NetEase.com was founded in 1997 and went public on Nasdaq in 1999. It has three main revenue sources: online games (87.4% of revenues), advertising (11.2%), and value-added services (1.5%). NetEase operates popular games like Westward Journey II and licenses games from Activision Blizzard. It also runs the #1 portal in China, 163.com, and owns email/search/microblog platforms. Though profitable, NetEase faces challenges of heavy reliance on gaming revenues and increasing R&D costs in a competitive industry.

1. INSIDE
INSIDE
NETEASE
NASDAQ: NTES
ONLINE-GAMES AND WEB PORTAL
REPORT BY
iChinaStock.com profiles Chinese firms
that are publicly-listed or may list soon in
overseas markets
© July 2011 iChinaStock

2. INSIDE
SUMMARY
 NetEase.com, Inc was founded by Mr. William Lei Ding in 1997 and went
public on the Nasdaq in 1999. As of July 8, 2011, its market cap was $6.1
billion.
 NetEase has 3 revenue sources: online-game services (87.4% of
revenues), advertising services (11.2%), and value-added services (1.5%),
 Westward Journey II came into operation in 2002, and PCU (Peak
Concurrent Users) reached a record 1.19 million in May, 2010.
 NetEase gained exclusive licenses to operate the popular games World
of Warcraft and Starcraft II in China from the US-based firm Activision
Blizzard, Inc. in 2008.
 NetEase operates an Internet portal www.163.com, that ranked first in
view rates by iResearch in 2009.
 NetEase owns eight email server centers, with userbase totaling over 360
million, as of April, 2011.
 NetEase also operates self-developed search engine, Youdao, a micro-blog
and WAP mobile services.

3. INSIDE
BUSINESS STRUCTURE
NetEase
Online games
Portal
Mail
WVA
(revenues via virtual goods (revenues via ads)
(revenues via VAS and
and premium services)
ads)
(revenues via ads)
Games Games Content
Community
Search Engine
developed licensed from
Blizzard
Communicate
Micro-blog
in-house
Source: NetEase Inc. F-1 SEC Filling
Disclaimer: This is not the firm’s official structure, but rather iChinaStock’s representation of the firm’s key properties

4. INSIDE
GAMING INDUSTRY OVERVIEW
Market
Share
2010
Introduc6on
Tencent
Gaming
is
the
most
developed
industry
on
the
Chinese
NTES
Internet.
Web
games
and
MMORPGs
operate
23.7%
29.0%
GAME
predominantly
on
a
freemium
model
whereby
games
are
4.0%
6.8%
PWRD
free
to
play,
but
virtual
goods
cost
real
money.
Many
of
7.3%
15.3%
13.9%
China’s
listed
tech
companies
are
gaming
companies.
CYOU
GA
Others
A
hit-­‐driven
and
top-­‐heavy
industry
In
2009,
321
new
online-­‐games
were
produced
in
China.
NTES
Market
Share
But
less
than
5
games
reached
over
600,000
average
30.0%
concurrent
users.
25.0%
20.0%
The
6
players
held
76%
of
market
share
in
2010.
Netease
was
in
second
place
with
15.3%
of
the
market.
15.0%
10.0%
5.0%
0.0%
Challenges
2006
2007
2008
2009
2010
Games
face
increasing
R&D
costs
in
a
compeYYve
industry
where
hits
are
difficult
to
come
by.
Growth
has
leveled
off
Source: CGIGC, China Online-game Industry Report
in
recent
years..

5. INSIDE
ADVERTISING INDUSTRY OVERVIEW
Portal Market
40000
36,000
Top
Portals
NetEase
is
among
China’s
top
5
Internet
30000
portals,
though
it
has
fallen
behind
and
now
holds
only
3%
market
share
in
adverYsing.
20000
7,900
6,500
6,400
5,900
10000
190
150
130
260
73
0
Sina
Sohu
NetEase
Tencent
iFeng
UV
PV
Microblog Market
NetEase,
3%
Sohu,
6%
Tencent,
Micro-­‐blog
21%
Sina
and
Tencent
together
occupy
78%
of
Sina,
57%
market
share.
Baidu,
13%
NetEase
recently
invited
200
presYgious
local
economists
to
its
Micro-­‐blog.
Sina
Baidu
Tencent
Sohu
NetEase
Source: iMeigu

