NetEase Rumored Downsizing: Fat-Trimming Or Business Restructuring Ahead?

Key Takeaways:

• NetEase is said to be laying off workers in many departments, but the company rebutted the claim and said it was actively hiring
• NetEase surpassed Meituan to become the fourth most valuable Internet company in China

Bai Xin Rui

Things are in flux in the Chinese gaming sector. Following the sudden release of the Method on Managing Internet Gaming draft at the end of last year and the ensuing selloff of several gaming stocks, on Jan. 19 (Friday), the Chinese gaming giant NetEase, Inc. NTES was reported to have started downsizing several departments in December, but the company denied immediately.

According to some media outlets, to facilitate healthy business development, NetEase has been trimming fat in several of its operation department since Dec. 2013, including through drastic staff cuts. Media communication, literary creation, open-source courses are among the ones most affected. Content, marketing, sales and product related positions have seen major reshuffles, even the key gaming department not spared. It is said that each operation department has had at least 10% and some times as much as 50% of its headcounts reduced.

According to some sources, NetEase media communication is offering a compensation package consisting off severance pay plus one-month salary in lieu of notice. Employees are encouraged to resign and claim their compensation. The gaming department offers a more generous package, severance pay plus three-month salary in lieu of notice.

Company Continues To Hire 

But in its response to media inquiries, people from the company said that the market rumor missed important part of the story and that the company was undergoing normal personnel adjustment while continuing hiring top-quality talents.

On the day the news about the layoffs broke, its stock did well in Hong Kong, opening at HK$140, up by 2.1% from the previous trading day, and closed at HK$138.9, up by 1.3%. Its US stock rose by an even higher margin after the clarification by the company, closing up by 2.5%.

NetEase, the undisputed mainland gaming leader, saw its stock rise by 22.8% last year, compared with Hang Seng Index’s 13.8% decrease, the eighth fastest-growing blue-chip stock in the Hong Kong market. Its great stock performance is mostly a reflection of its remarkable business performance.

The company was founded by Ding Lei in 1997 in Guangzhou offering free e-mail services. And it got listed at NASDAQ in 2000 as the first US-listed Chinese Internet company. In 2001, it bought Teamax Technology Group Co., Ltd. and set up an online gaming department thus paving the way as the leader in the Chinese gaming sector. In 2008, it achieved another milestone when it purchased Blizzard Entertainment, Inc. and obtained control of StarCraft II and Warcraft III, catapulting the gaming business to a new high.

Impressive Quarterly Numbers

NetEase secured quite good quarterly performance last year, warding off the fierce competition in the market. Its third-quarter revenue in 2023 reached 27.3 billion yuan, up by 11.6% year-on-year, NON-GAAP net profit 8.65 billion yuan, up by 15.7% year-on-year. Gaming revenue, accounting for nearly 80% of total revenue, reported especially strong growth, up by 16.5% year-on-year to 21.8 billion yuan, thanks to the gathering popularity of flagship games like Fantasy Westward Journey Online and the strong revenue and user growth of Treacherous Waters, a game with more than 50 million registered users.

The Chinese gaming market is dominated by mobile gaming, accounting for 75% of the total domestic market in 2023. It is competition that has supported the high-quality development of the segment. Not only domestic players but also foreign ones cannot get enough of the well-designed mobile games developed by Chinese companies. These games brought in sales of $16.4 billion last year, over 100 billion yuan for the fourth consecutive year.

The US and Japan are the two major exporting markets of Chinese games where they have 32.5% and 18.9% of the local markets. The US computer gaming market has developed for many years but still has great potential, especially given that fact that the US market is dominated by mainframe and PC games while the mobile game segment has not saturated which leaves room for top Chinese mobile gaming companies like NetEase to expand. Mr. Ding made no bones about his ambition to conquer the overseas market in the quarterly results. He said he was always on the lookout for partners with whom he could work together for common development and eager to launch competitive content products overseas for long-term growth.

Surpassing Meituan In Market Valuation

In addition to NetEase and its gaming business, another company Youdao, Inc. DAO, the US-listed smart-learning service provider also saw continuous operational improvement. It reported a 9.7% revenue growth in the third quarter of 2023, totaling 1.54 billion yuan, and its net loss narrowed substantially by 44% to 100 million yuan. Thanks to the application of AI technologies in its various products and services, the gross margins of its learning services, smart hardware products and online marketing services rose by 3.3, 2.2 and 4.8 percentage points respectively to 67.8%, 42.6% and 31.9%.

With its robust performance, NetEase became one of the few Chinese Internet businesses that registered stock price increases last year. Last month, in particular, its market valuation surpasses that of Meituan (3690.HK) and became the fourth most valuable Internet company in China, following Tencent (0700.HK), Pinduoduo PDD and Alibaba BABA.

NetEase is not expensive right now with a forward price-to-earnings (P/E) ratio of 12.6 times, lower than the 16.3 times average in the past five years. And the market expects its ROE to stay stable at over 20%, higher than that of most mainland Internet companies. Its overseas expansion ambitions also make the stock look attractive. Thus, once the Hong Kong stock market regains its stride, NetEase stands a great chance to deliver pleasant surprise to investors.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.