Intrinsic value of Netease ADR - NTES

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$333.56

  Intrinsic Value

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  Value-price divergence*

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$333.56

 
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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 44.7

 

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
  58,452
  86,679
  124,783
  174,778
  238,674
  318,397
  415,706
  532,129
  668,915
  827,013
  1,007,065
  1,209,428
  1,434,198
  1,681,259
  1,950,323
  2,240,987
  2,552,776
  2,885,191
  3,237,749
  3,610,012
  4,001,620
  4,412,309
  4,841,924
  5,290,435
  5,757,938
  6,244,662
  6,750,966
  7,277,338
  7,824,398
  8,392,885
Variable operating expenses, $m
 
  38,111
  56,514
  81,359
  113,955
  155,615
  207,595
  271,040
  346,948
  436,133
  539,212
  656,607
  788,547
  935,097
  1,096,181
  1,271,611
  1,461,123
  1,664,410
  1,881,145
  2,111,012
  2,353,728
  2,609,056
  2,876,825
  3,156,934
  3,449,364
  3,754,176
  4,071,520
  4,401,630
  4,744,825
  5,101,507
  5,472,161
Fixed operating expenses, $m
 
  707
  725
  743
  762
  781
  800
  820
  841
  862
  883
  905
  928
  951
  975
  999
  1,024
  1,050
  1,076
  1,103
  1,131
  1,159
  1,188
  1,218
  1,248
  1,279
  1,311
  1,344
  1,378
  1,412
  1,447
Total operating expenses, $m
  3,696
  38,818
  57,239
  82,102
  114,717
  156,396
  208,395
  271,860
  347,789
  436,995
  540,095
  657,512
  789,475
  936,048
  1,097,156
  1,272,610
  1,462,147
  1,665,460
  1,882,221
  2,112,115
  2,354,859
  2,610,215
  2,878,013
  3,158,152
  3,450,612
  3,755,455
  4,072,831
  4,402,974
  4,746,203
  5,102,919
  5,473,608
Operating income, $m
  1,827
  19,634
  29,439
  42,682
  60,061
  82,278
  110,002
  143,845
  184,340
  231,921
  286,917
  349,553
  419,953
  498,150
  584,103
  677,713
  778,839
  887,316
  1,002,970
  1,125,633
  1,255,154
  1,391,405
  1,534,296
  1,683,772
  1,839,823
  2,002,483
  2,171,831
  2,347,992
  2,531,136
  2,721,478
  2,919,277
EBITDA, $m
  1,874
  20,113
  30,150
  43,705
  61,494
  84,235
  112,613
  147,254
  188,704
  237,406
  293,699
  357,811
  429,870
  509,910
  597,889
  693,706
  797,215
  908,249
  1,026,629
  1,152,183
  1,284,756
  1,424,218
  1,570,476
  1,723,476
  1,883,205
  2,049,698
  2,223,037
  2,403,350
  2,590,810
  2,785,639
  2,988,098
Interest expense (income), $m
  0
  0
  297
  712
  1,271
  2,005
  2,943
  4,114
  5,543
  7,252
  9,260
  11,582
  14,225
  17,197
  20,497
  24,124
  28,075
  32,343
  36,920
  41,801
  46,977
  52,443
  58,193
  64,223
  70,531
  77,116
  83,980
  91,127
  98,560
  106,289
  114,321
Earnings before tax, $m
  2,010
  19,634
  29,142
  41,970
  58,790
  80,272
  107,058
  139,731
  178,797
  224,669
  277,657
  337,972
  405,728
  480,953
  563,606
  653,589
  750,764
  854,974
  966,050
  1,083,832
  1,208,176
  1,338,962
  1,476,102
  1,619,549
  1,769,292
  1,925,367
  2,087,851
  2,256,865
  2,432,576
  2,615,190
  2,804,956
Tax expense, $m
  304
  5,301
  7,868
  11,332
  15,873
  21,674
  28,906
  37,728
  48,275
  60,661
  74,967
  91,252
  109,546
  129,857
  152,174
  176,469
  202,706
  230,843
  260,834
  292,635
  326,208
  361,520
  398,548
  437,278
  477,709
  519,849
  563,720
  609,354
  656,795
  706,101
  757,338
Net income, $m
  1,679
  14,333
  21,274
  30,638
  42,916
  58,599
  78,153
  102,004
  130,522
  164,008
  202,689
  246,719
  296,181
  351,096
  411,433
  477,120
  548,058
  624,131
  705,217
  791,198
  881,969
  977,442
  1,077,555
  1,182,271
  1,291,584
  1,405,518
  1,524,131
  1,647,512
  1,775,780
  1,909,088
  2,047,618

