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NetEase latest business and financial analysis ( NetEase, Inc. (NTES)) – written by Business expert on Chinese market Doug Young

News Digest: June 12, 2012 报摘： 2012年6月12日

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The following press releases and media reports about Chinese companies were carried on June 12. To view a full article or story, click on the link next to the headline.

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◙ Huawei, ZTE (HKEx: 763) Execs Sentenced to 10 Years for Corruption in Algeria (English article)

◙ 7 Days (NYSE: SVN) Announces Strategy Update and Share Repurchase Program (PRNewswire)

◙ Lenovo (HKEx: 992) Launches No-Contract Mobile Broadband Service (English article)

◙ NetEase (Nasdaq: NTES) Invests Over RMB 10 Mln in Mobile Literature Content (English article)

◙ Shanda Games (Nasdaq: GAME) Reports Q1 Unaudited Results (PRNewswire)

Russia’s DST Builds More Valuation Froth 俄罗斯DST助长中国互联网企业估值虚高

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When historians write about the China Internet bubble of 2011-2012 years from now, they are likely to feature Russia’s Digital Sky Technologies (DST) as perhaps the biggest foreign force that pumped in big sums of money and drove up valuations to unsustainable levels. The company, which rose to prominence as an early investor in Facebook (Nasdaq: FB), has been a steady investor in Chinese Internet companies, and is now making headlines yet again with another reported purchase of a stake in Xiaomi, an up-and-coming maker of low-cost, high-performance smartphones. (Chinese article) The Chinese headlines are buzzing with news of this major new investment in Xiaomi, including an interesting twist that saw Internet giant Tencent (HKEx: 700) withdraw from the new investor group after Xiaomi refused to shutter one of its services that competed with Tencent’s Weixin instant messaging service. But I’m digressing from the main subject of this posting, which is that DST has become a major force behind China’s Internet bubble, repeatedly making big new investments that drive up valuations for some interesting start-ups — many of them money-losing companies — to overinflated levels. In a similar pattern seen in DST’s previous investments, unnamed sources in this instance are saying this new capital raising values Xiaomi at around $4 billion — a number that puts it in the same ranks as much older names like Sina (Nasdaq: SINA) and NetEase (Nasdaq: NTES) that have much longer operating histories. I have little doubt that the unnamed sources in this case are inside DST, as similar unnamed sources have also flouted sky-high valuations after DST made other recent investments in e-commerce leaders Alibaba (previous post) and Jingdong Mall, which also goes by the name 360Buy. (previous post) I wrote about Xiaomi earlier this year, as it really does look like an interesting company that is full of market potential due to its niche as maker of low-cost, high-performance smartphones that sell for around $300 each. (previous post) The company previously raised around $90 million in new funding last year, and counts such big names as Singapore’s Temasek, leading chipmaker Qualcomm (Nasdaq: QCOM) and tech investment specialist IDG among its earlier investors. Furthermore, its CEO disclosed late last year that it sold nearly 400,000 of its first smartphone in 2011, and hinted its major new customers could include China Unicom (HKEx: 762; NYSE: CHU), China’s second largest wireless carrier. This kind of early progress is certainly encouraging, though I sincerely believe that DST isn’t doing Xiaomi or any of its other investments any favors by giving them more money than they probably need and filling the market with such high valuations. I’ve previously said that China’s overheated Internet space is in the midst of a much needed correction, which is already starting to see valuations for many companies come down. By the time the bubble finally finishes bursting, look for valuations of many of DST’s investments, and Internet companies in general, to be quite a bit lower than figures now in the market, more in line with peers from the US and Europe.

Bottom line: Russia’s Digital Sky is adding to China’s Internet bubble by investing in companies at inflated valuations, which will come down sharply by the time a current correction ends.

