NetEase.com, Inc. (NTES) is a leading provider of online gaming, web-based communication services, and an array of interactive content in China. NetEase is a leading online gaming provider in China. NetEase.com is one of the five busiest Internet portals in China. NetEase offers free e-mail, photos, news, online chat rooms, matchmaking, and discussion forums to its users. This is the main reason behind the company's expanding customer base. Online games, advertising, and wireless value-added services are the company's major businesses. NetEase's online games business focuses on offering massively multi-player online role-playing games (MMORPG). Revenues from online gaming contributed 83.7% of the company's total revenues for the fiscal year of 2006, while online advertising and wireless value-added services accounted for about 12.9% and 3.4%, respectively.
NetEase's revenue from online games business for the third quarter of 2007 to slightly declined sequentially. Its revenue exceeded market consensus, but EPS did not meet the consensus due to higher marketing expenses of online games. We think NetEase's results demonstrate that it has the ability and experience to expand the life cycle of its online games despite the fierce competition in the Chinese online gaming market. However, we are concerned that NetEase's current games have gotten long in the tooth, and new games may not be as successful as its current popular games. Therefore, we are maintaining our Hold rating on NetEase.
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