1. NetEase, Inc. (NASDAQ: NTES)
Danyun Wang
Jiaze Li
Peiyang Liu
Zhonghao Zhu
4/18/2017

2. Agenda Company Industry Financial Analysis Valuation Recommendation
Introduction
Business Overview
Management team
SWOT Analysis
Industry
Market Comparison by region
Online Games
Internet Services
Financial Analysis
Ratio Analysis
Competitors
Valuation
DCF
Comparable
Technical Analysis
Recommendation
Agenda

3. Company Introduction Overview Market Information History
A leading Internet technology company in China
Founded in 1997, incorporated in Cayman Islands and headquartered in Beijing.
Operates a leading interactive online community in China, including Online Game Services; Advertising Services; and , E-commerce and other businesses.
Market Information
Current price: $266 per share (+0.20%)
Dividend yield: 1.24%
Trailing P/E: 20.93
Market Capitalization: 35 Billion
Enterprise Value: Billion
Price/Book ratio: 6.31
History
2005
2007
2003
1997
1998
1999
2000
2001
Internet Software Developer
Web-based Free Service
Internet Portal Service and E-commerce Services
IPO and listed in NASDAQ
Launched First MMORPG and Wireless Services
2002
2004
2006
2008
Game Licensing and Joint Venture with Blizzard
Present
Launched Second MMORPG
(Westward Journey online)
RCMP Spring 2017
Overview and History from 20-k
Market information from yahoo finance

4. Business Overview Business Breakdown Total Net Revenue
Online Games Services
Advertising Services
2016 World Top Video Game Companies ranking: No.7 (Based on estimated revenue for 2016)
Has the fastest revenue growth rate in 2016
Leading game developers in China
, E-commerce and Others
First company in China to provide free web services
Caipiao, an online lottery purchase platform, Baoxian, an online sale of insurance products, and Kaola, e-commerce platform.
Wangyibao, online payment platform, e-reading (EaseRead), online music SNS (Cloud Music) services and online education services (NetEase Cloud Classroom).
Internet Media Business (163.com)
Core service categories—content, community and communication
One of three most popular internet portal websites
Consolidate and distribute content from more than 100 international and domestic content providers.
Total Net Revenue
Total Net Revenue for 2016: $38.2 Billion
Total Net Revenue for 2015: $22.8 Billion
Increased 67.4% from 2016 to 2015
Revenue Breakdown
Online Games Services
Advertising Services
, E-commerce and Others
RCMP Spring 2017
Business and revenue from 20-k ; ;
Online Game Services Rankings from Newzoo

5. Online Game Services Most Popular Games Online Games Breakdown
Names
Logo
Types
Revenue Model
Westward Journey Online II
PC/Mobile
Time-Based
Fantasy Westward Journey
Tianxia III
Item-Based
New Ghost
Onmyoji
Mobile
Heroes of Tang Dynasty Zero
PC-Client MMORPG
>30
Mobile Games
>100
Developing
Unknown
Self-Developed
>110
Licensed
>20
*MMORPG: massively multi-player online role-playing
Game Licensing: Companies
Blizzard
Wicked Interactive Ltd (PristonTale)
Aeonsoft (Fly For Fun)
DreamWorks (Kung Fu Panda)
Warner Bros (Tom and Jerry)
Netmarble (Raven)
Virtual Toys (Pirates: Treasure Hunters)
Mojang (Minecraft-Expected in 2017)
RCMP Spring 2017
Online Game Services from 20k

6. Game Licensing with Blizzard
Blizzard Entertainment
A premier developer and publisher of entertainment software in the United States and one of the most popular and well-respected makers of computer games.
Name of Games
License Period
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
StarCraft II: Wings of liberty
StarCraft II: Heart of Swarm
Warcraft III: Reign of Chaos
Warcraft III: The Frozen Throne
World of Craft
Hearthstone: Heroes of Warcraft
Diablo III
Over Watch
Heroes of Storm
RCMP Spring 2017
Game Licensing from 20-k
Blizzard Entertainment introduction from company websites