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
  33,136
  49,137
  70,739
  99,080
  135,302
  180,497
  235,661
  301,660
  379,204
  468,828
  570,899
  685,617
  813,038
  953,095
  1,105,625
  1,270,401
  1,447,152
  1,635,596
  1,835,458
  2,046,492
  2,268,492
  2,501,309
  2,744,855
  2,999,113
  3,264,137
  3,540,058
  3,827,078
  4,125,475
  4,435,600
  4,757,871
Adjusted assets (=assets-cash), $m
  3,132
  33,136
  49,137
  70,739
  99,080
  135,302
  180,497
  235,661
  301,660
  379,204
  468,828
  570,899
  685,617
  813,038
  953,095
  1,105,625
  1,270,401
  1,447,152
  1,635,596
  1,835,458
  2,046,492
  2,268,492
  2,501,309
  2,744,855
  2,999,113
  3,264,137
  3,540,058
  3,827,078
  4,125,475
  4,435,600
  4,757,871
Revenue / Adjusted assets
  1.763
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
  1.764
Average production assets, $m
  418
  2,397
  3,554
  5,116
  7,166
  9,786
  13,054
  17,044
  21,817
  27,426
  33,908
  41,290
  49,587
  58,802
  68,932
  79,963
  91,880
  104,664
  118,293
  132,748
  148,010
  164,066
  180,905
  198,519
  216,908
  236,075
  256,031
  276,790
  298,371
  320,800
  344,108
Working capital, $m
  4,396
  -3,332
  -4,941
  -7,113
  -9,962
  -13,604
  -18,149
  -23,695
  -30,331
  -38,128
  -47,140
  -57,403
  -68,937
  -81,749
  -95,832
  -111,168
  -127,736
  -145,508
  -164,456
  -184,552
  -205,771
  -228,092
  -251,502
  -275,990
  -301,555
  -328,202
  -355,946
  -384,805
  -414,808
  -445,991
  -478,394
Total debt, $m
  552
  8,496
  20,337
  36,322
  57,294
  84,099
  117,543
  158,364
  207,204
  264,586
  330,908
  406,440
  491,331
  585,623
  689,265
  802,138
  924,071
  1,054,867
  1,194,316
  1,342,214
  1,498,379
  1,662,659
  1,834,943
  2,015,168
  2,203,318
  2,399,437
  2,603,618
  2,816,013
  3,036,827
  3,266,319
  3,504,800
Total liabilities, $m
  2,870
  24,521
  36,362
  52,347
  73,319
  100,124
  133,568
  174,389
  223,229
  280,611
  346,933
  422,465
  507,356
  601,648
  705,290
  818,163
  940,096
  1,070,892
  1,210,341
  1,358,239
  1,514,404
  1,678,684
  1,850,968
  2,031,193
  2,219,343
  2,415,462
  2,619,643
  2,832,038
  3,052,852
  3,282,344
  3,520,825
Total equity, $m
  5,525
  8,615
  12,776
  18,392
  25,761
  35,179
  46,929
  61,272
  78,432
  98,593
  121,895
  148,434
  178,260
  211,390
  247,805
  287,463
  330,304
  376,259
  425,255
  477,219
  532,088
  589,808
  650,340
  713,662
  779,769
  848,676
  920,415
  995,040
  1,072,624
  1,153,256
  1,237,047
Total liabilities and equity, $m
  8,395
  33,136
  49,138
  70,739
  99,080
  135,303
  180,497
  235,661
  301,661
  379,204
  468,828
  570,899
  685,616
  813,038
  953,095
  1,105,626
  1,270,400
  1,447,151
  1,635,596
  1,835,458
  2,046,492
  2,268,492
  2,501,308
  2,744,855
  2,999,112
  3,264,138
  3,540,058
  3,827,078
  4,125,476
  4,435,600
  4,757,872
Debt-to-equity ratio
  0.100
  0.990
  1.590
  1.970