Related postings 相关文章:

◙ Xiaomi: A Fresh Face In Smartphones　　小米：智能手机新面孔

◙ More Internet Froth in Alibaba Valuation, Dangdang Price War 阿里巴巴估值奇高凸显网络泡沫

◙ 360Buy — More Details But Still Pricey 京东商城值多少？

 

Renren Weighs Game Unit Spin-Off 人人网考虑分拆游戏业务

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Renren (NYSE: RENN) investors tired of seeing losses quarter after quarter could soon have another alternative as China’s leading social networking site reportedly plans to spin off its online game unit into a separately listed company. If true, the news would mark the latest plan by an Internet company to spin off an individual business into a separate unit, as part of a broader trend by this sector to provide investors with clearer choices focused on specific businesses like games or e-commerce. Many of China’s Internet companies, especially the older ones, often have lots of different businesses, from portals, to games, e-commerce and social networking, under a single company. One or more of the businesses are often profitable and end up subsidizing the others that are losing money — frustrating investors who might like the profitable units but care less for the loss-making ones. In this latest case, media are citing unnamed sources saying Renren is crafting a plan to spin off its game unit by September, and would eventually list the business separately with an IPO. (Chinese article) Renren may have hinted at this move when it released its first-quarter results last month, at which time it said its online game revenue nearly doubled to $17.5 million, accounting for more than half of the company’s total revenue. (previous post) I’m normally not a big fan of online game stocks, as business for such companies can vary widely due to their dependence on 1 or 2 popular titles for success. But in Renren’s case, the company actually looks a bit more interesting than traditional rivals like Shanda Games (Nasdaq: GAME) and The9 (Nasdaq: NCTY), which are simply game companies and little more. Renren brings the added advantage of millions of users for its core social networking site, which provide an instant audience for its games. For that reason, it could probably find more success with so-called casual gamers, the people who like to play games occasionally but aren’t as fanatical as hard-core players who can spend hours playing at Internet cafes. Renren hasn’t commented in too much detail on the game business, but presumably its profitable or would become profitable by the time of a public listing, most likely late this year or in early 2013. That would be an attractive alternative for investors, who have shunned Chinese IPOs for nearly a year now partly because most of the ones to list during that time were losing money. An IPO for Renren’s game unit would parallel a similar move by Internet portal Sohu (NYSE: SOHU), which spun off its gaming business into a separately listed company, Changyou (Nasdaq: CYOU) several years ago. Others reportedly weighing similar moves include gaming company NetEase (Nasdaq: NTES), which may spin off its portal business; and Internet giant Tencent (HKEx: 700), which recently reorganized and has discussed spinning off its e-commerce business. Look for more such spin-off plans in the next 12 months, potentially providing stock buyers with some more focused, and perhaps even profitable, China Internet investment options.

Bottom line: Renren’s reported plan to spin off its online games business is part of a trend that could see a flurry of similar moves and IPOs by profitable Chinese Internet companies in the next year.

Related postings 相关文章:

◙ Renren: China’s Next Gaming Company? 人人网：中国下一个网游企业？

◙ Tencent E-Commerce: Another Money Loser IPO 腾讯电商：将又一个失败的

◙ NetEase Name Change: Spin-Off Coming 网易更名：预示业务分拆

News Digest: May 19-21, 2012 报摘： 2012年5月19-21日

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The following press releases and media reports about Chinese companies were carried on May 19-21. To view a full article or story, click on the link next to the headline.

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◙ Yahoo (Nasdaq: YHOO) Finally Set to Strike Alibaba Share Deal (English article)

◙ Tencent (HKEx: 700) Reorganizes Into 6 Units, Splits Off E-Commerce (Chinese article)

◙ China Cries Foul After US Sets Tariffs on Solar Imports (English article)

◙ NetEase (Nasdaq: NTES) Upgrades Youdao Search Engine (English article)

◙ China Unicom (HKEx: 762) Announces April Subscribers Data (HKEx announcement)

◙ Latest calendar for Q1 earnings reports (Earnings calendar)