7. Management Team William Lei Ding Founder, Director and CEO
Graduated from University of Electronic Science and Technology of China in 1993 and started career in a local state department in Ningbo as an engineer.
Quit the Job in Sybase and established his own business: NetEase in 1997.
Pioneer in the internet technology industry in China and a major force in the development of the Internet in China.
Ultimate Owner and leader of the company and a man with foresight.
Forbes 2017 World's Billionaires ranking: #52 and Forbes China Rich List: #5.
The lead architect of the search platform powering its new search service Yodao.com.
Has extensive experience in computer science research and systems development.
He has published more than 10 papers in leading international research conferences and journals.
He holds Bachelor's and M.S. degrees in CS from Tsinghua University, and a PhD in CS from the UC Berkley.
Graduated from Hong Kong Polytechnic University with a major in Accountancy in 1993.
Served as the Corporate Finance Director of NetEase.com, Inc. from Nov to Dec and served as its Financial Controller from Jan to Jun
A member of a member of the Hong Kong Institute of Certified Public Accountants and a registered practicing Certified Public Accountant in Hong Kong.
Onward Choi, FCCA, HKICPA
Acting Chief Financial Officer (July, 2007-)
Feng Zhou
Senior VP of Search Operations (Aug. 20, 2007-)
RCMP Spring 2017
Capital IQ

8. VIE Structure Poses Risks
Simple Structure of VIE
Risks to Investors
Contractual risk: VIE is essentially a series of contractual agreement to allow foreign investors control companies operating in China1. If PRC government declares such contract is illegal, they might be voided
Regulatory risk: VIE structure might be illegalized by PRC government if it views these structure as a violation of business laws2
Sovereign risk: the company generates majority of revenue from companies operating in China. Business environment in China is much different from US which may pose risks from accounting, legal and operating perspective
SPV = Special Purpose Vehicle
VIE = Variable Interest Entity (Operating entity)
WFOE = Wholly Foreign-owned Entity
RCMP Spring 2017
Financial Times, Joy Shaw in Washington and Lisa Chow in Shanghai
VIE STRUCTURES IN CHINA: AN UPDATED OVERVIEW by Rivers Lan

9. Firm Structure RCMP Spring 2017
NetEase, Inc
(Holding Company, incorporated in Cayman Islands)
100.0%
100.0%
100.0%
100.0%
100.0%
NetEase Interactive Entertainment Limited (Holding company, incorporated in British Virgin Islands)
NetEase (Hong Kong) Limited
(Holding Company, incorporated in HK)
NetEase Media, Inc. (holding company, incorporated in Cayman Islands)
Lede, Inc. (holding company, incorporated in Cayman Islands)
Lede, Inc. (holding company, incorporated in Cayman Islands)
100.0%
100.0%
71.1%
Guangzhou Boguan Telecommunication Technology Co., Ltd. (provides technical consulting and related services to VIEs, formed in PRC)
NetEase Information Technology (Beijing) Co., Ltd. (provides technical consulting and related services to VIEs, formed in PRC)
NetEase Youdao Information Technology (Beijing) Co., Ltd. (Develops online search related technologies, formed in PRC)
100.0%
100.0%
100.0%
100.0%
Hong Kong NetEase Interactive Entertainment Limited (Holding company, incorporated in Hong Kong)
NetEase Media (Hong Kong) Limited (Holding company, incorporated in Hong Kong)
Lede (Hong Kong) Limited (Holding company, incorporated in Hong Kong)
Lede (Hong Kong) Limited (Holding company, incorporated in Hong Kong)
Hangzhou Langhe Technology Co., Ltd., (provides technical and consulting services for licensed games, formed in PRC)
100.0%
100.0%
100.0%
100.0%
NetEase Media Technology (Beijing) Co., Ltd. (provides technical consulting and related services to VIEs, formed in PRC)
Lede Technology Co., Ltd. (provides e-commerce services, formed in PRC)
Hangzhou Youmai Technology Co., Ltd. (provides technical consulting and related services for cross-border e-commerce, formed in PRC)
Guangzhou NetEase Computer System Co., Ltd. (operates various online and other services, formed in PRC) 1%
Xiaojun Hui
99%
NetEase (Hangzhou) Network Co., Ltd., (provides technical and consulting services and related services to VIEs, formed in PRC)
William Lei Ding
100.0%
Wangyibao Co., Ltd. (provides online payment system, formed in PRC)
100.0%
Beijing NetEase Youdao Computer System Co., Ltd. (provides online search services, formed in PRC)
Beijing NetEase Media Co., Ltd. (provides online advertising services, formed in PRC) 1%
Li Li
Hangzhou NetEase Leihuo Network Co., Ltd., (operates mobile game business, formed in PRC)
71.1%
28.9%
Other Shareholders
99%
William Lei Ding
RCMP Spring 2017
Firm structure from 20-k
Represent VIE contractual agreement Represent ownership

