In the early stage of the development of the domestic Internet, NetEase was a company chasing waves at the top. After more than 20 years of wind and rain, NetEase is still at the forefront of the wave, known as the "Internet tumbler".
In this quarter's Chinese stock earnings season, NetEase (09999.HK; NTES.US) "can't wait" to take the lead: before the US stock market on February 24, Beijing time, NetEase released the fourth quarter and full year of 2021 financial report.
According to the financial report, NetEase's net income in 2021Q4 was 24.4 billion yuan, and the net income for the whole year of 2021 was 87.6 billion yuan; under non-gagnit accounting standards, the net profit attributable to the company's shareholders in 2021Q4 was 6.6 billion yuan, and the net profit attributable to the company's shareholders in 2021 was 19.8 billion yuan.
Ding Lei directly used the four words "fruitful" to describe NetEase's performance in 2021. Netizens also joked that the original pig farm owner was making a fortune in a muffled voice.
Red Star Capital Bureau will review the development of NetEase for more than 20 years, discuss how NetEase has built a moat, and what opportunities and challenges will be faced by various businesses in the future.
(i)
Review netease's business development context
NetEase was officially established in 1997, from the embryonic period to today's mature period, NetEase's development process can be roughly summarized as: starting from the portal, interested in games, and moving towards diversification.
From the portal
In 1998, NetEase established a portal website, and NetEase, which entered the industry earlier, successfully seized the dividends of China's Internet. With the huge traffic of the portal, NetEase is tied with Sina and Sohu as the "Big Three" of China's Internet portals, and the founders of the three companies are also known as the "Three Musketeers of the Internet".
In 2000, NetEase successfully listed on the NASDAQ. It seems that the debut is the peak, but in fact, because it coincided with the bursting of the global Internet bubble, NetEase was in a state of flux as soon as it was listed.
Happy with the game
At that time, NetEase was eager to find a new breakthrough, and the acquisition of the game became a turning point for NetEase. In 2001, NetEase acquired Tianxia Technology, established the Online Game Division, and began to march in the direction of game self-research. In the same year, NetEase launched the first MMORPG (Massively Multiplayer Online Role-Playing Game) "Journey to the West", the market response was better, and NetEase's game business began to move on the right track. Relying on games, NetEase's stock price has also soared since October 2002.
Subsequently, in 2004, NetEase launched the self-developed game "Fantasy Journey to the West" series; in 2008, NetEase became the exclusive agent of Blizzard Games in China, operating "StarCraft II", "Warcraft III: Chaos Dynasty", "Warcraft III: Frozen Throne" and so on. Since 2011, NetEase has announced its entry into the field of mobile games, such as "Fantasy Journey to the West 2 Pocket Edition", "Coast of the Land", "Yin and Yang Division", "After Tomorrow" and so on are netease's classic mobile game products.
Relying on the game, NetEase gradually stabilized its basic disk.
Towards diversification
In addition to the game business, NetEase has also begun to lay out other Internet areas, and its business has developed in a diversified direction.
In the field of entertainment, in 2013, NetEase Cloud Music came out, relying on UGC (user-generated content) community, personalized content recommendation and other innovative play methods, successfully survived in the market; in the field of online education, in 2014, Youdao officially launched Youdao boutique courses, and the business scope gradually included Internet learning tool products and online education and training services; in the field of e-commerce, in 2015, NetEase Yanxuan, NetEase Koala (sold in 2019), NetEase's e-commerce business focuses on differentiated competition routes to avoid Taobao Jingdong is competing head-on.
Starting from the portal, interested in games, and moving towards diversification, the development path of NetEase has been very clear in the past twenty years.
From the perspective of revenue of various businesses, the financial report shows that the game business has always been NetEase's "cash cow". As for the innovative business and others, due to the formal divestiture of NetEase Koala in 2019, the revenue of this business fell sharply in that year, but due to the continuous loss of NetEase Koala, the net profit of the company was increased after the divestiture of NetEase Koala. In addition, youdao business is relatively weak overall in various businesses.
Source: Company Financial Report, Red Star Capital Bureau
According to the recently updated financial report, from the perspective of NetEase's revenue structure in 2021, NetEase's main business is online game services, Youdao, NetEase Cloud, Innovation Business and other four sectors, and the proportion of each business revenue to total revenue is 71.69%, 6.11%, 7.99%, and 14.21% respectively. It can be seen that the game business in the four businesses is still the main source of revenue for NetEase.
At the same time, the game business has a higher gross profit margin, so it also contributes the most to NetEase's net profit.
According to the financial report, in the whole year of 2021, the gross profit margins of the game business, Youdao, NetEase Cloud, Innovation and other businesses were 64.8%, 54.3%, 2.0% and 25.8% respectively. Among them, NetEase Cloud has the lowest gross profit margin.
In summary, NetEase has achieved a commercial territory from portals to games to today's diversified businesses, but games are still netease's deepest brand. NetEase is currently the second largest game manufacturer in China after Tencent, but compared with Tencent (the game business accounts for about 30% of the total revenue), NetEase's revenue structure is uneven.
(ii)
Insight into the current operating conditions of each business from the latest financial reports
Game business
Games are the most profitable business of NetEase, so it is also the most concerned sector of the capital market.
Judging from the latest financial performance, netease online game revenue in 2021Q4 was 17.4 billion yuan, an increase of 29.8% year-on-year, exceeding market expectations by 28%, mainly due to the global release of the terminal game "Forever Doom" and the mobile game "Harry Potter" in August 2021.