6. INSIDE
REVENUES
6,000
300
Growth
Rate
5,000
250
7-­‐year
CAGR
of
Total
Revenues,
Online
Game
4,000
200
Services,
AdverYsing
Services,
and
Wireless
Value-­‐
3,000
150
added
Services
is
38.8%,
57.8%,
33.0%,
and
(16.1%)
2,000
100
1,000
50
respecYvely.
0
0
2003
2004
2005
2006
2007
2008
2009
2010
Total
Revenues
Online
game
services
AdverYsing
services
Wireless
value-­‐added
services
100.0%
2.4%
1.9%
1.5%
Netease
Segmenta6on
13.6%
10.0%
11.2%
The
Online
Game
Services
Department
is
the
cash
90.0%
cow
of
NetEase,
contribuYng
87.4%
of
total
80.0%
84.0%
88.1%
87.4%
revenues
in
2010.
Netease
has
not
been
able
to
reduce
its
dependence
upon
gaming
revenues
in
70.0%
2008
2009
2010
recent
years.
Online
game
services
AdverYsing
services
Wireless
value-­‐added
services
Source: NetEase Inc. F-1 SEC Filling

7. INSIDE
PROFITABILITY
90.0%
Profit
Margins
84.8%
80.0%
80.2%
75.1%
78.9%
80.4%
78.0%
Gross
Margin
saw
a
15%
decrease
from
around
73.4%
70.0%
65.5%
80%
to
65%
during
the
past
7
years.
60.0%
56.7%
55.0%
56.1%
54.8%
53.6%
50.0%
46.1%
48.4%
Net
Income
Margin
also
saw
the
same
trend
as
40.0%
39.5%
Gross
Margin.
30.0%
20.0%
10.0%
Looking
forward,
management
expects
the
margin
0.0%
will
remain
at
the
same
level
as
in
2010.
2003
2004
2005
2006
2007
2008
2009
2010
Gross
Profit
Margin
Net
Income
Margin
In
Millions
of
RMB
Primary
Factor
As
Netease
signed
a
3-­‐year
contract
to
operate
Online
game
revenues
2008-­‐2010 14,009
Warcraa
with
Blizzard
,
the
cost
associated
with
royalYes,
amorYzaYon
of
license
fees
and
technical
Warcraa
Total
Expenses 2,200
consultancy
service
fees
amounted
RMB
2,200
million,
bringing
down
gross
margin
by
roughly
NegaYve
Impact
to
Gross
Margin
(aprx.) 15.7% 15%.
Source: NetEase Inc. F-1 SEC Filling

8. INSIDE
BALANCE SHEET
10,000
9,620
9,000
8,000
7,000
7,141
Leverage
6,000
5,613
NetEase
sits
on
huge
amounts
of
cash
and
keeps
5,000
very
low
financial
leverage.
4,000
3,938
4,159
3,378
3,000
1,688
2,289
Cash
/
share
2,000
828
839
In
2010,
the
company
has
RMB
9.6
billion
in
cash
1,000
818
792
and
deposits,
$11.1/share.
0
10
0
2003
2004
0
35
2005
2006
2007
2008
2009
2010
Cash
Debt
Source: NetEase Inc. F-1 SEC Filling
Disclaimer: This is not the firm’s official structure, but rather iChinaStock’s representation of the firm’s key properties

9. INSIDE
BUSINESS ANALYSIS
800
11.5%
700
11.1%
11.0%
Online-­‐game
Market
Growth
600
10.5%
10.5%
500
1)
Paying
Online
Game
Player
Growth
400
10.0%
The
Internet
User
base
grew
by
28.6%
annually
300
9.6%
9.5%
during
2006
and
2010,
the
Paying
Online
Game
9.4%
200
Player
expanded
by
20.4%
correspondingly.
9.0%
100
0
8.5%
2)
ARPU
(Average
Revenue
Per
User)
Growth
2006
2007
2008
2009
2010
5-­‐year
CAGR
of
ARPU
during
2006
and
2010
was
Internet
User
Paying
Online
Game
Player
14.4%.
ARPU
as
a
%
of
Internet
User
35,000
30.0%
28.4%
NetEase
Market
Share
30,000
25.0%
As
compeYYon
increased
over
Yme,
NetEase
lost
25,000
20.0%
market
share
during
2006
and
2009.
However,
20,000
18.3%
15.3%
15.0%
market
share
will
remain
stable
as
NetEase
has
15,000
13.6%
13.1%
10,000
10.0%
very
strong
pipeline
underway.
5,000
5.0%
0
0.0%
2006
2007
2008
2009
2010
Revenue
of
Online
Game
Industry
Online-­‐game
Revenue
of
NetEase
Market
Share
of
NetEase
Source: NetEase Inc. F-1 SEC Filling

