281
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Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 194: BIDU Annual Cash Flow Statement
$ in millions
2007 2008E 2009E 2010E
Net Income 84 155 209 304
Add Non cash Expenses/(income)
Depreciation and Amortization 24 45 74 118
Extra-ordinaries - - - -
Other Non-Cash Items 5 12 12 12
Changes in Working Capital:
(Increase)/Decrease Receivables (5) (6) (6) (9)
(Increase)/Decrease Inventories - - - -
(Increase)/Decrease Other Current Assets (5) (15) (10) (15)
Increase/(Decrease) Payables 27 34 33 49
Increase/(Decrease) Other Current Liabilities 16 38 30 48
Net Cash from Operations 146 263 342 506
Cash Flow from Investing
Purchase of Property, Plant & Equipment (88) (78) (185) (217)
Purchase / Sale of Other LT Assets (6) (8) - -
Purchase / Sale of Investments (2) (1) - -
Net Cash from Investing Activities (96) (86) (185) (217)
Cash Flow from Financing
Issuance/Repayment of Debt - - - -
Change in other LT liabilities (1) (0) - -
Change in Common Equity - net (1) 0 18 22
Payment of Cash Dividends - - - -
Other Financing Charges, Net - - - (0)
Net Cash from Financing Activities (1) (0) 18 22
Net Change in Cash & Cash Equivalents 57 197 179 311
Cash & Cash Equivalents at end of period 211 409 588 899
Source: Company reports and J.P. Morgan estimates.
282
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y
2009
Imran Khan
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imran.t.khan@jpmorgan.com
China Finance Online, Neutral, ($7.05)
We maintain our Neutral rating on China Finance Online (JRJC) due to the greater
customer demand uncertainty in the near term and the continuing challenging
domestic stock market environment. Our Jun-09 price target is US$8, which implies
10.7x FY08E and 12.3x FY09E GAAP EPS, or 7.4x FY08E and 8.6x FY09E
adjusted diluted EPS.
• We had downgraded our rating on JRJC to Neutral (on 15 Dec 2008) due to: (a)
greater uncertainties around customer demand in the near term, especially with
TopView (~20% of cash revenue in 2H08, as per our estimate) discontinuation
from Jan 1, ’09, (b) JRJC’s individual subscribers (core business segment)
turning cautious in their purchase activities since mid-September (on global
equity market stress and slowdown in the real economy), (c) continuing tough
environment from slowdown in China's stock market activities, and (d) 4Q08
guidance being significantly below prior expectations.
• JRJC’s 3Q08 revenue was US$15.2MM, up 4% Q/Q, 109% Y/Y but 8% below
our forecast (US$16.5MM) and 6% below consensus (US$16.2MM), and also
below the guidance range (US$15.5-16.5MM). GAAP EPS was US$0.21, up 5%
Q/Q, 148% Y/Y, in line with our and consensus estimates, though aided by a tax
benefit and forex gain. JRJC’s 4Q08 guidance was significantly below prior
estimates; guided revenue range was US$14.5-15.0MM, implying Q/Q decline of
1% to 5%, or Y/Y growth of 63% to 69%. The midpoint of guidance was ~22%
below our prior forecast (US$18.9MM) as well as consensus forecast
(US$18.7MM).
• For 4Q08, we expect revenue at US$15.0MM, at the top end of guidance range,
sequentially lower due to reduced cash flow and revenue estimates for the core
individual subscriptions business. We expect 4Q08 margins to be largely similar
to 3Q08 levels. Our revenue estimate for FY08 was reduced to US$56.0MM, at
the bottom end of prior FY08 guidance (US$56-61MM). Given the demand
uncertainties in the near to medium term, we had reduced our FY09 revenue /
adusted. EPS estimates as well, on the back of lower individual subscriber cash
inflows and lower margin assumptions. Thus, we expect FY09 revenue / adjusted
EPS Y/Y change of -2% / -13%, respectively.
• 2009 drivers: In our view, the key share price driver (on the upside and the
downside) in 2009 will be a meaningful recovery, or further deterioration, in
China's domestic stock market activities.