Baidu Smartphones Set to Stumble 百度进军智能手机市场或以失败告终

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I don’t like to sound too negative for 2 days in a row, but one day after predicting failure for PC giant Lenovo’s (HKEx: 992) new smart TV initiative I have to give a similar forecast for the recent rush into smartphones by a growing number of Chinese Internet players, with search leader Baidu (Nasdaq: BIDU) leading the charge. Chinese media have been buzzing for the last few days about Baidu’s new offering, a low-end smartphone that runs on the company’s self-developed operating system and was co-developed with TV maker Changhong (Shanghai: 600839). (Chinese article; English article) Baidu’s move follows the announcement of similar self-developed smartphones from online game specialist Shanda and Internet security firm Qihoo 360 (NYSE: QIHU), and the latest reports that online game specialist NetEase (Nasdaq: NTES) may also be getting into the space. (English article) Let’s have a closer look at the Baidu smartphone initiative, as that one is the most advanced, following the previous roll-out of an original Baidu model that failed to gain much attention under a partnership with Dell (Nasdaq: DELL). This latest tie-up with Changhong differs from the Dell model in that it is significantly cheaper, costing just 899 yuan, or about $140. I’ve looked at pictures of the new phone, and while a photo doesn’t always tell the full story, the handset truly does look clunky and cheap. I’m a bit surprised that Baidu is partnering with such unexperienced companies, first with Dell and now Changhong, in this initiative that is no doubt costing a lot of money. Dell is more known for its computers than cellphones, though the 2 product types do share some similarities. Changhong is known almost exclusively for its TVs, which have almost nothing in common with smartphones. That said, I really don’t expect much if any success for this new Baidu-Changhong model, which will have to compete with much more attractive low-cost smartphones from fast-growing domestic firms ZTE (HKEx: 763; Shenzhen: 000063) and Huawei, which mostly use Google’s (Nasdaq: GOOG) popular and reliable Android operating system. In fact, Baidu’s initiative looks like an attempt to imitate Google with Android, acknowledging the increasing importance of the mobile Internet. I applaud Baidu for putting big resources into this important new area, but honestly believe its smartphone initiative is set for failure. If Baidu wants to increase its chances of success, it could start by partnering with a major smartphone maker rather than Changhong, though I suspect many such players would be reluctant to form such a tie-up. Meantime, I would make similar predictions for the other smartphone initiatives from Shanda, Qihoo and now NetEase. I’m not sure why all these companies are taking such steps, as the smartphone market is already quite crowded with much more experienced and resource-rich players like Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930). Perhaps all these companies just have too much money and are looking for a place to spend it.

Bottom line: Baidu’s smartphone initiative is likely to fail due to competition and inexperience, but could stand a better chance of success with better manufacturing partners.

Related postings 相关文章:

◙ Huawei Follows ZTE to Lower Profits 继中兴之后华为利润也降低

◙ ZTE Results: Waiting for Returns 中兴坚持低成本手机策略 亟需尽早盈利

◙ Nokia Bets on China Telecom 诺基亚联手中国电信

News Corp Makes New Play for China 新闻集团入股博纳影业集团

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Rupert Murdoch isn’t giving up on China’s difficult media market despite his numerous setbacks there, with word that his flagship News Corp (Nasdaq: NWSA) is buying 20 percent of Bona Film (Nasdaq: BONA), one of the nation’s few privately held movie distributors. But if past experience is any indicator, this latest tie-up could also be doomed for disappointment due to the nature of the investment. Murdoch was once one of China’s most bullish media investors, seeing huge potential in its market of 1.3 billion viewers. But the company, now at the center of an unrelated hacking scandal in Britain, largely abandoned the market 2 years ago after many failed ventures, mostly caused by News Corps’ own overzealousness and Beijing’s equally strong reluctance to open the sensitive sector. The main difference this time seems to be strong signals from Beijing that it’s finally preparing to liberalize the sector, including a big new opening to foreign investment. Let’s look at the actual news, which says that News Corp will acquire the stake from Bona’s chief executive. (English article) No other terms were given, but based on Nasdaq-listed Bona’s latest market value, that would translate to a purchase price of about $75 million. From an investor’s perspective, this deal does indeed look like an interesting play into a sector that could soon see rapid expansion. China’s movie market is already the world’s second largest after the US, with the majority of revenue coming from US films. What’s more, the market could soon be set for big new growth, following China’s relaxation earlier this year of a strict quota that previously only allowed the import of 20 foreign films each year. Under the new quota, the number will rise to 34, or about 40 percent higher than the previous total. If ticket sales rise by a similar amount, that could translate to nearly a $3 billion box office next year, a healthy boost from the $2.1 billion for 2010. This latest tie-up follows a number of previous failures for News Corp, including its operation of a TV station that never gained an audience and which it sold a couple of years ago. Other News Corp investments in Internet company NetEase (Nasdaq: NTES) and Phoenix Satellite Television (HKEx: 2008) were successful in terms of financial returns, but were also largely failures in helping News Corp gain access to China. Frankly speaking, this latest tie-up looks most similar to the earlier Phoenix one, which saw News Corp also sign on as a strategic minority investor, only to be largely ignored by the company’s charismatic founder and chief executive Liu Changle. I suspect the same will happen in this latest tie-up, since founders of Chinese companies often like to run their own shows and don’t seem to like listening to so-called strategic investors, regardless of how much experience those investors bring. If that’s the case, look for another frustrating tie-up for News Corp in terms of expanding its China presence, though it will probably earn a nice return on this modest investment.

