Intrinsic value of Netease ADR - NTES

Previous Close

$278.56

  Intrinsic Value

$4,506

stock screener

  Rating & Target

str. buy

+999%

  Value-price divergence*

+1096%

Previous close

$278.56

 
Intrinsic value

$4,506

 
Up/down potential

+999%

 
Rating

str. buy

 
Value-price divergence*

+1096%

*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 37.3

 

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
  60.00
  54.50
  49.55
  45.10
  41.09
  37.48
  34.23
  31.31
  28.68
  26.31
  24.18
  22.26
  20.53
  18.98
  17.58
  16.32
  15.19
  14.17
  13.26
  12.43
  11.69
  11.02
  10.42
  9.87
  9.39
  8.95
  8.55
  8.20
  7.88
  7.59
Revenue, $m
  5,523
  8,837
  13,653
  20,418
  29,625
  41,797
  57,461
  77,130
  101,276
  130,318
  164,602
  204,398
  249,897
  301,210
  358,380
  421,391
  490,179
  564,645
  644,669
  730,121
  820,873
  916,806
  1,017,820
  1,123,839
  1,234,814
  1,350,728
  1,471,597
  1,597,471
  1,728,436
  1,864,609
  2,006,143
Variable operating expenses, $m
 
  5,753
  8,888
  13,292
  19,286
  27,210
  37,407
  50,211
  65,931
  84,837
  107,156
  133,063
  162,683
  196,087
  233,305
  274,326
  319,107
  367,584
  419,680
  475,309
  534,388
  596,841
  662,601
  731,619
  803,864
  879,324
  958,009
  1,039,954
  1,125,212
  1,213,860
  1,305,999
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
  5,856
  8,993
  13,400
  19,396
  27,323
  37,523
  50,330
  66,053
  84,962
  107,284
  133,194
  162,817
  196,225
  233,446
  274,471
  319,255
  367,736
  419,836
  475,469
  534,552
  597,009
  662,773
  731,795
  804,045
  879,509
  958,199
  1,040,149
  1,125,412
  1,214,065
  1,306,209
Operating income, $m
  1,827
  2,982
  4,660
  7,018
  10,229
  14,474
  19,938
  26,799
  35,224
  45,356
  57,318
  71,204
  87,079
  104,984
  124,933
  146,921
  170,924
  196,909
  224,834
  254,652
  286,321
  319,797
  355,047
  392,043
  430,769
  471,219
  513,397
  557,323
  603,024
  650,544
  699,934
EBITDA, $m
  1,874
  3,049
  4,764
  7,173
  10,454
  14,792
  20,375
  27,386
  35,993
  46,346
  58,569
  72,757
  88,979
  107,273
  127,657
  150,123
  174,649
  201,200
  229,733
  260,201
  292,559
  326,765
  362,783
  400,585
  440,154
  481,484
  524,581
  569,463
  616,160
  664,715
  715,181
Interest expense (income), $m
  0
  0
  49
  119
  219
  354
  533
  763
  1,052
  1,407
  1,833
  2,337
  2,922
  3,590
  4,344
  5,184
  6,109
  7,120
  8,214
  9,390
  10,645
  11,978
  13,388
  14,871
  16,429
  18,059
  19,762
  21,538
  23,387
  25,311
  27,312
Earnings before tax, $m
  2,010
  2,982
  4,611
  6,899
  10,010
  14,120
  19,405
  26,036
  34,172
  43,949
  55,485
  68,867
  84,158
  101,394
  120,589
  141,737
  164,815
  189,789
  216,620
  245,263
  275,676
  307,819
  341,660
  377,172
  414,340
  453,159
  493,635
  535,785
  579,637
  625,233
  672,623
Tax expense, $m
  304
  805
  1,245
  1,863
  2,703
  3,812
  5,239
  7,030
  9,226
  11,866
  14,981
  18,594
  22,723
  27,376
  32,559
  38,269
  44,500
  51,243
  58,487
  66,221
  74,432
  83,111
  92,248
  101,836
  111,872
  122,353
  133,281
  144,662
  156,502
  168,813
  181,608
Net income, $m
  1,679
  2,177
  3,366
  5,036
  7,307
  10,308
  14,166
  19,007
  24,945
  32,083
  40,504
  50,273
  61,435
  74,018
  88,030
  103,468
  120,315
  138,546
  158,132
  179,042
  201,243
  224,708
  249,412
  275,335
  302,468
  330,806
  360,354
  391,123
  423,135
  456,420
  491,015