Our financial estimates are in the table below:
283
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imran.t.khan@jpmorgan.com
Table 195: China Finance Online Financial Snapshot
$ in millions, except per share data
4Q'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y
J.P. Morgan
Revenue 15.0 56.0 54.8 57.0 116% -2% 4%
EBITDA 6.2 23.0 23.3 25.0 174% 1% 7%
GAAP EPS 0.18 0.74 0.65 0.67 nm -12% 2%
Adj. EPS 0.25 1.08 0.94 0.94 135% -13% 1%
Consensus
Revenue 14.6 57.3 71.6 58.3 121% 25% -19%
EBITDA 5.5 20.1 33.1 NA 138% 65% nm
GAAP EPS 0.16 0.77 1.12 NA nm 46% nm
Adj. EPS 0.19 1.07 1.19 0.80
134% 11% -33%
Source: J.P. Morgan estimates and Bloomberg. *Note: Adj. EPS excludes share-based compensation expense.
Our Estimates and Outlook for 2009
For FY09, due to expectations of customer demand uncertainties for the company in
the near to medium term, especially with TopView (~20% of cash revenue in 2H08,
as per our estimate) discontinuation from Jan 1, ’09, and continuing challenges from
the business environment (A share market), we believe a cautious stance is
warranted. We forecast net revenue of US$54.8MM in 2009, down 2% Y/Y, and
GAAP diluted EPS of US$0.65, down 12% Y/Y, or adjusted EPS (ex-share-based
expense) of US$0.94, down 13% Y/Y.
We forecast gross margin at 81.9% for 2009, down from 83.5% for 2008. We expect
adjusted operating margin (ex-share-based expense) of 36.9% for 2009, down
slightly from 37.4% for 2008, and adjusted net margin of 39.0% for 2009, down
from 43.9% for 2008 (partly due to higher tax rate of ~8% in 2009 vs. ~0% in 2008
due to tax benefits from a prior acquisition).
Our Estimates and Outlook for 2010
For 2010, we forecast net revenue of US$57.0MM, up 4% Y/Y, and GAAP diluted
EPS of US$0.67, up 2% Y/Y, or adjusted EPS of US$0.94, up 1% Y/Y. On margins,
we forecast gross margin at 81.6% (largely stable Y/Y), adjusted operating margin of
36.6% (largely stable Y/Y) and adjusted net margin of 38.3% (slightly lower Y/Y).
Price Target, Valuation and Rating Analysis
We maintain our Neutral rating on JRJC due to the greater customer demand
uncertainty in the near term (especially with TopView discontinuation from Jan 1,
‘09) and the continuing challenging domestic stock market environment. Our price
target is US$8 (Jun-09), which implies FY08E / FY09E adjusted PE of 7.4x / 8.6x, or
GAAP PE of 10.7x / 12.3x, on the back of FY08E / ‘09E / ‘10E adjusted EPS growth
of 135%/ -13% / 1%. JRJC also has a net cash balance of US$3.6 / diluted ADS; our
price target implies ex-cash FY08E / FY09E adjusted PE of 4.4x / 5.3x. We set our
PT below our DCF valuation of ~US$10 (WACC of 13%, terminal growth 0%) due
to the near-term uncertainties, which could keep the stock price under pressure.
On the positive side, we note: (a) JRJC has demonstrated solid execution capability
over the past couple of years, with seven back-to-back quarters (up to 2Q08) of
record cash inflows in the retail subscription business, (b) JRJC’s significantly
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enhanced telemarketing capability (ramped up through the course of 2008 to ~780
telemarketers at present, from 410 at end-2007) and product development capability,
which have helped scaling up of revenues and earnings (through conversion of free
users to paying subscribers), and (c) JRJC’s paying subscriber base of 115k as of
3Q08, up from 56.2k at end-2007, with further room for upside in conversion rate
(active paying subscribers as a percentage of free registered users, currently still only
~1.1%).
Risks to Our Rating and Price Target
Key upside risks to our rating and price target include: (1) meaningful recovery in
China’s A share market activities (positively impacting customer demand for JRJC’s
products), (2) higher than expected revenue growth in core subscription business, and
(3) further strategic partnerships and acquisitions to expand its core business.
Key downside risks include: (1) further deterioration in domestic stock market
activities, (2) increase in competition in financial analysis software, and (3)
management challenges of managing the larger business scale.