10. SWOT Analysis Strengths Weaknesses Opportunities Threats
Good reputation in China
Leading position in the game market in China
Diversified products and services
Strong personnel and management support
Mostly restricted to China and less global presence
Chinese internet regulation
Lagging in other areas of internet service expect for Online gaming
Complex corporate structure signals lack of internal control
Opportunities
Threats
Huge market for online gaming in China
Good technical, personnel and financial strength can be used in R&D to explore new opportunities
Prosperous mobile Internet market
Uncertainty regarding Chinese government Regulations
Strategic alliances with key players in the online game industry
Constant change in preference of customers
Institutional investors distrust complicated organizational structure, which may hinder future refinancing
RCMP Spring 2017
Reference from mbaskool

11. Market comparison by region
Revenue
(in million $ )
United States
China
Europe
Segment
2016
2017
2018
2019
2020
2021
CAGR
16-21
Online Games
(PCs)
3822
3880
3934
3981
4021
4055
1.2%
2184
2131
2080
2032
1991
1956
-2.2%
2660
2806
2953
3096
3234
3363
4.8%
Mobile Games
4304
4769
5195
5512
5759
5956
6.7%
7144
8222
9261
10245
11167
12028
11.0%
3283
3591
3885
4156
4399
4612
7.0%
Downloads
3469
3473
3477
3482
3488
3495
0.1%
1341
1435
1522
1600
1669
1729
5.2%
2772
2961
3142
3308
3457
3586
5.3%
Total
11595
12122
12606
12975
13268
13506
3.1%
10669
11788
12863
13877
14827
15713
8.1%
8715
9358
9980
10560
11090
11561
5.8%
Users
(in million) 92 93 94 95 96
0.9%
163
166
169
171
174
176
1.5% 75 77 80 82 85 87
3.0%
104
112
119
125
129
133
5.0%
284
298
313
327
341
355
4.6%
140
146
151
156
160
164
3.2%
118
117
116
115
-0.7% 49 53 56 59 62 65
123
126
131
134
1.7%
168
170
173
0.5%
332
352
364
377
391
3.3%
202
200
205
208
0.6%
Source: Statista Digital Market Outlook 2016

12. Market comparison by region
China
Market size
Total market size of US$10.7 billion in 2016
Mobile games is the biggest segment and accounts for 70%
Download Games is the smallest segment with $1.3 billion
Growth Rate
Fastest growing region with an average annual growth rate of 8.0%
Total market volume will overtake the US in 2018
Further growth in the Mobile Games segment with 11.0% p.a.
Mobile games revenue will be US$ 12.0 billion in 2021, twice the size of the mobile games market in the US
Trend Signals
Mobile devices will stay the first choice for gaming in China
Repeal of the gaming console prohibition in 2014 opened a new (niche) market driving Download Games growing with an average at 5.2%
Source: Statista Digital Market Outlook 2016