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
  5,012
  7,744
  11,581
  16,804
  23,708
  32,593
  43,749
  57,445
  73,918
  93,365
  115,938
  141,745
  170,851
  203,278
  239,019
  278,037
  320,275
  365,666
  414,136
  465,612
  520,026
  577,323
  637,458
  700,405
  766,153
  834,712
  906,110
  980,395
  1,057,634
  1,137,914
Adjusted assets (=assets-cash), $m
  3,132
  5,012
  7,744
  11,581
  16,804
  23,708
  32,593
  43,749
  57,445
  73,918
  93,365
  115,938
  141,745
  170,851
  203,278
  239,019
  278,037
  320,275
  365,666
  414,136
  465,612
  520,026
  577,323
  637,458
  700,405
  766,153
  834,712
  906,110
  980,395
  1,057,634
  1,137,914
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
  418
  672
  1,038
  1,552
  2,252
  3,177
  4,367
  5,862
  7,697
  9,904
  12,510
  15,534
  18,992
  22,892
  27,237
  32,026
  37,254
  42,913
  48,995
  55,489
  62,386
  69,677
  77,354
  85,412
  93,846
  102,655
  111,841
  121,408
  131,361
  141,710
  152,467
Working capital, $m
  4,396
  -504
  -778
  -1,164
  -1,689
  -2,382
  -3,275
  -4,396
  -5,773
  -7,428
  -9,382
  -11,651
  -14,244
  -17,169
  -20,428
  -24,019
  -27,940
  -32,185
  -36,746
  -41,617
  -46,790
  -52,258
  -58,016
  -64,059
  -70,384
  -76,991
  -83,881
  -91,056
  -98,521
  -106,283
  -114,350
Total debt, $m
  552
  1,390
  3,412
  6,251
  10,116
  15,225
  21,800
  30,055
  40,191
  52,381
  66,771
  83,475
  102,572
  124,110
  148,107
  174,555
  203,428
  234,685
  268,274
  304,141
  342,234
  382,500
  424,900
  469,400
  515,981
  564,634
  615,368
  668,202
  723,173
  780,330
  839,738
Total liabilities, $m
  2,870
  3,709
  5,731
  8,570
  12,435
  17,544
  24,119
  32,374
  42,510
  54,700
  69,090
  85,794
  104,891
  126,429
  150,426
  176,874
  205,747
  237,004
  270,593
  306,460
  344,553
  384,819
  427,219
  471,719
  518,300
  566,953
  617,687
  670,521
  725,492
  782,649
  842,057
Total equity, $m
  5,525
  1,303
  2,013
  3,011
  4,369
  6,164
  8,474
  11,375
  14,936
  19,219
  24,275
  30,144
  36,854
  44,421
  52,852
  62,145
  72,290
  83,272
  95,073
  107,675
  121,059
  135,207
  150,104
  165,739
  182,105
  199,200
  217,025
  235,588
  254,903
  274,985
  295,858
Total liabilities and equity, $m
  8,395
  5,012
  7,744
  11,581
  16,804
  23,708
  32,593
  43,749
  57,446
  73,919
  93,365
  115,938
  141,745
  170,850
  203,278
  239,019
  278,037
  320,276
  365,666
  414,135
  465,612
  520,026
  577,323
  637,458
  700,405
  766,153
  834,712
  906,109
  980,395
  1,057,634
  1,137,915
Debt-to-equity ratio
  0.100
  1.070
  1.690
  2.080
  2.320
  2.470
  2.570
  2.640
  2.690
  2.730
  2.750
  2.770
  2.780
  2.790
  2.800
  2.810
  2.810
  2.820
  2.820
  2.820
  2.830
  2.830
  2.830
  2.830
  2.830
  2.830
  2.840
  2.840
  2.840
  2.840
  2.840
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
  2,177
  3,366
  5,036
  7,307
  10,308
  14,166
  19,007
  24,945
  32,083
  40,504
  50,273
  61,435
  74,018
  88,030
  103,468
  120,315
  138,546
  158,132
  179,042
  201,243
  224,708
  249,412
  275,335
  302,468
  330,806
  360,354
  391,123
  423,135
  456,420
  491,015
Depreciation, amort., depletion, $m
  47
  67
  104
  155
  225
  318
  437
  586
  770
  990
  1,251
  1,553
  1,899
  2,289
  2,724
  3,203
  3,725
  4,291
  4,899
  5,549
  6,239
  6,968
  7,735
  8,541
  9,385
  10,266
  11,184
  12,141
  13,136
  14,171
