Several banks have recommended a “buy” rating for NetEase’s shares after the internet company sold its cross-border e-commerce platform to rival Alibaba last week.
JP Morgan, Guotai Junan Securities and China Merchants Securities are all upbeat about NetEase after it sold NetEase Kaola, its e-commerce business for $2 billion.
Although a leading player in the Chinese internet market, NetEase has always appeared to be an also-ran in other businesses. Apart from its mainstream gaming business, it has tried e-commerce, online music streaming, a search engine business and online education.
But the sale of its e-commerce platform has sent out a clear message: NetEase will stop being diverted by side-missions, and will pour its resources into gaming.
In a recently released report, JP Morgan said that Kaola’s deconsolidation will have an insignificant impact on NetEase’s main business. It shows NetEase’s intention to shift to a cost-conscious, return-driven investment strategy. “We feel positive on the deal,” analysts wrote in the report. “We hope that NetEase will focus on its gaming business.”
Trailing Tencent, NetEase has held on to the second spot in China's gaming industry for years. After regulations in the sector tightened last year, the market has now regained its momentum. Total sales in the Chinese game market grew 10.8% year-on-year to Rmb116 billion ($16.4 billion) from January to June this year, according to research platform Gamma Data. The growth rate has doubled as well after hitting a 10 year low of 5.2% in 2018.
Gaming revenues expanded in the second quarter of this year and made up 64% of NetEase’s revenues. For NetEase, it appears reasonable to remain focused on games while it spins off its e-commerce business. But some, especially NetEase Kaola staff, were stunned.
“We were ready to take on Alibaba in cross-border e-commerce, but you can’t do anything if your boss surrenders,” one senior manager at Kaola told FinanceAsia.
NetEase Kaola certainly worked hard to gain market share. It topped cross-border e-commerce rankings for 18 months from the beginning of 2018, with a market share of over 27%. Alibaba's Tmall ranked second with a 25% market share. Kaola also has the highest reputation among all cross-border platforms, according to research firm iiMedia.
After this transaction, Alibaba will top the cross-border e-commerce rankings with a market share of almost 53%. It will pose a huge threat to platforms like Vipshop and Xiaohongshu, which are ranked fourth and fifth and have a market share of less than 10% respectively.
“At $2 billion, Alibaba is getting our staff for free. Our inventory alone is worth almost $2 billion,” the manager said. “Staff here are unhappy about the decision.” Alibaba has paid $1.7 billion in cash and $300 million in stock to acquire NetEase Kaola.
NetEase has been restructuring its business since the end of last year to save costs. In December, it sold its manga and comic platform to Bilibili. The internet company has also integrated its online education business into the company's search engine department.
NetEase is attracting external capital to develop its core business. NetEase Cloud Music, which was squeezed by Tencent Music, accepted $700 million from Alibaba and Yunfeng Capital. And NetEase Youdao’s online course business is currently talking to Softbank.
With all of its attention on its gaming business, NetEase has increased the volume of games that it issues overseas. But people are waiting to see if NetEase can release popular games to regain its business momentum.
