Intrinsic value of Netease ADR - NTES

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$265.39

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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$265.39

 
Intrinsic value

$3,117

 
Up/down potential

+999%

 
Rating

str. buy

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of NTES stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 35.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  67.41
  53.10
  48.29
  43.96
  40.06
  36.56
  33.40
  30.56
  28.01
  25.71
  23.63
  21.77
  20.09
  18.58
  17.23
  16.00
  14.90
  13.91
  13.02
  12.22
  11.50
  10.85
  10.26
  9.74
  9.26
  8.84
  8.45
  8.11
  7.80
  7.52
  7.27
Revenue, $m
  5,523
  8,456
  12,539
  18,051
  25,283
  34,527
  46,059
  60,136
  76,978
  96,766
  119,636
  145,683
  174,957
  207,472
  243,212
  282,135
  324,183
  369,286
  417,374
  468,375
  522,227
  578,877
  638,288
  700,436
  765,318
  832,947
  903,357
  976,599
  1,052,745
  1,131,883
  1,214,120
Variable operating expenses, $m
 
  5,505
  8,163
  11,751
  16,460
  22,477
  29,985
  39,149
  50,113
  62,994
  77,883
  94,839
  113,897
  135,064
  158,331
  183,670
  211,043
  240,405
  271,710
  304,912
  339,970
  376,849
  415,525
  455,984
  498,222
  542,249
  588,085
  635,766
  685,337
  736,856
  790,392
Fixed operating expenses, $m
 
  103
  105
  108
  110
  113
  116
  119
  122
  125
  128
  131
  134
  138
  141
  145
  148
  152
  156
  160
  164
  168
  172
  176
  181
  185
  190
  195
  200
  205
  210
Total operating expenses, $m
  3,696
  5,608
  8,268
  11,859
  16,570
  22,590
  30,101
  39,268
  50,235
  63,119
  78,011
  94,970
  114,031
  135,202
  158,472
  183,815
  211,191
  240,557
  271,866
  305,072
  340,134
  377,017
  415,697
  456,160
  498,403
  542,434
  588,275
  635,961
  685,537
  737,061
  790,602
Operating income, $m
  1,827
  2,849
  4,271
  6,192
  8,714
  11,937
  15,959
  20,869
  26,744
  33,646
  41,625
  50,712
  60,925
  72,270
  84,740
  98,320
  112,991
  128,729
  145,507
  163,303
  182,093
  201,860
  222,590
  244,276
  266,915
  290,513
  315,082
  340,638
  367,208
  394,822
  423,518
EBITDA, $m
  1,874
  2,918
  4,374
  6,340
  8,921
  12,220
  16,336
  21,362
  27,375
  34,440
  42,606
  51,907
  62,360
  73,971
  86,734
  100,634
  115,650
  131,757
  148,930
  167,144
  186,376
  206,607
  227,824
  250,019
  273,191
  297,343
  322,489
  348,646
  375,841
  404,104
  433,474
Interest expense (income), $m
  0
  0
  43
  103
  184
  290
  426
  595
  802
  1,050
  1,340
  1,676
  2,059
  2,489
  2,967
  3,492
  4,064
  4,681
  5,344
  6,050
  6,800
  7,591
  8,423
  9,296
  10,209
  11,162
  12,156
  13,190
  14,266
  15,385
  16,547
Earnings before tax, $m
  2,010
  2,849
  4,228
  6,089
  8,530
  11,646
  15,533
  20,273
  25,941
  32,597
  40,285
  49,036
  58,866
  69,781
  81,773
  94,828
  108,928
  124,047
  140,163
  157,253
  175,294
  194,269
  214,167
  234,980
  256,706
  279,351
  302,926
  327,448
  352,942
  379,438
  406,971
Tax expense, $m
  304
  769
  1,142
  1,644
  2,303
  3,145
  4,194
  5,474
  7,004
  8,801
  10,877
  13,240
  15,894
  18,841
  22,079
  25,604
  29,410
  33,493
  37,844
  42,458
  47,329
  52,453
  57,825
  63,445
  69,311
  75,425
  81,790
  88,411
  95,294
  102,448
  109,882
Net income, $m
  1,679
  2,079
  3,086
  4,445
  6,227
  8,502
  11,339
  14,799
  18,937
  23,796
  29,408
  35,796
  42,972
  50,940
  59,694
  69,225
  79,517
  90,555
  102,319
  114,794
  127,964
  141,817
  156,342
  171,535
  187,396
  203,926
  221,136
  239,037
  257,648
  276,990
  297,089