  15,247
Funds from operations, $m
  2,623
  2,244
  3,470
  5,191
  7,532
  10,625
  14,602
  19,593
  25,715
  33,073
  41,755
  51,826
  63,334
  76,307
  90,754
  106,671
  124,040
  142,837
  163,032
  184,591
  207,482
  231,676
  257,147
  283,877
  311,853
  341,072
  371,538
  403,264
  436,271
  470,591
  506,261
Change in working capital, $m
  382
  -189
  -275
  -386
  -525
  -694
  -893
  -1,121
  -1,376
  -1,655
  -1,954
  -2,268
  -2,593
  -2,925
  -3,259
  -3,592
  -3,921
  -4,245
  -4,561
  -4,871
  -5,173
  -5,468
  -5,758
  -6,043
  -6,326
  -6,607
  -6,890
  -7,175
  -7,465
  -7,762
  -8,067
Cash from operations, $m
  2,241
  2,433
  3,744
  5,577
  8,057
  11,319
  15,495
  20,714
  27,091
  34,729
  43,709
  54,095
  65,928
  79,232
  94,013
  110,262
  127,961
  147,082
  167,593
  189,462
  212,655
  237,144
  262,905
  289,920
  318,178
  347,679
  378,427
  410,438
  443,736
  478,353
  514,329
Maintenance CAPEX, $m
  0
  -42
  -67
  -104
  -155
  -225
  -318
  -437
  -586
  -770
  -990
  -1,251
  -1,553
  -1,899
  -2,289
  -2,724
  -3,203
  -3,725
  -4,291
  -4,899
  -5,549
  -6,239
  -6,968
  -7,735
  -8,541
  -9,385
  -10,266
  -11,184
  -12,141
  -13,136
  -14,171
New CAPEX, $m
  -165
  -254
  -366
  -514
  -700
  -925
  -1,190
  -1,495
  -1,835
  -2,207
  -2,606
  -3,025
  -3,458
  -3,900
  -4,345
  -4,789
  -5,228
  -5,659
  -6,082
  -6,494
  -6,897
  -7,291
  -7,677
  -8,057
  -8,434
  -8,809
  -9,186
  -9,566
  -9,953
  -10,349
  -10,757
Cash from investing activities, $m
  -2,026
  -296
  -433
  -618
  -855
  -1,150
  -1,508
  -1,932
  -2,421
  -2,977
  -3,596
  -4,276
  -5,011
  -5,799
  -6,634
  -7,513
  -8,431
  -9,384
  -10,373
  -11,393
  -12,446
  -13,530
  -14,645
  -15,792
  -16,975
  -18,194
  -19,452
  -20,750
  -22,094
  -23,485
  -24,928
Free cash flow, $m
  215
  2,137
  3,311
  4,959
  7,202
  10,169
  13,987
  18,782
  24,670
  31,752
  40,113
  49,819
  60,917
  73,433
  87,379
  102,750
  119,530
  137,697
  157,220
  178,068
  200,209
  223,614
  248,260
  274,127
  301,203
  329,485
  358,976
  389,688
  421,642
  454,868
  489,401
Issuance/(repayment) of debt, $m
  216
  1,390
  2,021
  2,840
  3,865
  5,109
  6,575
  8,256
  10,135
  12,190
  14,390
  16,704
  19,097
  21,538
  23,997
  26,448
  28,873
  31,256
  33,589
  35,868
  38,092
  40,267
  42,400
  44,500
  46,580
  48,654
  50,733
  52,834
  54,971
  57,157
  59,408
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
  1,390
  2,021
  2,840
  3,865
  5,109
  6,575
  8,256
  10,135
  12,190
  14,390
  16,704
  19,097
  21,538
  23,997
  26,448
  28,873
  31,256
  33,589
  35,868
  38,092
  40,267
  42,400
  44,500
  46,580
  48,654
  50,733
  52,834
  54,971
  57,157
  59,408
Total cash flow (excl. dividends), $m
  277
  3,527
  5,333
  7,798
  11,067
  15,278
  20,562
  27,038
  34,805
  43,942
  54,503
  66,523
  80,014
  94,971
  111,375
  129,198
  148,403
  168,953
  190,809
  213,935
  238,301
  263,881
  290,660
  318,627
  347,784
  378,138
  409,709
  442,522
  476,613
  512,025
  548,809
Retained Cash Flow (-), $m
  -1,295
  -490
  -710
  -998
  -1,358
  -1,795
  -2,310
  -2,901
  -3,561
  -4,283
  -5,056
  -5,869
  -6,710
  -7,567
  -8,431
  -9,293
  -10,145
  -10,982
  -11,802
  -12,602
  -13,384
  -14,148
  -14,897
  -15,635
  -16,366
  -17,095
  -17,825
  -18,563
  -19,314
  -20,082
  -20,873
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
 
