Morningstar | NetEase has been consolidating its leadership of online gaming in the mobile Internet wave.
NetEase is a leading online services provider in China, and the majority of its revenue is generated from online games. Over the past 17 years, it has launched 27 self-developed PC-client games, some of which have become strong intellectual property, such as Westward Journey Online II and Fantasy Westward Journey. During the transition from PC-client games to mobile games, which began in 2013, NetEase built up a mobile game portfolio that amounted to over 100 titles by the end of 2016, and four of its mobile games have been listed in the top 10 grossing games in the China iOS store: Fantasy Westward Journey Mobile (2015), Mobile Westward Journey Online (2015), New Ghost (2016), and Onmyoji (2016). In addition, NetEase has partnered with global leading online/video game companies to operate their most popular international online/mobile games in China, and its exclusive licenses with Blizzard started in 2008. In 2016, NetEase announced an exclusive partnership with Mojang under Microsoft to license its global popular sandbox game, Minecraft, in mainland China.During the forecast market consolidation of the online/mobile game market, we think moaty NetEase will be one of the long-term winners, given its strong IP and sophisticated research and development capability. On one side, NetEase continues to invest in developing new games in a variety of genres; on the other, it has been expanding to pan-entertainment areas, such as monetizing its online game IP through movies and drama series and developing a new game based on the scenario of an upcoming movie/drama.Alongside its online/mobile game business, the explosive growth of NetEase’s e-commerce business has attracted investors’ attention. Through cross-selling to the users of NetEase’s various internet services, such as email and media users, its e-commerce services have gained great popularity among online shoppers who pay more attention to quality. However, investors should be aware that the margins of NetEase’s e-commerce business are much lower than those of its online games and advertising business. Moreover, NetEase needs to grab market share from existing e-commerce players, such as Alibaba and JD.com.
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