13. Online Games in China Competitive Landscape
Market share concentration is medium
Top four players make 61.5% of total industry revenue
Competition is high and the trend is steady
Barriers to entry are low and are increasing
Web games do not require high pre-investment
Popularization of mobile games simulates enterprises to enter
Globalization is medium and the trend is increasing
Industry Life Cycle – Growing
The basic industry structure of the industry is sound
A huge development potential for MMOG and mobile segments
Average revenue per user has been increasing
Expected to experience stable growth over the next five years
Industry revenue and value-added have been growing strongly
Expected to grow at an annualized rate of 16.4% over the next five years
Demand from overseas market is projected to be a growth point
Major Companies
Tencent Holdings Limited 32.5%
Brand Names: QQ Game Center, Cross Fire, Dungeon & Fighter
Netease.com, Inc. 13.8%
Brand Names: Westward Journey Online , Fantasy Westward Journey, World of Warcraft
Shanda Games Ltd. 9.0%
Changyou.com Ltd 6.2%
Perfect World Co. Ltd 6.1%
Brand Names: Perfect World, Zhu Xian, Red Cliff, Dota 2
By the definition of IBISWorld, online games are played over the Internet using consoles such as personal computers and mobile terminals.
In 2016, the top four player in the online game industry in China make 61.5% of total industry revenue, which indicates a medium level of concentration.
Small game studios have many opportunities to access to this industry, since web games do not require high pre-investment, and developers can make revenue in a very short time after a game is launched. Furthermore, the popularization of mobile games simulates enterprises to enter this industry.
The Online Game industry has a medium level of globalization, and the scale of globalization is expected to increase in the future. 
The basic market structure of the industry is in place and online game companies can provide comprehensive services. The development potential is huge for emerging segments such as mobile and massively multiplayer online game product.
Average revenue per user is a measure of the revenue a company can earn from an individual player. ARPU has been increasing steadily in the past five years, and is expected to experience stable growth over the next five years.
Value-added for the online game industry in China is expected to grow at an annualized rate of 16.4% over the 5 years to 2022.
In recent years, many Chinese online game companies completed their IPOs and had outstanding performance. As a result, more overseas markets began considering importing online games from China. Demand from overseas markets is projected to be another growth point for the industry in future.
Source: IBISWorld

14. Online Games in China Key External Drivers Industry Outlook
Personal Final Consumption Expenditure – Total
Chinese government plans to double household incomes by 2020
Pervasive Technology – Internet Connections
3G and 4G LTE has made mobile games more popular
Service Prices – Internet Prices
Systems and Technology – by Industry Sector
Age Group (15-34)
Industry Outlook
Grow at an annualized rate of 7.5% to $39.8 billion
Growth is projected to slow due to China’s birth control policy , but this population is also becoming increasingly wealthy
Growth in the number of industry enterprises will slow
Growth in the number of establishments and employees will be higher
Exports are projected to experience double-digital growth over the next five years, and account for a stable share of total revenue-34.2% or $13.6 billion
Source: IBISWorld

15. Internet Services
Includes basic internet access and application services, but excludes E- commerce business
The concentration level is low but is expected to increase rapidly
Competition is high and the trend is steady
Barriers to entry are high and are increasing
Globalization is medium and the trend is increasing
Revenue is expected to grow at a declining growth rate of 39.3% to total $1.54 tillion in 2021
Pricing competition is forecast to result in slower revenue growth
Concentration is expected to increase slightly
Large-scale firms will expand, maintaining their leading positions
Industry is growing.
The Internet Services industry in China includes basic internet access and application services, such as online advertising, web portals, search engines, instant messaging, internet games, blogs, but excludes E-commerce business. Netease has a 1.5% percentage market share in the Internet Services industry.
The concentration level in the Internet Services industry is low but is expected to increase rapidly. There were about 30,590 enterprises in this industry in 2016 but the top four companies account for about 20.2% of total industry revenue.
In the next five years, total industry revenue will continue to grow at a steady rate of 39.3% per year to total $1.54 billion in 2021.
Although the number of internet users is expected to increase significantly, pricing competition is forecast to result in slower revenue growth than in the previous five years.
Industry concentration is expected to increase slightly in the five years through 2021.
Large-scale firms will expand, and thus maintain their leading positions in many fields.
Source: IBISWorld