  7,749
  4,622
  6,801
  9,709
  13,483
  18,252
  24,137
  31,244
  39,659
  49,447
  60,654
  73,304
  87,403
  102,944
  119,905
  138,259
  157,971
  179,008
  201,333
  224,917
  249,733
  275,762
  302,992
  331,418
  361,044
  391,884
  423,959
  457,299
  491,943
  527,936
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
 
  7,430
  4,232
  5,919
  7,995
  10,451
  13,246
  16,307
  19,528
  22,782
  25,923
  28,804
  31,281
  33,232
  34,560
  35,202
  35,135
  34,372
  32,966
  31,000
  28,580
  25,831
  22,881
  19,858
  16,880
  14,045
  11,433
  9,099
  7,075
  5,370
  3,975
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 545.3
Price to Sales 165.8
Price to Book 165.7
Price to Tangible Book
Price to Cash Flow 408.6
Price to Free Cash Flow 441
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 60% 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 7.6%.

Life of production assets of 10 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 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 $37.3 billion.

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COMPANY NEWS

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▶ NetEase: Buy the Dip?   [02:40AM  Barrons.com]
▶ NetEase Reports Second Quarter 2017 Financial Results   [Aug-10-17 11:25PM  CNW Group]
▶ Why NetEase Stock Plunged Today   [01:34PM  Motley Fool]
▶ Chinese Internet Stocks NetEase, YY Retreat   [04:36AM  Investor's Business Daily]
▶ NetEase posts 2Q profit   [Aug-09-17 11:32PM  Associated Press]
▶ Coming Up Wednesday: Earnings From 4 Major China Internet Companies   [Aug-08-17 11:12AM  Investor's Business Daily]
▶ Will NetEase Make It or Break It This Earnings Season?   [Aug-07-17 08:11PM  Motley Fool]
▶ Netease: What to Expect From Q2 Results   [Aug-02-17 11:35PM  Barrons.com]
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▶ ETFs with exposure to NetEase, Inc. : July 3, 2017   [Jul-03-17 03:33PM  Capital Cube]
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▶ ETFs with exposure to NetEase, Inc. : June 22, 2017   [Jun-22-17 04:06PM  Capital Cube]
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▶ While Not At Alibaba, Weibo Levels, This Chinese Stock Gets Upgraded   [Jun-20-17 04:07PM  Investor's Business Daily]
▶ Mulling A Stock Buy? Check Out These 5 Failed Tech Breakouts First   [Jun-16-17 04:20PM  Investor's Business Daily]
▶ Five Failed Tech Breakouts Highlight Risks   [06:31AM  Investor's Business Daily]
▶ Futures: 3 Top Tech Stocks In Buy Range As Apple, FANGs Falter   [06:43AM  Investor's Business Daily]
▶ 3 Stocks That Offer Both Growth and Value   [Jun-10-17 08:25PM  Motley Fool]
▶ NetEase Hits Record High Despite Sell Rating; E3 Show On Tap   [Jun-08-17 04:19PM  Investor's Business Daily]
▶ Stocks To Buy And Watch: Top IPOs, Big And Small Caps, Growth Stocks   [Jun-07-17 10:33PM  Investor's Business Daily]
▶ Stocks Dodge Oil Dilemma, End Higher As China-Names Rally   [04:29PM  Investor's Business Daily]
▶ Three Momentum Stocks Breaking Out   [01:00PM  Investopedia]
▶ [$$] Tencent vs NetEase: Let the Games Begin   [May-29-17 08:38PM  Barrons.com]
▶ 3 Reasons NetEases Momentum Will Continue   [May-25-17 01:41PM  Motley Fool]
▶ Use The 10-Day Moving Average To Get Ahead Of Sell Signals   [May-24-17 02:02PM  Investor's Business Daily]
▶ 3 Stocks That Feel Like Microsoft in 1986   [May-17-17 02:19PM  Motley Fool]
▶ NetEase Undervaluation Could Be Short-Lived   [May-14-17 09:15AM  Forbes]
▶ NetEase Handily Beats Earnings Views, Stock Jumps After Hours   [08:46PM  Investor's Business Daily]
▶ NetEase posts 1Q profit   [07:10PM  Associated Press]
▶ Will Snap, China's Internet Stocks Leap Like JD? Investing Action Plan   [May-09-17 04:43PM  Investor's Business Daily]
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▶ JD.com Beats Street Estimates   [06:52AM  Forbes]
▶ NetEase: What to Expect from Q1 Earnings   [12:44AM  Barrons.com]
▶ Activision Blizzard Beats Q1 Sales, Earnings Targets   [May-04-17 04:43PM  Investor's Business Daily]
▶ Better Buy: Glu Mobile vs. NetEase   [Apr-25-17 09:43PM  Motley Fool]
▶ Which Companies Are Now Outperforming 95% Of All Stocks?   [Apr-20-17 10:56AM  Investor's Business Daily]
▶ Stocks With Rising Composite Ratings: NetEase   [Apr-19-17 11:15AM  Investor's Business Daily]
▶ The Stock Picking Robots Are Coming   [Apr-18-17 04:16PM  Forbes]
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▶ NetEase Game Business Weakens; First-Quarter Targets In Doubt   [Apr-03-17 04:21PM  Investor's Business Daily]
▶ Top 5 Best-Performing Industry Groups In Q1? You Might Be Surprised   [Apr-02-17 10:06AM  Investor's Business Daily]
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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