% through 2029. Youdao listed in the US in October 2019 under the ticker symbol “DAO” at US$17 per share. It is currently trading for US$42.49, a 250% return, and looks poised to continue running.

NetEase has and continues to develop popular games for the Chinese Market and is making the right moves to expand successfully in the international market. With recent wins in their streaming music business and Youdao adding a promising additional revenue stream, NetEase has put together the pieces to be a long-term winner.