16. Financial Analysis
(Westward Journey online)
Game segment growth results in robust return in recent years
Profit margin decreases due to product mix changes
Turnover decreases due to shift in customer and supplier
Turnover will remain stable in future
RCMP Spring 2017
EDGAR 20-F Year 2012 – 2016, Bloomberg
Projections based on analysts’ estimate

17. Financial Analysis NetEase carries small portion of debt
(Westward Journey online)
NetEase carries small portion of debt
The company has a strong balance sheet
Strong performance generate favorable return to shareholders
RCMP Spring 2017
EDGAR 20-F Year 2012 – 2016, Bloomberg
Projections based on analysts’ estimate

18. DuPont Analysis Observations
Tax Burden
0.85
0.89
0.87
0.83
0.84
Interest Burden
1.00
Operating Margin
52.2%
54.1%
46.6%
35.6%
36.4%
32.1%
30.1%
28.7%
27.5%
26.2%
Asset Turnover
0.47
0.42
0.43
0.64
0.77
0.75
0.73
0.69
0.67
0.65
Leverage Ratio
1.21
1.22
1.26
1.36
1.47
1.53
1.50
1.48
1.46
ROE
25.3%
24.7%
21.8%
25.6%
34.4%
30.6%
27.9%
24.9%
22.4%
20.5%
Observations
Tax burden is low due to offshore capital and corporate structure
No interest expenses
Operating margin slightly decreases due to change in product mix
Improving asset turnover is the key driver for earnings growth
Leverage ratio is low and bank loans are short-term in nature
(Westward Journey online)
RCMP Spring 2017
EDGAR 20-F Year 2012 – 2016, Bloomberg
Projections based on analysts’ estimate

19. Competition Companies
Kingsoft Corporation Limited operates through three segments: Entertainment Software; Information Security and Internet Services; and Cloud services, Office Software and Others. Its Entertainment Software segment is involved in the research and development of games; and provision of online games, mobile games, and casual game services.
Tencent Holdings Limited operates through VAS, Online Advertising, and Others segments. It offers online/mobile games, community VAS, and applications across various Internet and mobile platforms; instant messaging services; and online literature services
Changyou.com Limited operates through Online Game, Platform Channel, and Others segments. It develops, operates, and licenses online games, including interactive online games that are accessed and played simultaneously by various game players through personal computers; and mobile games played on mobile devices.
Perfect World Co., Ltd is a China-based video game company specializing in MMORPGs, The company aims to develop and market games with Chinese characteristics.
The Internet Services industry in China includes basic internet access and application services, such as online advertising, web portals, search engines, instant messaging, internet games, blogs, but excludes E-commerce business. Netease has a 1.5% percentage market share in the Internet Services industry.
The concentration level in the Internet Services industry is low but is expected to increase rapidly. There were about 30,590 enterprises in this industry in 2016 but the top four companies account for about 20.2% of total industry revenue.
In the next five years, total industry revenue will continue to grow at a steady rate of 39.3% per year to total $1.54 billion in 2021.
Although the number of internet users is expected to increase significantly, pricing competition is forecast to result in slower revenue growth than in the previous five years.
Industry concentration is expected to increase slightly in the five years through 2021.
Large-scale firms will expand, and thus maintain their leading positions in many fields.
RCMP Spring 2017
Source: Capital IQ

20. Competition Companies
The Internet Services industry in China includes basic internet access and application services, such as online advertising, web portals, search engines, instant messaging, internet games, blogs, but excludes E-commerce business. Netease has a 1.5% percentage market share in the Internet Services industry.
The concentration level in the Internet Services industry is low but is expected to increase rapidly. There were about 30,590 enterprises in this industry in 2016 but the top four companies account for about 20.2% of total industry revenue.
In the next five years, total industry revenue will continue to grow at a steady rate of 39.3% per year to total $1.54 billion in 2021.
Although the number of internet users is expected to increase significantly, pricing competition is forecast to result in slower revenue growth than in the previous five years.
Industry concentration is expected to increase slightly in the five years through 2021.
Large-scale firms will expand, and thus maintain their leading positions in many fields.
RCMP Spring 2017
Source: Capital IQ