285
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Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 196: JRJC Annual Income Statement
$ in millions
INCOME STATEMENT
2007 2008E 2009E 2010E
Revenue 25.90 55.97 54.84 57.01
Subscriptions 22.69 50.70 49.04 50.35
Online Ads 1.56 2.83 3.02 3.33
Wireless (Stockstar) / others 1.66 2.43 2.77 3.33
COGS -4.41 -9.26 -9.93 -10.50
Gross Profit 21.49 46.71 44.90 46.51
Operating Expense -16.99 -33.36 -31.12 -32.10
Sales & Mktg. expenses -6.79 -13.14 -13.16 -13.68
G&A expenses -5.12 -7.71 -7.13 -7.41
R&D expenses -2.15 -4.96 -4.39 -4.56
Other expenses 0.00 0.00 0.00 0.00
Share-based compensation expense (123R) -2.95 -7.56 -6.44 -6.44
EBITDA 8.41 23.02 23.34 25.03
EBIT 4.50 13.35 13.78 14.41
Adj. EBIT (ex-123R expense) 7.45 20.91 20.23 20.86
Net Interest Income 1.11 1.66 2.47 3.01
Net Other Income -10.56 1.63 0.40 0.40
Pre Tax Profit -4.95 16.64 16.65 17.83
Tax Expense/(Credit) -0.81 -0.10 1.73 2.43
GAAP Net Profit -4.13 16.99 14.92 15.40
Adj. Net Profit (ex-123R expense) 9.94 24.55 21.37 21.84
Pre Tax EPS (USD) -0.26 0.84 0.84 0.89
EPS (USD) -0.22 0.86 0.75 0.77
Diluted EPS (USD) -0.22 0.74 0.65 0.67
Adj. Diluted EPS (ex-123R exp., USD) 0.46 1.08 0.94 0.94
Margins (%)
Gross Margin 83.0 83.5 81.9 81.6
Adj. Operating Margin (ex-123R option expense) 28.7 37.4 36.9 36.6
EBITDA Margin 32.5 41.1 42.6 43.9
Net Margin -15.9 30.4 27.2 27.0
Adj. Net Margin (ex-123R option expense) 38.4 43.9 39.0 38.3
Sequential Growth (%)
Revenue 263.4 116.1 -2.0 4.0
Gross Profit 272.4 117.3 -3.9 3.6
Adj. EBIT 1,448.0 180.8 -3.3 3.1
Pre Tax Profit nm -435.8 0.1 7.0
Adj. Net Profit 1,599.7 146.9 -13.0 2.2
Adj. Diluted EPS 1,508.4 134.6 -13.1 0.9
Source: Company reports and J.P. Morgan estimates.
286
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imran.t.khan@jpmorgan.com
Table 197: JRJC Quarterly Income Statement
$ in millions
1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08E 1Q'09E 2Q'09E 3Q'09E 4Q'09E
Revenue 4.00 5.72 7.30 8.88 11.06 14.68 15.23 15.01 14.30 13.63 13.46 13.44
Subscriptions 3.39 4.93 6.38 7.99 9.85 13.40 13.78 13.67 13.01 12.21 11.96 11.86
Online Ads 0.25 0.40 0.50 0.41 0.59 0.76 0.76 0.73 0.65 0.75 0.79 0.83
Wireless (Stockstar) / others 0.36 0.40 0.42 0.49 0.62 0.52 0.68 0.61 0.63 0.67 0.71 0.75
COGS -0.82 -1.08 -1.19 -1.32 -1.72 -2.10 -2.77 -2.67 -2.56 -2.46 -2.45 -2.46
Gross Profit 3.18 4.64 6.11 7.56 9.34 12.58 12.46 12.34 11.74 11.17 11.01 10.98
Operating Expense -2.81 -3.59 -4.67 -5.93 -7.36 -9.00 -8.56 -8.44 -8.05 -7.75 -7.67 -7.66
