NetEase Profit Rises as Online-Game Sales Surge

NetEase.com Inc. (NTES), China’s second-biggest provider of online games, reported first-quarter profit rose 55 percent after attracting more players in the world’s largest Internet market by users.

Net income climbed to 416.7 million yuan ($61 million), or 3.23 yuan per American depositary receipt, from 269.4 million yuan, or 2.08 yuan, a year earlier, Beijing-based NetEase said today in a statement. The company was expected to report profit of 393.7 million yuan, based on the median of nine analyst estimates complied by Bloomberg. Sales rose 20 percent to 781.7 million yuan.

Chief Executive Officer William Ding boosted revenue after adding weapons and characters to the “Fantasy Westward Journey III” role-playing game, which Morgan Stanley says is the most popular of its type in China. NetEase is licensing more games, including “World of Warcraft,” from outside developers as competition increases from Shanda Interactive Entertainment Ltd., Sohu.com Inc. (SOHU) and other rivals.

“Gaining the ‘World of Warcraft’ license is a long-term positive for NetEase,” Timothy Chan, who rates the company’s stock “buy” at CLSA Ltd. in Hong Kong, said before the earnings. “NetEase, which had been developing most of its own games up to now, is diversifying its portfolio.”

Revenue from online games rose 30 percent to 724 million yuan in the quarter, NetEase said. Sales of online advertising fell 47 percent to 41 million yuan.

NetEase ADRs were little changed at $30.58 in Nasdaq Stock Market trading yesterday. The stock has gained 38 percent this year, compared with a 66 percent increase in shares of Shanda, China’s biggest online-games company.

The company last month won the right to operate the “World of Warcraft” game in China from Blizzard Entertainment Inc. The current license holder, The9 Ltd. (NCTY) of Shanghai, generated 90 percent of its 2008 sales from the game, according to an April 23 report by Morgan Stanley.

“Fantasy Westward Journey,” a game based on a Chinese novel, is China’s most popular game that uses two-dimensional graphics, with 2.3 million simultaneous players, according to Morgan Stanley.

China passed the U.S. last year as the world’s biggest Internet market, with 298 million Web users at the end of December, according to the state-backed China Network Information Center, which licenses domain names. China may have 406 million users by 2010, according to Credit Suisse Group AG.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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