  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
  14,333
  21,274
  30,638
  42,916
  58,599
  78,153
  102,004
  130,522
  164,008
  202,689
  246,719
  296,181
  351,096
  411,433
  477,120
  548,058
  624,131
  705,217
  791,198
  881,969
  977,442
  1,077,555
  1,182,271
  1,291,584
  1,405,518
  1,524,131
  1,647,512
  1,775,780
  1,909,088
  2,047,618
Depreciation, amort., depletion, $m
  47
  479
  711
  1,023
  1,433
  1,957
  2,611
  3,409
  4,363
  5,485
  6,782
  8,258
  9,917
  11,760
  13,786
  15,993
  18,376
  20,933
  23,659
  26,550
  29,602
  32,813
  36,181
  39,704
  43,382
  47,215
  51,206
  55,358
  59,674
  64,160
  68,822
Funds from operations, $m
  2,623
  14,812
  21,984
  31,661
  44,350
  60,556
  80,763
  105,413
  134,886
  169,493
  209,471
  254,977
  306,098
  362,856
  425,219
  493,112
  566,434
  645,063
  728,875
  817,747
  911,571
  1,010,255
  1,113,736
  1,221,975
  1,334,965
  1,452,733
  1,575,337
  1,702,870
  1,835,454
  1,973,248
  2,116,439
Change in working capital, $m
  382
  -1,156
  -1,609
  -2,172
  -2,850
  -3,642
  -4,544
  -5,547
  -6,636
  -7,797
  -9,012
  -10,263
  -11,535
  -12,812
  -14,082
  -15,337
  -16,568
  -17,772
  -18,948
  -20,096
  -21,219
  -22,322
  -23,409
  -24,488
  -25,565
  -26,648
  -27,743
  -28,859
  -30,003
  -31,182
  -32,404
Cash from operations, $m
  2,241
  15,001
  23,593
  33,833
  47,199
  64,198
  85,308
  110,959
  141,522
  177,290
  218,482
  265,240
  317,633
  375,668
  439,301
  508,449
  583,002
  662,835
  747,823
  837,843
  932,790
  1,032,577
  1,137,145
  1,246,463
  1,360,530
  1,479,381
  1,603,081
  1,731,729
  1,865,458
  2,004,431
  2,148,843
Maintenance CAPEX, $m
  0
  -311
  -479
  -711
  -1,023
  -1,433
  -1,957
  -2,611
  -3,409
  -4,363
  -5,485
  -6,782
  -8,258
  -9,917
  -11,760
  -13,786
  -15,993
  -18,376
  -20,933
  -23,659
  -26,550
  -29,602
  -32,813
  -36,181
  -39,704
  -43,382
  -47,215
  -51,206
  -55,358
  -59,674
  -64,160
New CAPEX, $m
  -165
  -841
  -1,157
  -1,562
  -2,050
  -2,620
  -3,269
  -3,990
  -4,773
  -5,608
  -6,482
  -7,382
  -8,297
  -9,216
  -10,129
  -11,032
  -11,917
  -12,783
  -13,629
  -14,455
  -15,263
  -16,056
  -16,838
  -17,614
  -18,389
  -19,168
  -19,956
  -20,758
  -21,581
  -22,429
  -23,308
Cash from investing activities, $m
  -2,026
  -1,152
  -1,636
  -2,273
  -3,073
  -4,053
  -5,226
  -6,601
  -8,182
  -9,971
  -11,967
  -14,164
  -16,555
  -19,133
  -21,889
  -24,818
  -27,910
  -31,159
  -34,562
  -38,114
  -41,813
  -45,658
  -49,651
  -53,795
  -58,093
  -62,550
  -67,171
  -71,964
  -76,939
  -82,103
  -87,468
Free cash flow, $m
  215
  13,849
  21,957
  31,560
  44,126
  60,145
  80,082
  104,359
  133,340
  167,318
  206,515
  251,077
  301,078
  356,535
  417,411
  483,631
  555,092
  631,676
  713,261
  799,730
  890,977
  986,919
  1,087,493
  1,192,667
  1,302,437
  1,416,832
  1,535,910
  1,659,764
  1,788,519
  1,922,327
  2,061,375