NetEase's game revenue is mainly composed of two parts: terminal games and mobile games, of which the contribution of mobile games to revenue is significantly greater than that of terminal games.
In addition, the gross profit margin of NetEase's game sector has also maintained a relatively stable state, basically stable at about 64%, so in the short term, the game business is in good condition. However, in the long run, NetEase is also facing pressure and challenges in the game sector.
The first is the difficulty of the mobile game market. Nowadays, the mainland mobile game market has passed the period of barbaric growth, and the possibility of creating a new game that has turned out to be born and won a big victory is getting lower and lower, and it is still necessary to rely on the original IP to continue to cultivate in the later stage, and the stock market competition will intensify.
The second is the issue of version number supervision. The version number is the official release of the game, but as of February 24, there has been no release of the version number list for 7 months. The uncertainty at the regulatory level will also bring greater pressure to major domestic game manufacturers in the future.
It is worth mentioning that in the 2021Q4 conference call, when asked about the relevant questions, NetEase executives said: "The version number has indeed been suspended for a long time. We started developing games around the world very early on, for example you can see our success in developing games in Japan. We are very determined in the development and investment of overseas markets, and hope that after 2-3 years, our development in overseas markets can achieve great success. "The key layout of the game to go to sea may become a major strategic adjustment of NetEase, and the later development remains to be seen."
There is a way
Youdao's main business includes providing learning products, learning services and online marketing services. In 2021, affected by the national double reduction policy, NetEase announced at the end of September 2021 that it would gradually close the K9 boutique course business before the end of 2021. In 2021Q4, the overall revenue of Youdao business was 1.334 billion yuan, an increase of 20.5% year-on-year, and the revenue growth rate slowed down significantly.
NetEase's K9 business is mainly online course services, so the gross profit margin is relatively high. After the closure of the K9 business, Youdao's revenue began to gradually rely on fast-growing smart hardware devices, but in contrast, the gross profit margin of hardware equipment was low, which also dragged down Youdao's gross profit margin to a certain extent (2021Q3 Youdao gross margin was 56.6%, and 2021Q4 fell to 50.7%).
If Youdao put the focus of its business on hardware equipment in the later period, the company is also in the fierce encirclement and suppression of many established education enterprises and Internet manufacturers.
For example, in October 2020, ByteDance launched a vigorous education brand and released a smart work light product, similar to NetEase Youdao's idea of doing hardware products, ByteDance also emphasizes AI+ hardware. NetEase Youdao products involve English learning, reading text recognition, translation and other functions of ByteDance related products are also covered, while ByteDance also belongs to the competitors with their own traffic. Nowadays, Youdao products are difficult to have technical advantages in the hardware field, and in the later stage, in the face of traffic competition, Youdao is still facing greater pressure.
NetEase Cloud
2021Q4 is the first time that NetEase's revenue from Cloud Music was disclosed in netease's financial report, and netease cloud revenue in this quarter was 1.889 billion yuan, an increase of 23% year-on-year. At present, netease cloud's revenue sources are mainly divided into two major sectors, one is online music service revenue, and the other is social entertainment services and other revenues.
But for now, online music is not a good business to do. NetEase Cloud's competitors are mainly Tencent Music, but at present, the user scale gap between NetEase Cloud and Tencent Music is large. According to the previous prospectus and the company's financial report, the number of monthly active users of NetEase Cloud Music in 2020 was 181 million, and Tencent Music was 644 million.
From the perspective of splitting revenue sources, due to the low payment rate of online music users in mainland China (before NetEase Cloud also reduced the amount of single-user payment through "promotion" to increase the payment rate), compared with the mainland long video payment rate ceiling of about 25%, so the online music payment conversion is still relatively limited. In addition, the high cost of copyright also makes it difficult for the online music business to make money.
So NetEase Cloud began to vigorously emulate Tencent Music (Tencent Music's main source of revenue is the national K song), take the road of entertainment and social networking, and want to improve the platform's revenue capacity through virtual gifts, but this also makes NetEase Cloud fall into two dilemmas.
The first is the destruction of the platform community ecology. As NetEase Cloud began to move towards pan-entertainment, live broadcasts and other pages flew all over the screen, many platform natives began to think that simply listening to music was disturbed, and the good reputation accumulated by NetEase Cloud was questioned, and the later user retention will also face greater challenges.
Secondly, from the regulatory level, the show business is also an area subject to key supervision. Previously, the national K song also had negative news such as "pornography", which not only affected the corporate image, but also led to risks such as the platform being shut down.
The financial report shows that from 2020 to 2021, the number of monthly active users of cloud music will increase by only 1%, and the user ceiling will be prominent, and in the short term, the imagination space of NetEase Cloud is relatively limited.
brief summary
From portals to games to a hundred flowers of various businesses, for more than 20 years, NetEase has indeed completed its transformation steadily. In this earnings season, NetEase can't wait to share its good results, and the capital market also actively gives a positive vote.
While cheering and cheering, it cannot be ignored that today's NetEase is still caught in many fogs such as game version supervision, education hardware competition, and online music trapped. Perhaps NetEase, which has been "practicing internal skills" for a long time, is more aware that there is no tumbler in the Internet, and some are just prepared competitors.
Red Star News reporter Yu Yao Liu Mi
Edited by Yu Dongmei
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