21. Competition Companies
Company Comp Set
Company Name
Overall
Operational
Solvency
Liquidity
LTM Period Ending
Changyou.com Limited (NasdaqGS:CYOU) 2 3
Dec
Kingsoft Corporation Limited (SEHK:3888) 4 1
Tencent Holdings Limited (SEHK:700)
Perfect World Co., Ltd. (SZSE:002624)
NetEase, Inc. (NasdaqGS:NTES)
The Internet Services industry in China includes basic internet access and application services, such as online advertising, web portals, search engines, instant messaging, internet games, blogs, but excludes E-commerce business. Netease has a 1.5% percentage market share in the Internet Services industry.
The concentration level in the Internet Services industry is low but is expected to increase rapidly. There were about 30,590 enterprises in this industry in 2016 but the top four companies account for about 20.2% of total industry revenue.
In the next five years, total industry revenue will continue to grow at a steady rate of 39.3% per year to total $1.54 billion in 2021.
Although the number of internet users is expected to increase significantly, pricing competition is forecast to result in slower revenue growth than in the previous five years.
Industry concentration is expected to increase slightly in the five years through 2021.
Large-scale firms will expand, and thus maintain their leading positions in many fields.
RCMP Spring 2017
Source: Capital IQ

22. Assumptions Game Advertising E-mail and E-commerce
5-year exclusive license agreement with Minecraft and promotion of Onmyoji will boost revenue
Shift to mobile and license game will decrease gross margin due to product mix change
Advertising
163.com has increasing customer traffic and a loyal customer base
Internet advertising is facing increasing competition from other local giants, i.e. Tencent, Baidu, etc
and E-commerce
Kaola.com is likely to attract more customers who demand high quality foreign products
COGS margin will stabilize as revenue increases
(CNY in 000,000s)
2012A
2013A
2014A
2015A
2016A
2017E
2018E
2019E
2020E
2021E
Revenues
Online Game Services
7,200.6
7,864.5
9,266.2
17,314.1
27,980.5
34,975.6
41,970.7
48,266.3
55,506.3
63,832.2
Growth Rate %
12% 9%
18%
87%
62%
25%
20%
15%
Advertising Services
767.5
987.5
1,344.8
1,789.4
2,152.4
2,475.2
2,722.8
2,995.0
3,144.8
3,302.0 7%
29%
36%
33%
10% 5%
, e-commerce and others
232.9
344.2
1,101.8
3,699.4
8,046.0
12,069.0
15,689.6
18,043.1
19,847.4
21,832.1
91%
48%
220%
236%
117%
50%
30%
Total Revenues
8,201.0
9,196.2
11,712.8
22,802.9
38,178.8
49,519.8
60,383.1
69,304.5
78,498.5
88,966.4
27%
95%
67%
22%
13%
Cost of Revenue
1,872.7
1,649.8
2,111.7
5,393.6
9,974.1
13,290.7
16,788.3
20,271.9
24,422.8
29,362.8
% of Online Game Revenue
26%
21%
23%
31%
38%
40%
42%
44%
46%
474.2
461.3
518.7
599.0
749.7
866.3
1,007.4
1,108.2
1,163.6
1,221.7
% of Advertising Services Revenue
47%
39%
35%
37%
231.2
367.4
631.2
3,406.7
5,791.2
8,686.9
11,292.9
12,986.8
14,285.5
15,714.1
%of E-commerce Revenue
99%
107%
57%
92%
72%
Total Cost of Revenue
2,578.1
2,478.5
3,261.5
9,399.3
16,515.0
22,843.9
29,088.6
34,366.9
39,871.9
46,298.7
Gross Profit Margin
69%
73%
59%
54%
52%
49%
(Westward Journey online)
RCMP Spring 2017
EDGAR 20-F Year 2012 – 2016, Bloomberg
Projections based on analysts’ estimate