Bottom line: News Corp’s return to China with a new investment in a film distributor is likely to earn good financial returns, but will ultimately end in frustration in terms of as a strategic tie-up.

Related postings 相关文章:

◙ Disney, Tencent Tie-Up to Animate China 迪斯尼、腾讯合作研发动漫

◙ More Media IPOs From People’s Daily, Shopping Channel 电视购物，继人民日报后又一计划上市的媒体

◙ QVC Opens Shop in China QVC与中央人民广播电台合作运营电视购物频道

News Digest: May 16, 2012 报摘： 2012年5月16日

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The following press releases and media reports about Chinese companies were carried on May 16. To view a full article or story, click on the link next to the headline.

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◙ Sina (Nasdaq: SINA) Reports Q1 Financial Results (PRNewswire)

◙ News Corp (Nasdaq: NWSA) to Acquire 20 Pct of Chinese Film Distributor (English article)

◙ SouFun (NYSE: SFUN) Announces Unaudited Q1 Results (Businesswire)

◙ NetEase (Nasdaq: NTES) to Launch Smartphone – Source (English article)

◙ Suntech (NYSE: STP), Krannich Solar Announce 120MW Sales Agreement (PRNewswire)

◙ Latest calendar for Q1 earnings reports (Earnings calendar)

Renren: China’s Next Gaming Company? 人人网：中国下一个网游企业？

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Renren (NYSE: RENN) has reported a widening loss that should normally be worrisome, and yet investors seem to be focusing on surprising strength in the online game business for this leading social networking site, which could perhaps finally lead it to its goal of long-term profits. The upbeat news for Renren’s game business comes as another major online game developer, Japan’s Nexon (Tokyo: 3659), is also reporting strong growth in its China business, testifying to the resilience of this market dominated by teen-agers and 20-somethings who seem less like to reduce spending on their hobby even as China’s economy shows signs of slowing. In fact, the slowing economy hit Renren’s other main business, advertising, in the first quarter, with ad sales climbing an anemic 15 percent as the business experienced a “challenging period”, Renren said in its results announcement. The advertising slowdown is hardly unique to Renren, with other major ad-dependent companies also like Sohu (Nasdaq: SOHU) and Phoenix New Media (NYSE: FENG) also reporting weakness in the most recent quarter. But while Renren’s advertising revenue reached just $9.3 million for the quarter, online game revenues soared 90 percent to $17.5 million, meaning games now account for more than half of Renren’s revenue. Despite that rise, the company’s net loss ballooned to $13.6 million, far bigger than the $2.6 million a year earlier. Investors clearly seemed to be focused on the upbeat story in online games, bidding up Renren shares by nearly 3 percent in after-hours trading after the results came out. If online games can continue growing at a similar rate, the business could potentially lead Renren to the elusive goal of long-term profitability, although such a shift would make the company look more like an online game company competing with names like Shanda Games (Nasdaq: GAME) and NetEase (Nasdaq: NTES) rather than a social networking company like Facebook. If that happened, Renren certainly wouldn’t be the first to make such a transition, as NetEase itself started out as a portal company before becoming a gaming giant, and gaming leader Tencent (HKEx: 700) also rose to fame on the back of its popular QQ instant messaging platform. Of course, the big risk in moving into online games is becoming dependent on individual game titles as a major revenue source, meaning one needs to develop or license a steady stream of new games to stay successful. Meantime, Nexon, supplier of a popular gaming title to Tencent, has said its China sales also rose similarly by nearly 90 percent in the first quarter and should remain robust throughout the year, even as the broader China online game market is only expected to grow about 12 percent. (English article) All that says that there’s still plenty of growth opportunity in China’s online game market despite the broader economic slowdown, though companies with popular titles and a wider arrange of complementary social networking offerings like Renren and Tencent could be better positioned to thrive in the current climate.