Sales & Mktg. expenses -1.22 -1.33 -1.85 -2.39 -2.39 -3.57 -3.58 -3.60 -3.43 -3.27 -3.23 -3.23
G&A expenses -0.87 -1.25 -1.16 -1.83 -1.64 -2.23 -1.88 -1.95 -1.86 -1.77 -1.75 -1.75
R&D expenses -0.32 -0.42 -0.58 -0.83 -0.97 -1.23 -1.48 -1.28 -1.14 -1.09 -1.08 -1.08
Other expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Share-based compensation expense (123R) -0.39 -0.60 -1.08 -0.88 -2.37 -1.97 -1.61 -1.61 -1.61 -1.61 -1.61 -1.61
EBITDA 0.94 1.87 2.78 2.82 4.77 6.00 6.10 6.16 6.00 5.78 5.76 5.80
EBIT 0.37 1.05 1.44 1.63 1.97 3.58 3.90 3.90 3.70 3.42 3.34 3.32
Adj. EBIT (ex-123R expense) 0.77 1.65 2.52 2.51 4.34 5.54 5.52 5.51 5.31 5.04 4.95 4.93
Net Interest Income 0.25 0.25 0.24 0.36 0.34 0.35 0.52 0.45 0.57 0.60 0.63 0.67
Net Other Income 0.06 0.11 0.04 -10.77 0.87 0.55 0.11 0.10 0.10 0.10 0.10 0.10
Pre Tax Profit 0.69 1.41 1.73 -8.78 3.19 4.47 4.52 4.45 4.37 4.12 4.07 4.09
Tax Expense/(Credit) -0.09 -0.15 -0.18 -0.40 -0.06 -0.09 -0.25 0.30 0.45 0.43 0.43 0.43
GAAP Net Profit 0.78 1.56 1.90 -8.37 3.51 4.56 4.77 4.15 3.92 3.69 3.65 3.66
Adj. Net Profit (ex-123R expense) 1.17 2.16 2.98 3.63 5.88 6.53 6.38 5.76 5.53 5.31 5.26 5.27
Pre Tax EPS (USD) 0.04 0.07 0.09 -0.45 0.16 0.23 0.23 0.22 0.22 0.21 0.20 0.21
EPS (USD) 0.04 0.08 0.10 -0.43 0.18 0.23 0.24 0.21 0.20 0.19 0.18 0.18
Diluted EPS (USD) 0.04 0.08 0.08 -0.43 0.15 0.20 0.21 0.18 0.17 0.16 0.16 0.16
Adj. Diluted EPS (ex-123R exp., USD) 0.06 0.11 0.13 0.16 0.26 0.28 0.28 0.25 0.24 0.23 0.23 0.23
Margins (%)
Gross Margin 79.6 81.1 83.7 85.1 84.5 85.7 81.8 82.2 82.1 81.9 81.8 81.7
Operating Margin (ex-123R option expense) 19.2 28.8 34.5 28.2 39.3 37.8 36.2 36.7 37.1 36.9 36.8 36.7
EBITDA Margin 23.6 32.6 38.0 31.8 43.1 40.9 40.0 41.0 41.9 42.4 42.8 43.1
Net Margin 19.4 27.3 26.0 -94.2 31.7 31.1 31.3 27.6 27.4 27.1 27.1 27.2
Net Margin (ex-123R option expense) 29.2 37.7 40.8 40.9 53.1 44.5 41.9 38.4 38.7 38.9 39.1 39.2
Sequential Growth (%)
Revenue 58.4 43.2 27.6 21.6 24.5 32.8 3.7 -1.4 -4.7 -4.7 -1.3 -0.1
Gross Profit 65.7 46.1 31.6 23.7 23.5 34.7 -0.9 -1.0 -4.8 -4.9 -1.5 -0.3
EBIT ex-123R option expense -248.6 115.0 52.9 -0.6 73.0 27.7 -0.5 -0.1 -3.6 -5.2 -1.7 -0.4
Pre Tax Profit -138.9 104.6 22.2 -608.8 -136.3 40.1 1.2 -1.6 -1.8 -5.6 -1.3 0.4
Net Profit ex-123R option expense n.m. 84.8 38.2 21.8 61.7 11.1 -2.2 -9.8 -3.9 -4.1 -0.9 0.3
Diluted EPS ex-123R expense n.m. 85.1 25.0 17.3 66.3 10.1 -1.4 -9.7 -4.1 -4.2 -1.1 0.1
Source: Company reports and J.P. Morgan estimates.