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  5,264
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  8,396
  4,796
  7,112
  10,239
  14,341
  19,584
  26,126
  34,110
  43,663
  54,887
  67,859
  82,633
  99,238
  117,681
  137,954
  160,031
  183,881
  209,465
  236,741
  265,669
  296,215
  328,348
  362,046
  397,298
  434,100
  472,460
  512,398
  553,942
  597,133
  642,021
  688,667
Adjusted assets (=assets-cash), $m
  3,132
  4,796
  7,112
  10,239
  14,341
  19,584
  26,126
  34,110
  43,663
  54,887
  67,859
  82,633
  99,238
  117,681
  137,954
  160,031
  183,881
  209,465
  236,741
  265,669
  296,215
  328,348
  362,046
  397,298
  434,100
  472,460
  512,398
  553,942
  597,133
  642,021
  688,667
Revenue / Adjusted assets
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
Average production assets, $m
  225
  347
  514
  740
  1,037
  1,416
  1,888
  2,466
  3,156
  3,967
  4,905
  5,973
  7,173
  8,506
  9,972
  11,568
  13,291
  15,141
  17,112
  19,203
  21,411
  23,734
  26,170
  28,718
  31,378
  34,151
  37,038
  40,041
  43,163
  46,407
  49,779
Working capital, $m
  4,396
  -482
  -715
  -1,029
  -1,441
  -1,968
  -2,625
  -3,428
  -4,388
  -5,516
  -6,819
  -8,304
  -9,973
  -11,826
  -13,863
  -16,082
  -18,478
  -21,049
  -23,790
  -26,697
  -29,767
  -32,996
  -36,382
  -39,925
  -43,623
  -47,478
  -51,491
  -55,666
  -60,006
  -64,517
  -69,205
Total debt, $m
  552
  1,230
  2,944
  5,258
  8,293
  12,173
  17,014
  22,923
  29,992
  38,297
  47,897
  58,830
  71,117
  84,765
  99,767
  116,104
  133,753
  152,685
  172,869
  194,276
  216,880
  240,658
  265,595
  291,681
  318,915
  347,302
  376,855
  407,598
  439,559
  472,776
  507,295
Total liabilities, $m
  2,870
  3,549
  5,263
  7,577
  10,612
  14,492
  19,333
  25,242
  32,311
  40,616
  50,216
  61,149
  73,436
  87,084
  102,086
  118,423
  136,072
  155,004
  175,188
  196,595
  219,199
  242,977
  267,914
  294,000
  321,234
  349,621
  379,174
  409,917
  441,878
  475,095
  509,614
Total equity, $m
  5,525
  1,247
  1,849
  2,662
  3,729
  5,092
  6,793
  8,869
  11,352
  14,271
  17,643
  21,485
  25,802
  30,597
  35,868
  41,608
  47,809
  54,461
  61,553
  69,074
  77,016
  85,370
  94,132
  103,297
  112,866
  122,840
  133,223
  144,025
  155,254
  166,925
  179,054
Total liabilities and equity, $m
  8,395
  4,796
  7,112
  10,239
  14,341
  19,584
  26,126
  34,111
  43,663
  54,887
  67,859
  82,634
  99,238
  117,681
  137,954
  160,031
  183,881
  209,465
  236,741
  265,669
  296,215
  328,347
  362,046
  397,297
  434,100
  472,461
  512,397
  553,942
  597,132
  642,020
  688,668
Debt-to-equity ratio
  0.100
  0.990
  1.590
  1.980
  2.220
  2.390
  2.500
  2.580
  2.640
  2.680
  2.710
  2.740
  2.760
  2.770
  2.780
  2.790
  2.800
  2.800
  2.810
  2.810
  2.820
  2.820
  2.820
  2.820
  2.830
  2.830
  2.830
  2.830
  2.830
  2.830
  2.830
Adjusted equity ratio
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,679
  2,079
  3,086
  4,445
  6,227
  8,502
  11,339
  14,799
  18,937
  23,796
  29,408
  35,796
  42,972
  50,940
  59,694
  69,225
  79,517
  90,555
  102,319
  114,794
  127,964
  141,817
  156,342
  171,535
  187,396
  203,926
  221,136
  239,037
  257,648
  276,990
  297,089
Depreciation, amort., depletion, $m
  47
  69
  103
  148
  207
  283
  378
  493
  631
  793
  981
  1,195
  1,435
  1,701
  1,994
  2,314
  2,658
  3,028
  3,422
  3,841
  4,282
  4,747