Bottom line: An unexpectedly rapid growth in gaming revenue could help lead Renren into the profit column by the end of this year, transforming it into an online game play.

Related postings 相关文章:

◙ NetEase: Still a Gamer With WoW Renewal　　网易续签《魔兽世界》运营权

◙ Online Games: Where’s the Excitement? 中国网游企业增长有限

◙ Shanda Delists: Thanks for the Profits 盛大网络退市：获利可喜

Perfect World Plays On Brazil 完美时空开拓巴西市场

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China’s online game operators contending with a fiercely competitive home market are trying a number of tricks to bring back some excitement to their business and sluggish stocks, as evidenced by an interesting new overseas licensing deal from Perfect World (Nasdaq: PWRD). I previously applauded NetEase (Nasdaq: NTES) as one of the sector’s more interesting names for its ability to develop its own popular games, and now would similar kudos to Perfect World, which is looking beyond its home market with this new deal to offer one of its own self-developed titles in Brazil. (company announcement) The deal will see Perfect World license its new “Forsaken World” title to a local operator for unspecified terms. “Forsaken World” marks an interesting milestone for Perfect World, as it is one of the company’s first online games developed by a multinational team, which probably means a team led by managers from the US or Europe. That move sounds strikingly familiar to a similar one by rival The9 (Nasdaq: NCTY), which in December announced a landmark deal to offer “Firefall”, the first major title developed by its own recently acquired US-based team, to a Singapore company that planned to operate the game in several Southeast Asian markets. (previous post) While NetEase has been able to build its business by creating popular games based on Chinese themes such as the classic novel “Journey to the West,” such titles have relatively limited appeal outside China and thus can’t really be used to generate profits through licensing deals in other countries. By contrast, this new generation of Chinese-owned titles developed by Western-based teams has much bigger potential as such games typically are designed by teams with more international experience in creating games that can appeal in many markets. I also like the fact that both The9 and now Perfect World have chosen developing markets like Southeast Asia and Brazil to launch this new crop of titles developed by their international teams, as such markets tend to be less competitive than the West and the Chinese firms can also offer some expertise to their licensing partners in areas like technical operations and payments for these less developed markets. Investors seem to like this new, more international focus, bidding up The9 shares some 40 percent since it announced its Southeast Asia deal last year. Perfect World’s shares are also up about 30 percent over the same period, though it’s latest announcement didn’t do much to boost its stock, perhaps because the company is already one of China’s most outwardly focused online game firms. Still, this newer focus on developing titles with more international appeal should help both of these companies find stable growth over the longer term by giving them a dependable revenue source from licensing fees, helping them to diversify beyond their own crowded home market.

Bottom line: Perfect World’s new licensing deal in Brazil marks an important step in global diversification, a longer-term move that more Chinese online game operators need to take to survive.

Related postings 相关文章:

◙ Online Games: Where’s the Excitement? 中国网游企业增长有限

◙ The9 WoWs Wall Street With New Deal

◙ NetEase: Still a Gamer With WoW Renewal　　网易续签《魔兽世界》运营权

News Digest: April 13, 2012 报摘： 2012年4月13日

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The following press releases and media reports about Chinese companies were carried on April 12. To view a full article or story, click on the link next to the headline.

