HONG KONG (Reuters Breakingviews) - The number two player in Chinese gaming just advanced another level. Sales at NetEase are soaring and its shares have almost doubled in a year. It also scored a real coup by bagging the Chinese rights to "Minecraft", the wildly popular block-building game. Yet the $37 billion group still looks cheap next to rivals Tencent and Activision Blizzard.
Graphic: Power up: reut.rs/2pmAtXd
The Beijing-based outfit on Wednesday once again proved its gaming skills. First-quarter revenue surged 72 percent year-on-year to 13.7 billion yuan ($2 billion). That easily beat the forecast mean of 11.8 billion yuan from analysts polled by Eikon. Thanks to hits like "Onmyoji", a fantasy role-playing game about an ancient Japanese sorcerer, and "Fantasy Westward Journey", NetEase raked in 7.9 billion yuan in sales from mobile games alone - more than double the amount from last year.
That is impressive, considering NetEase is up against the $305 billion social media and gaming behemoth Tencent. In March, eight out of the ten top-grossing mobile games in China's Apple app store came from the two, with four from NetEase, according to App Annie. Together, the pair account for more than half of China's high-flying mobile games sector, a market that is expected to hit over $21 billion in sales by 2020, according to Newzoo estimates.
Shares of the New York-listed NetEase have rocketed. Total returns for the past year topped 92 percent, a third more than Tencent's. Yet a lot of the rise reflects increased earnings expectations, rather than investors valuing near-term earnings more highly. NetEase still appears comparatively good value: its shares trade at some 17 times forward earnings, well below 34 times at Tencent and 26 times at Candy Crush-parent Activision.
That is understandable. NetEase lacks the breadth of Tencent, which also runs China's pre-eminent social network. Its success has relied on a handful of hit titles and there are signs that Chinese gamers may be moving on already: "Onmyoji", for instance, has slipped in rankings since debuting last September. And while NetEase is preparing a major update for that game, and is dabbling in things like e-commerce, competition from Tencent will be fierce. The journey continues.
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