  5,234
  5,744
  6,276
  6,830
  7,408
  8,008
  8,633
  9,281
  9,956
Funds from operations, $m
  2,623
  2,149
  3,189
  4,593
  6,434
  8,785
  11,717
  15,293
  19,568
  24,589
  30,389
  36,991
  44,407
  52,641
  61,689
  71,538
  82,175
  93,583
  105,742
  118,635
  132,247
  146,563
  161,576
  177,279
  193,671
  210,757
  228,544
  247,045
  266,280
  286,271
  307,045
Change in working capital, $m
  382
  -167
  -233
  -314
  -412
  -527
  -657
  -802
  -960
  -1,128
  -1,304
  -1,485
  -1,669
  -1,853
  -2,037
  -2,219
  -2,397
  -2,571
  -2,741
  -2,907
  -3,070
  -3,229
  -3,386
  -3,542
  -3,698
  -3,855
  -4,013
  -4,175
  -4,340
  -4,511
  -4,688
Cash from operations, $m
  2,241
  2,176
  3,422
  4,907
  6,846
  9,312
  12,374
  16,095
  20,528
  25,717
  31,692
  38,475
  46,076
  54,495
  63,726
  73,757
  84,572
  96,154
  108,483
  121,542
  135,316
  149,792
  164,962
  180,821
  197,369
  214,611
  232,557
  251,220
  270,621
  290,782
  311,732
Maintenance CAPEX, $m
  0
  -45
  -69
  -103
  -148
  -207
  -283
  -378
  -493
  -631
  -793
  -981
  -1,195
  -1,435
  -1,701
  -1,994
  -2,314
  -2,658
  -3,028
  -3,422
  -3,841
  -4,282
  -4,747
  -5,234
  -5,744
  -6,276
  -6,830
  -7,408
  -8,008
  -8,633
  -9,281
New CAPEX, $m
  -165
  -122
  -167
  -226
  -297
  -379
  -473
  -577
  -691
  -811
  -938
  -1,068
  -1,200
  -1,333
  -1,465
  -1,596
  -1,724
  -1,849
  -1,972
  -2,091
  -2,208
  -2,323
  -2,436
  -2,548
  -2,660
  -2,773
  -2,887
  -3,003
  -3,122
  -3,245
  -3,372
Cash from investing activities, $m
  -2,026
  -167
  -236
  -329
  -445
  -586
  -756
  -955
  -1,184
  -1,442
  -1,731
  -2,049
  -2,395
  -2,768
  -3,166
  -3,590
  -4,038
  -4,507
  -5,000
  -5,513
  -6,049
  -6,605
  -7,183
  -7,782
  -8,404
  -9,049
  -9,717
  -10,411
  -11,130
  -11,878
  -12,653
Free cash flow, $m
  215
  2,009
  3,185
  4,578
  6,402
  8,726
  11,618
  15,140
  19,345
  24,274
  29,961
  36,426
  43,681
  51,727
  60,559
  70,167
  80,535
  91,646
  103,483
  116,029
  129,268
  143,188
  157,780
  173,039
  188,966
  205,563
  222,840
  240,810
  259,491
  278,905
  299,079
Issuance/(repayment) of debt, $m
  216
  1,230
  1,714
  2,314
  3,036
  3,880
  4,841
  5,909
  7,069
  8,306
  9,600
  10,933
  12,287
  13,648
  15,001
  16,338
  17,649
  18,932
  20,184
  21,407
  22,604
  23,778
  24,937
  26,086
  27,233
  28,387
  29,554
  30,743
  31,961
  33,217
  34,518
Issuance/(repurchase) of shares, $m
  -173
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  42
  1,230
  1,714
  2,314
  3,036
  3,880
  4,841
  5,909
  7,069
  8,306
  9,600
  10,933
  12,287
  13,648
  15,001
  16,338
  17,649
  18,932
  20,184
  21,407
  22,604
  23,778
  24,937
  26,086
  27,233
  28,387
  29,554
  30,743
  31,961
  33,217
  34,518
Total cash flow (excl. dividends), $m
  277
  3,240
  4,899
  6,892
  9,437
  12,605
  16,459
  21,049
  26,414
  32,580
  39,561
  47,359
  55,968
  65,375
  75,561
  86,504
  98,184
  110,578
  123,667
  137,436
  151,871
  166,966
  182,717
  199,125
  216,199
  233,950
  252,394
  271,552
  291,452
  312,122
  333,597
Retained Cash Flow (-), $m
  -1,295
  -434
  -602
  -813
  -1,067
  -1,363
  -1,701
  -2,076
  -2,484
  -2,918
  -3,373
  -3,841
  -4,317
  -4,795
  -5,271
  -5,740
  -6,201
  -6,652
  -7,092
  -7,521
  -7,942
  -8,355
  -8,762
  -9,165
  -9,569
  -9,974
  -10,384
  -10,801
  -11,230
  -11,671
  -12,128
Prev. year cash balance distribution, $m
 
