Bought a 2% position in Netease @HKD 149 per share.
In my mind, Netease is almost the perfect game company – a DNA of game as a service, a healthy stream of cashflow from existing game portfolio and a proven game development track record. See previous post on game as a service vs game as a product.
To translate the above business characteristics into cashflow terms, it means that Netease’s existing games can generate stable and even slightly growing cashflow for a very long period of time. And Netease’s ability to develop new games only adds to this base of stable cashflow.
Unlike many successful game companies, Netease’s founder, Ding Lei, has proven to be a very capable capital allocator who owns 50% of the company. Few Chinese internet companies pay regular dividends and maintain a single share class structure like Netease. What’s even more impressive is that Ding Lei has successfully incubated new businesses beyond gaming with varying degrees of success. Netease cloud music is the best online music platform in China while Youdao (spun off to list in US) is the most popular dictionary app in China. Ding Lei’s forray into e-commerce has been less impressive but it managed to recoup investment cost by selling the business to Alibaba almost at cost in 2018.
Going forward, Netease’s next leg of growth could come from expanding its gaming business globally. It would take a long time but I think Netease can eventually crack it.
There are a lot of concerns about gaming regulation in China. My view is that 1) shorter term, minor gaming revenue is only low single percentage of Netease revenue 2) I am confident that minors will embrace gaming as they grow older because gaming as an entertainment format is superior. By regulating one of the major negative externalities of gaming – minor addiction to gaming, it is in fact more sustainable for the industry long term.
At roughly, Netease is roughly at fair value at 20x core gaming earnings and growing earnings at a rate of 10%. This is a business that I would love to buy more at lower valuation
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