10. INSIDE
BUSINESS ANALYSIS
MMORPG
(Self
R&D) Revenue
Model Game
Status
Westward
Journey
Online
II Time-­‐Based Launched
2002.8 Pipeline
Fantasy
Westward
Journey Time-­‐Based Launched
2004.12 NetEase’s
Westward
Journey
series
has
had
an
Datang Time-­‐Based Launched
2006.7
outstanding
track
record.
Westward
Journey
Online
III Time-­‐Based Launched
2007.9
Tianxia
II Item-­‐Based Launched
2008.6
Legend
of
Westward
Journey Item-­‐Based Launched
2008.9 NetEase
has
had
a
gap
of
new
games
2009-­‐2010,
New
Fly
for
Fun Item-­‐Based Launched
2008.11 but
plans
to
release
3
new
games
in
2011.
Westward
Journey
Genesis Time-­‐Based Close-­‐beta
TesYng
2011.3
Ghost Unknown Close-­‐beta
TesYng
2011.4
Legend
of
Fairy Unknown Close-­‐beta
TesYng
2011.5
40
3.5
35
R&D
Expenses
3
30
NetEase
is
a
R&D
driven
company.
2.5
25
2
Developing
new
games
incurs
considerable
R&D
20
15
1.5
expenses.
10
1
5
0.5
0
0
2003
2004
2005
2006
2007
2008
2009
2010
Average
Annual
Stock
Price
New
Game
Source: NetEase Inc. F-1 SEC Filling

11. INSIDE
MANAGEMENT
 Current CEO Mr. William Lei Ding founded NetEase in 1997, and holds a 45%
stake in the company. Mr. Ding holds a Bachelor of Science degree in
Communication Technology from the University of Electronic Science and
Technology of China.
 Mr. Ding maintains very tight control over NetEase.
 NetEase has closed only one M&A deal in its history, when it spent RMB 10
million to acquire GuangZhou TianXia Technology in 2001.

12. INSIDE
VALUATION
NetEase’s P/E and EV / EBITDA relative to other Chinese gaming firms
P/E
EV
/
EBITDA
As
of
June
18,
2011,
P/E
of
NetEase
was
14.1.
As
of
June
18,
2010,
EV
/
EBITDA
of
NetEase
was
8.6.
June
18,
2011
Trailing
P/E June
18,
2011
EV/EBITDA
Tencent
(HK) 37.7 Tencent
N/A
NTES 14.1 NTES
8.6
GAME 8.6 GAME
5.1
PWRD 7.4 PWRD
4
CYOU 5.2 CYOU
6.6
GA 12.3 GA
N/A
ATVI 24.6 ATVI
8.7
ERTS
(Forward) 22.0 ERTS
483.7
Source: Yahoo Finance

13. INSIDE
RISKS
 Though NetEase has a broad range of portfolio projects, over 86% of revenue
comes from online games. Increasing competition in the online-game market
might negatively impact NetEase.
 COO Zhonghui left NetEase in May, 2011. His departure might negatively
impact the Online-games Service Department.
 Regulations are still subject to change in China’s online gaming industry. GAPP
(General Administration of Press and Publication of the People's Republic of
China) and MCPRC (Ministry of Culture of the People's Republic of China) both
overlook the industry.

14. INSIDE
WEB PORTAL
Email Micro- Online-
Login blog payments
Games

15. INSIDE
WESTWARD JOURNEY II
WESTWARD JOURNEY IS NETEASE’S LONG-RUNNING FRANCHISE)

16. INSIDE
GHOST
GHOST IS A NEW MMORPG UNDER DEVELOPMENT)

17. INSIDE
WORLD OF WARCRAFT
NETEASE IS THE OFFICIAL OPERATOR OF WOW IN CHINA)

18. INSIDE
ABOUT ICHINASTOCK
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© March 2011 iChinaStock report by Richard Chen