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◙ Google (Nasdaq: GOOG) to Sell Motorola Handset Business to Huawei – Report (English article)

◙ NetEase (Nasdaq: NTES) Accuses Tencent (HKEx: 700) of Copying News (Chinese article)

◙ 360Buy Launches Online Real Estate Business (English article)

◙ Canadian Solar (Nasdaq: CSIQ) Launches Reseller Program for the EMEA Region (PRNewswire)

◙ Wal-mart (NYSE: WMT) International Focusing on Existing Markets (English article)

◙ Latest calendar for Q1 earnings reports (Earnings calendar)

New Crackdown Spotlights Social Networking Risk 新的打压凸显社交网络风险

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It’s a beautiful spring day here in Shanghai, and if you’re an avid microblogger you’re probably getting up and perusing the latest news and gossip on Sina’s (Nasdaq: SINA) popular Weibo service to read and pass on to your friends the latest news about your favorite celebrity or social issue. But a quick attempt to pass on someone else’s posts with your own insightful comments attached is suddenly impossible — blocked by Weibo itself as punishment from Beijing for spreading rumors, underscoring again the perils big companies face when setting up shop in China’s social networking realm. (English article) The news that Sina’s Weibo and another popular microblogging service from Tencent (HKEx: 700) are both being punished for spreading rumors should come as a surprise to no one, though enthusiastic investors who purchased stock of both companies on big hopes for their microblogging services might decide that Monday is a good time to sell some of their shares. The reports on what happened are actually quite detailed, saying both Sina and Tencent angered Beijing by allowing rumors to spread on their services that troops had moved into the nation’s capital as part of a coup attempt that never happened. Beijing has always been sensitive about any kind of rumor that could foment social unrest, and those sensitivities will only increase this year as the nation prepares for a major handover of power from the current leaders following the end of their official 10-year term in office. What’s interesting in this situation is the very public way in which the matter is being handled, with news of the false rumors and unspecified punishment both appearing in a report from Xinhua, the central news agency considered the voice of the Communist Party itself. No specifics of the punishment have been disclosed, and I suspect both Sina and Tencent will face limits on their microblogging operations and perhaps some small fines over the short term. But the longer term implications could be much more worrisome, with both companies facing big consequences — including even a possible shut-down — if they commit any similar transgressions in the year ahead during the sensitive power handover. That could pose a big risk to both companies, as well as other microblogging services, as all have now officially been warned that Beijing won’t tolerate any political rumors in the months ahead. That means all these services will undoubtedly delete any political postings on their services that are even remotely political for fear of offending Beijing, which could easily anger many of their millions of users who will no longer be able to post many of their thoughts online. Advertisers will also undoubtedly think twice about wanting to play in such a dangerous space, where their ads could not only suddenly become in accessible but they could also risk angering Beijing by doing business with companies accused of spreading rumors. This latest development comes only months after Beijing announced its “real name” policy for all microblogging sites, requiring them to register all their users by their real names, again as a measure to try and curb rumor mongering and other unsavory activities such as scams. (previous post) Sina, Tencent, NetEase (Nasdaq: NTES) and other microblog site operators aren’t the only ones at risk, as other social networking site operators like Renren (NYSE: RENN) and Kaixin, whose services are more similar to Facebook, could just as easily be accused of spreading rumors and also be punished. To anyone considering buying shares of any of these companies, I would just reiterate that they may have good great growth potential due to the size of China’s Internet market — which recently passed 500 million users — but they also come with huge risk. Especially in the coming year with the leadership change, these companies will have to be especially careful about what they allow on their sites, and can risk punishment or closure at any time. At the same time they face the risk of punishment by their own users, who might become frustrated with all the new restrictions and could easily end up abandoning their accounts.

Bottom line: The latest punishment for Sina and Tencent microblogging services for spreading rumors  underscores the big risks China Internet companies face due to political considerations.

Related postings 相关文章:

◙ Real Name Registration: Burden or Not for Weibo? 实名制会否成为新浪微博的负担？

◙ Sina Gets Serious on Weibo 新浪开始严肃对待微博

◙ Microblog Clampdown: Only Chapter 1? 实名制向网络行业吹去冷风