Saturday, November 06, 2004

Sina, Netease, Sohu: Comments on the earnings reports

The Motley Fool's Tim Goh wrote a trilogy on recent earnings reports from the three big China portals:

Game On for SINA

"...SINA (Nasdaq: SINA) had an excellent third quarter, reporting $52.5 million in revenue, which represented 65% year-over-year revenue growth. While advertising revenue was one of the highlights -- up 61.8% year over year -- mobile services still form the bulk of SINA's revenue, coming in at 60%."

"Mobile services may be SINA's sweet spot, but the company is looking beyond that. In the quarter, SINA launched the online gaming portal iGame, which has 3.6 million users to date despite debuting in July."

"SINA also managed to land prime property from Korean company NCSoft. Lineage 2 is the hottest massively multiplayer online game in the world right now, and Chinese gamers have latched onto the beta to the tune of 2 million subscribers and more than 100,000 concurrent users. The official launch scheduled for Nov. 11 should provide a new steady stream of revenue." Read More

Third Quarter a Breeze for NetEase

"Chinese Internet company NetEase (Nasdaq: NTES) sailed through its third quarter, reporting a revenue increase of 63% year-on-year and net income of $13.2 million, or 34 cents per share (excluding an insurance benefit of $2 million)."

"Like peers SINA and SOHU, NetEase has experienced a decrease from the second quarter in revenue from short message service (SMS)-related services. The company also had a sharp decline in gross margins for this sector -- down 69% to 53.2% from the second to the third quarters. However, the story this quarter for NetEase is the same as last year -- growth in online games and advertising more than offset the decline in wireless services."

"Unlike its fellow portals, NetEase already recognizes a large portion of its revenue -- two-thirds -- from online games. Its massively multiplayer online games (MMOGs) are mature, with one of them already into its fourth expansion pack. Subscriber numbers grew from 430,000 in the second quarter to 555,000 in the third, driving the 21.8% growth in gaming revenue."
Read More

SOHU So Hurt by Suspension

"While third-quarter profits tripled year over year to $0.21 per diluted share and were in line with expectations, fourth-quarter forecasts are for a sequential decline to $0.17 to $0.19, which would be significantly below expectations. This is largely due to leading mobile operator China Mobile's one-year suspension of SOHU's multimedia messaging services (MMS). The effect will be even more prominent in the fourth quarter, because there was only a month's worth of impact in the third."

"SOHU has strength in Web properties -- particularly in sports -- coming in first in traffic rankings for the first nine months of 2004, helped by partnerships with and Formula One."

"Priced at 22 times trailing earnings, SOHU is clearly the ugly duckling compared with peers SINA and NetEase, both of which did not experience MMS suspensions. True, the suspension will take its toll, but as SOHU continues to diversify, it should emerge as a stronger, more balanced company. With both the lackluster fourth-quarter and rate-increase news likely to be priced in following this earnings release, now may be a good time to get into SOHU." Read More

Tim Goh's conclusion:

"Having examined these companies, I would recommend that those interested in China stocks buy a basket of all three. There is still plenty of room for growth, and buying all three at the current valuations would allow investors to capitalize on that, while hedging bets should any company underperform."


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