Issuance/(repayment) of debt, $m
  216
  8,496
  11,841
  15,985
  20,973
  26,804
  33,444
  40,821
  48,840
  57,382
  66,322
  75,532
  84,891
  94,291
  103,642
  112,873
  121,934
  130,796
  139,449
  147,898
  156,165
  164,280
  172,284
  180,224
  188,151
  196,118
  204,181
  212,395
  220,814
  229,492
  238,481
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
  8,496
  11,841
  15,985
  20,973
  26,804
  33,444
  40,821
  48,840
  57,382
  66,322
  75,532
  84,891
  94,291
  103,642
  112,873
  121,934
  130,796
  139,449
  147,898
  156,165
  164,280
  172,284
  180,224
  188,151
  196,118
  204,181
  212,395
  220,814
  229,492
  238,481
Total cash flow (excl. dividends), $m
  277
  22,345
  33,798
  47,545
  65,099
  86,950
  113,526
  145,180
  182,179
  224,700
  272,837
  326,609
  385,970
  450,827
  521,054
  596,504
  677,026
  762,472
  852,710
  947,628
  1,047,142
  1,151,199
  1,259,778
  1,372,892
  1,490,588
  1,612,950
  1,740,091
  1,872,159
  2,009,333
  2,151,819
  2,299,856
Retained Cash Flow (-), $m
  -1,295
  -2,991
  -4,160
  -5,616
  -7,369
  -9,418
  -11,751
  -14,343
  -17,160
  -20,161
  -23,302
  -26,538
  -29,827
  -33,129
  -36,415
  -39,658
  -42,842
  -45,955
  -48,995
  -51,964
  -54,869
  -57,720
  -60,532
  -63,322
  -66,107
  -68,906
  -71,739
  -74,625
  -77,583
  -80,632
  -83,791
Prev. year cash balance distribution, $m
 
  32,567
  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
 
  51,920
  29,637
  41,929
  57,730
  77,532
  101,775
  130,838
  165,019
  204,539
  249,535
  300,070
  356,143
  417,697
  484,639
  556,846
  634,184
  716,517
  803,714
  895,664
  992,273
  1,093,479
  1,199,245
  1,309,570
  1,424,481
  1,544,043
  1,668,352
  1,797,534
  1,931,749
  2,071,187
  2,216,065
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
 
  49,780
  27,132
  36,489
  47,535
  60,097
  73,862
  88,392
  103,141
  117,497
  130,822
  142,499
  151,979
  158,816
  162,702
  163,481
  161,160
  155,902
  148,012
  137,907
  126,088
  113,102
  99,506
  85,831
  72,552
  60,065
  48,674
  38,580
  29,887
  22,609
  16,686
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 653
Price to Sales 198.5
Price to Book 198.4
Price to Tangible Book
Price to Cash Flow 489.2
Price to Free Cash Flow 528.1
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 $38179 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 65.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $690 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 4.7 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 - $38191 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 134.047 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 $44.7 billion.


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Stock chart of NTES Financial statements of NTES Annual reports 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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