287
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imran.t.khan@jpmorgan.com
Table 198: JRJC Annual Balance Sheet
$ in millions
2007 2008E 2009E 2010E
Cash & Cash Equivalents 74.7 104.0 126.6 157.0
Accounts Receivable 1.5 3.3 2.9 3.4
Inventory - - - -
Total Other Current Assets 8.6 12.2 10.8 11.5
Total Current Assets 84.8 119.5 140.3 171.9
Gross Fixed Assets 6.7 12.1 16.9 23.1
Accumulated Depreciation (1.2) (3.1) (5.8) (9.7)
Net Fixed Assets 5.5 9.0 11.1 13.5
Other Long Term Assets 12.1 14.4 14.1 13.8
Long Term Investments and Associates 1.5 1.5 1.5 1.5
Total Long Term Assets 19.1 25.0 26.6 28.7
Total Assets 103.9 144.4 166.9 200.6
ST Debt and Current Portion of LT Debt - - - -
Accounts Payable (Accrued expenses, etc.) 10.5 11.5 9.2 9.7
Other Current Liabilities 20.5 30.0 26.9 31.0
Total Current Liabilities 31.0 41.5 36.1 40.7
Long Term Debt - - - -
Other Long Term Liabilities 5.5 6.2 4.4 3.1
Total Long Term Liabilities 5.5 6.2 4.4 3.1
Share Capital 0.0 0.0 0.0 0.0
Share Premium 58.7 62.5 77.4 92.3
Other Reserves 4.5 13.0 13.0 13.0
Retained Earnings 4.1 21.1 36.0 51.4
Preferred Stock - - - -
Total Equity 67.4 96.6 126.5 156.8
Total Liabilities and Equity 103.9 144.4 166.9 200.6
Source: Company reports and J.P. Morgan estimates.
288
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Imran Khan
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imran.t.khan@jpmorgan.com
Table 199: JRJC Annual Cash Flow Statement
$ in millions
2007 2008E 2009E 2010E
Net Income (4.1) 17.0 14.9 15.4
Non cash Expenses/(income) - - - -
Depreciation and Amortization 1.0 2.1 3.1 4.2
Extraordinaries (0.0) (0.3) - -
Other Non-Cash Items 13.4 7.6 6.4 6.4
Changes in Working Capital:
(Increase)/Decrease Receivables 0.0 (1.8) 0.3 (0.5)
(Increase)/Decrease Inventories - - - -
(Increase)/Decrease Other Current Assets (4.3) (3.6) 1.4 (0.7)
Increase/(Decrease) Payables (0.0) 1.0 (2.3) 0.5
Increase/(Decrease) Other Current Liabilities 22.5 9.5 (3.1) 4.1
Net Cash from Operations 28.4 31.6 20.8 29.5
Cash Flow from Investing
Purchase of Property, Plant & Equipment (4.8) (5.4) (4.8) (6.2)
Purchase/Sale of Other LT assets - (2.6) - -
Purchase/Sale of Investments - - - -
Net Cash from Investing Activities (4.8) (8.0) (4.8) (6.2)
Cash Flow from Financing
Issuance/Repayment of Debt - - - -
Change in other LT liabilities - 0.7 (1.9) (1.3)
Change in Common Equity - net 3.2 4.7 8.5 8.5
Payment of Cash Dividends - - - -
Other Financing Charges, Net - 0.3 0.0 -
Net Cash from Financing Activities 3.2 5.7 6.6 7.2
Net Effect of Exchange Rate Changes 3.0 - - -
Net Change in Cash and Cash Equivalents 29.8 29.3 22.6 30.4
Cash & CE at End of Period 74.7 104.0 126.6 157.0
Source: Company reports and J.P. Morgan estimates.
289
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Imran Khan
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imran.t.khan@jpmorgan.com
NetEase, Neutral, ($22.10)
We remain Neutral on NetEase. While we like NetEase in the long run, we believe
NetEase lacks near-term drivers; we still don’t have confidence that TianXia 2 and
other upcoming item-based games will be significant revenue contributors in 2009.
Our price target is US$25 (Jun-09), which implies 16.3x FY08E and 11.7x FY09E
GAAP EPS, or 15.4x FY08E and 11.1x FY09E adjusted EPS.
• NetEase is one of the leading online game developers and operators in China.
However, we believe NetEase still lacks the next big game to drive earnings
growth in the near to medium term. While we are impressed by the consistent
growth of flagship games FWJ and WWJ2 (even after approximately five years
and seven years, respectively, since launch), 2009 growth is still expected to be
largely in line with the market growth. In addition, the Blizzard JV and Starcraft
will likely not contribute revenue until 2H09.
• Despite the ongoing transition period in its online games, we remain positive on
NetEase in the long run. We believe NetEase differentiates itself by: (1) its deep
penetration of sales & marketing teams into small cities (where there is less
competition), and (2) taking a long-term view in game development (and
upgrade) and customer monetization. As one of the leading online game
developers (with ~1,200 engineers) in China with proven game operating
capability, we believe NetEase is well positioned to capture growth in China’s
online games industry in the long run. In addition, NetEase has the largest free
email user base in China; we believe it can leverage this user base and portal
traffic to monetize better over time through online ads and search services.