23. Weighted Average Cost of Capital
WACC
Cost of Equity
CAPM
Risk Free
2.9%
Beta
0.87
MRP
7.8%
9.7%
Weight
90%
Realized Return (Annualized)
1 Year
100%
2 Year
47%
3 Year
55%
5 Year
38%
10%
14%
Weighted Average Cost of Capital
Current Share Price
$265.68
Average ADS outstanding (mil)
131.3
Market Value of Equity
$34,872.09
Bank Loan (Mil. )
$3,815.69
Equity Weight
90.1%
Debt Weight
9.9%
Cost of Debt
1.5%
Cost of Equity
14.3%
Tax rate
20.00%
WACC
13%
Business Risk Premium 2%
Discount Factor
15%
(Westward Journey online)
NetEase is primarily financed by equity
We weighted realized return lower due to significantly high stock return
RCMP Spring 2017
Risk free rate is 30 Year Treasury bond yield as of April 15, 2017
Stock price information from Yahoo! Finance

24. DCF Projections A/R and A/P turnover will be stable
EBIT
4,278
4,976
5,458
8,110
13,895
15,886
18,160
19,887
21,551
23,326
NOPAT
3,813
4,171
4,876
7,126
11,714
13,482
15,412
16,878
18,290
19,796
Depreciation
293
234
158
174
182
328
563
638
713
843
Adjust: Changes in NWC
- Increase in Accounts Recievable
(39)
(133)
(471)
(1,741)
(1,637)
(1,691)
(1,304)
(1,071)
(318)
(1,151)
- Increase in Prepayments and Other Current Assets
(221)
(22)
(279)
(1,272)
(2,581)
(963)
(1,458)
(1,351)
(1,000)
(1,400)
+ Increase in Accounts Payable 24 61
191
290
696
415
397
326
336
383
+ Increase in Accrued Liabilty
+ Increase in Salaries and Welfare Payable 45 87
157
386
570
489
435
357
368
419
Less: Increase in NWC
(192)
(7)
(401)
(2,337)
(2,952)
(1,750)
(1,930)
(1,738)
(614)
Capital Expenditures
(410)
(179)
(219)
(537)
(866)
(1,136)
(1,875)
(2,126)
(2,375)
(2,809)
Free Cash Flow
3,505
4,220
4,415
4,426
8,078
10,925
12,169
13,651
16,013
16,081
Time to Cash Flow
0.70
1.70
2.70
3.70
4.70
WACC
15%
Discount
0.91
0.79
0.69
0.60
0.52
Present Value
9,902
9,594
9,361
9,551
8,342
Terminal Growth
Long-term Growth Rate
3.50%
Gordon Growth Free Cash Flow
145,076.9
Present Value
191,827.3
Enterpise Value (CNY)
Less: Net Debt
(3,815.7)
Equtiy Value
195,643.0
ADS Outstanding
131.3
Price per Share (CNY)
1,490.5
USD to CNY Exchange Rate
6.8799
Price per ADS (USD) $
Projections
A/R and A/P turnover will be stable
Prepayments are royalties and revenue sharing cost representing prepaid royalties or revenue sharing cost related to operations of licensed PC and mobile games
Capex is for office building construction
NetEase will generate strong cash flow in the short-term future
(Westward Journey online)
RCMP Spring 2017
EDGAR 20-F Year 2012 – 2016, Bloomberg
Projections based on analysts’ estimate