  4,712
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  7,518
  4,297
  6,079
  8,371
  11,242
  14,758
  18,973
  23,930
  29,662
  36,188
  43,518
  51,651
  60,580
  70,290
  80,764
  91,983
  103,926
  116,576
  129,914
  143,929
  158,611
  173,955
  189,960
  206,631
  223,976
  242,010
  260,751
  280,222
  300,451
  321,469
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  7,208
  3,934
  5,291
  6,892
  8,714
  10,710
  12,818
  14,957
  17,039
  18,972
  20,666
  22,041
  23,033
  23,598
  23,711
  23,375
  22,613
  21,469
  20,003
  18,289
  16,406
  14,434
  12,450
  10,524
  8,713
  7,061
  5,596
  4,335
  3,280
  2,421
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

NetEase, Inc. operates an interactive online community in the People’s Republic of China. The company operates through Online Game Services; Advertising Services; and E-mail, E-commerce and Others segments. It offers PC-client massively multi-player online role-playing games and mobile games; and distributes its point cards to gamers. The company’s NetEase Websites provide Chinese Internet users a network of Chinese language-based online content channels, community and communication services, including news content, community forums, mobile-based applications, open courses, and interactive online video. It also offers other Web-based applications and services, such as a full text Chinese language search engine and a Web directory. NetEase provides online advertising services that include banner advertising, channel sponsorships, direct email, interactive media-rich sites, sponsored special events, games, contests, and other activities; email services to individual and corporate users; and wireless value-added services. In addition, the company offers e-commerce services, including Caipiao, an online service that facilitates the processing of end users’ purchase orders for lotteries; Baoxian, an online service for the sale of insurance products; Kaola that sells imported maternity and baby products, skincare and cosmetics, and other general merchandise; Duobao, an online service to exchange a virtual currency for products; Wangyibao, an online payment platform; EaseRead, an e-reading apps; Cloud Music, an online music social network; and NetEase Cloud Classroom, an online education platform. Further, it provides e-commerce marketplace services for third-party vendors; and Internet finance services, as well as sells game-related accessories. The company was formerly known as NetEase.com, Inc. and changed its name to NetEase, Inc. in March 2012. NetEase, Inc. was founded in 1997 and is based in Beijing, the People’s Republic of China.

FINANCIAL RATIOS  of  Netease ADR (NTES)

Valuation Ratios
P/E Ratio 519.5
Price to Sales 157.9
Price to Book 157.9
Price to Tangible Book
Price to Cash Flow 389.3
Price to Free Cash Flow 420.2
Growth Rates
Sales Growth Rate 67.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 10.7%
Cap. Spend. - 3 Yr. Gr. Rate 38.8%
Financial Strength
Quick Ratio 10
Current Ratio 0.2
LT Debt to Equity 0%
Total Debt to Equity 10%
Interest Coverage 0
Management Effectiveness
Return On Assets 23.4%
Ret/ On Assets - 3 Yr. Avg. 19.9%
Return On Total Capital 31.6%
Ret/ On T. Cap. - 3 Yr. Avg. 25.2%
Return On Equity 34.4%
Return On Equity - 3 Yr. Avg. 27.3%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 56.7%
Gross Margin - 3 Yr. Avg. 62.6%
EBITDA Margin 37.2%
EBITDA Margin - 3 Yr. Avg. 40.6%
Operating Margin 33.1%
Oper. Margin - 3 Yr. Avg. 35.2%
Pre-Tax Margin 36.4%
Pre-Tax Margin - 3 Yr. Avg. 39.5%
Net Profit Margin 30.4%
Net Profit Margin - 3 Yr. Avg. 33.5%
Effective Tax Rate 15.1%
Eff/ Tax Rate - 3 Yr. Avg. 14.3%
Payout Ratio 21.9%

NTES stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the NTES stock intrinsic value calculation we used $5523 million for the last fiscal year's total revenue generated by Netease ADR. The default revenue input number comes from 2016 income statement of Netease ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our NTES stock valuation model: a) initial revenue growth rate of 53.1% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for NTES is calculated based on our internal credit rating of Netease ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Netease ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of NTES stock the variable cost ratio is equal to 65.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $100 million in the base year in the intrinsic value calculation for NTES stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Netease ADR.

Corporate tax rate of 27% is the nominal tax rate for Netease ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the NTES stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for NTES are equal to 4.1%.

Life of production assets of 4.8 years is the average useful life of capital assets used in Netease ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for NTES is equal to -5.7%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $5525 million for Netease ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 133.38 million for Netease ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Netease ADR at the current share price and the inputted number of shares is $35.4 billion.


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Stock chart of NTES Financial statements of NTES
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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