• 2009 drivers: In our view, the following factors will drive shares in 2009: (1)
the performance of new games such as TX2 and Legend of Westward Journey
(item-based version of WWJ3), (2) potential upside from new Blizzard games
and in-house games in 2009, (3) performance of existing games (following
periodic release of new upgrade packs), and (4) share buyback of up to US$100M
over the next few quarters.
Our current and newly introduced 2010 estimates are in the table below:
Table 200: NetEase Financial Snapshot
$ in millions, except per share data
4Q'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y
J.P. Morgan
Revenue 122.0 433.5 529.7 589.2 47% 22% 11%
EBITDA 82.1 288.7 345.7 378.5 55% 20% 9%
GAAP EPS 0.51 1.54 2.14 2.33 21% 40% 9%
Adj. EPS 0.54 1.63 2.25 2.44 19% 38% 8%
Consensus
Revenue 117.9 448.7 499.1 551.0 53% 11% 10%
EBITDA 77.2 291.3 310.1 338.8 57% 6% 9%
GAAP EPS 0.41 1.57 1.91 2.09 23% 22% 9%
Adj. EPS 0.42 1.63 1.90 2.11
19% 16% 11%
Source: J.P. Morgan estimates and Bloomberg. *Note: Adj. EPS excludes share-based compensation expense.
290
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imran.t.khan@jpmorgan.com
Our Estimates and Outlook for 2009
We forecast net revenue of US$529.7M in 2009, up 22% Y/Y, and GAAP diluted
EPS of US$2.14, up 40% Y/Y, or adjusted EPS (ex-share-based expense) of
US$2.25, up 38% Y/Y. We forecast online game revenue of US$450.4M in 2009
(85% of total revenue), up 22% Y/Y, with FWJ revenue growth of 15% Y/Y, WWJ2
revenue growth of 6% Y/Y, and WWJ3 revenue growth of 17% Y/Y. For online
advertising, we forecast revenue of US$67.4M (13% of total revenue), up 21% Y/Y
(largely in line with market growth).
We forecast gross margin at 82.5% for 2009, up slightly from 82.0% for 2008,
mainly due to margin expansion in the online ad segment (with Olympics content
spending going away). We expect adjusted operating margin (ex-share-based
expense) of 60.9% for 2009, down from 63.1% for 2008 (due to expected higher
SG&A and R&D expenses in 2009), and adjusted net margin of 55.8% for 2009, up
from 48.4% for 2008 (due to net forex losses in 2008 and lower income tax rate of
~15% in 2009 vs. ~21% in 2008).
Our Estimates and Outlook for 2010
For 2010, we forecast net revenue of US$589.2M, up 11% Y/Y, and GAAP diluted
EPS of US$2.33, up 9% Y/Y, or adjusted EPS of US$2.44, up 8% Y/Y. On margins,
we forecast gross margin at 81.1% (down slightly Y/Y due to the online game
segment), adjusted operating margin of 59.5% (down slightly Y/Y), and adjusted net
margin of 55.6% (stable Y/Y).
Price Target, Valuation and Rating Analysis
We maintain our Neutral on NetEase with a Jun-09 price target of US$25, which
implies 16.3x FY08E and 11.7x FY09E GAAP EPS, or 15.4x FY08E and 11.1x
FY09E adjusted EPS. Our price target is below our DCF valuation of ~US$37 due to
relatively muted growth expectation in the near term, as we believe NetEase still
lacks the next big game to drive earnings growth. While we are impressed by the
delivery of consistent growth of FWJ and WWJ2 games, 2009 growth is still
expected to be in line with the market growth. As such, we remain Neutral. The
company currently has total cash balance of ~US$777M (US$5.9/share).
Risks to Our Rating and Price Target
Downside risks to our rating and price target include: (1) greater industry
competition, (2) delays in game launches, (3) hacking or pirated server issues
limiting user growth, and (4) significant increase in R&D expenses. Upside risks
include: (1) better-than-expected acceptance of its new games, (2) extended life cycle
of existing games on the back of new upgrade packs, and (3) upside in online
advertising revenue.
. Equity - net (1) 0 18 22
Payment of Cash Dividends - - - -
Other Financing Charges, Net - - - (0)
Net Cash from Financing Activities (1) (0) 18 22
Net Change. net 3.2 4.7 8.5 8.5
Payment of Cash Dividends - - - -
Other Financing Charges, Net - 0.3 0.0 -
Net Cash from Financing Activities 3.2 5.7 6.6 7.2
Net