25. Comparable Valuation(China)
Comparable Companies
TEV/Total Revenues LTM
TEV/EBIT LTM
P/ Diluted EPS LTM
TEV/EBITDA LTM
Kingsoft Corporation Limited (SEHK:3888)
2.4x
19.4x NM
13.40x
Tencent Holdings Limited (SEHK:700)
12.7x
40.1x
47.7x
31.90x
Changyou.com Limited (NasdaqGS:CYOU)
1.9x
7.4x
10.1x
6.20x
Perfect World Co., Ltd. (SZSE:002624)
5.6x
33.8x
30.4x
29.40x
Average
5.7x
25.2x
29.4x
20.2x
NetEase, Inc. (NasdaqGS:NTES)
5.5x
16.6x
21.0x
16.20x
NTES Impllied Pirce
Multiples
TEV/Sales
TEV/EBIT
P/E
TEV/EBITDA LTM
Average
High $ $ $ $ $
75% $ $ $ $ $
25% $ $ $ $ $
Low $ $ $ $ $
Mean $ $ $ $ $
Median $ $ $ $ $
The Internet Services industry in China includes basic internet access and application services, such as online advertising, web portals, search engines, instant messaging, internet games, blogs, but excludes E-commerce business. Netease has a 1.5% percentage market share in the Internet Services industry.
The concentration level in the Internet Services industry is low but is expected to increase rapidly. There were about 30,590 enterprises in this industry in 2016 but the top four companies account for about 20.2% of total industry revenue.
In the next five years, total industry revenue will continue to grow at a steady rate of 39.3% per year to total $1.54 billion in 2021.
Although the number of internet users is expected to increase significantly, pricing competition is forecast to result in slower revenue growth than in the previous five years.
Industry concentration is expected to increase slightly in the five years through 2021.
Large-scale firms will expand, and thus maintain their leading positions in many fields.
NTES
Cash & ST Investment
5284.4
Debt
554.2
Minority Interest
39.49
Shares Outstanding
131.5
Implied NTES Price
$335.18
RCMP Spring 2017
Source: Capital IQ

26. Comparable Valuation(Global)
Comparable Companies
TEV/Total Revenues LTM
TEV/EBIT LTM
P/ Diluted EPS LTM
TEV/EBITDA LTM
Electronic Arts Inc. (NasdaqGS:EA)
5.2x
22.9x
21.6x
19.60x
Nintendo Co., Ltd. (TSE:7974)
5.5x
60.6x
39.2x
48.00x
Ubisoft Entertainment SA (ENXTPA:UBI)
3.1x
24.5x
45.5x
21.50x
Activision Blizzard, Inc. (NasdaqGS:ATVI)
5.8x
26.1x
37.8x
17.80x
Average
4.9x
33.5x
36.0x
26.7x
NetEase, Inc. (NasdaqGS:NTES)
16.6x
21.0x
16.20x
Impllied Pirce
Multiples
TEV/Sales
TEV/EBIT
P/E
TEV/EBITDA LTM
Average
High $ $ $ $ $
75% $ $ $ $ $
25% $ $ $ $ $
Low $ $ $ $ $
Mean $ $ $ $ $
Median $ $ $
The Internet Services industry in China includes basic internet access and application services, such as online advertising, web portals, search engines, instant messaging, internet games, blogs, but excludes E-commerce business. Netease has a 1.5% percentage market share in the Internet Services industry.
The concentration level in the Internet Services industry is low but is expected to increase rapidly. There were about 30,590 enterprises in this industry in 2016 but the top four companies account for about 20.2% of total industry revenue.
In the next five years, total industry revenue will continue to grow at a steady rate of 39.3% per year to total $1.54 billion in 2021.
Although the number of internet users is expected to increase significantly, pricing competition is forecast to result in slower revenue growth than in the previous five years.
Industry concentration is expected to increase slightly in the five years through 2021.
Large-scale firms will expand, and thus maintain their leading positions in many fields.
NTES
Cash & ST Investment
5284.4
Debt
554.2
Minority Interest
39.49
Shares Outstanding
131.5
Implied NTES Price
$323.61
RCMP Spring 2017
Source: Capital IQ

27. Technical Analysis 20-Day Moving Average 285.75 200-Day Moving Average
254.93
52 Week High
308.66
52 Week Low
130.82
RCMP Spring 2017
Share price information from BigCharts.com

28. Technical & Comparable Valuation
Recommendation
Keep on the Watch List
Industry
High revenue growth but growth rate is decreasing
Fierce competition
Company
Pros:
Broad user base
High cash resources
Cons:
Heavily rely on online game segment
Complex rights and obligations
Complicated corporate structure
DCF Valuation
Potential Downside: 18%
Technical & Comparable Valuation
Low debt and sound financial condition
Potential Upside: 21.6%-25.9%
Technical analysis: stock price tends to decrease in short term