Netease reports heavy losses

Analysts are shunning Chinese Internet stocks that rely heavily on online ads

By Kristie Lu Stout
CNN.com Writer

HONG KONG, China (CNN) -- China portal Netease reported a heavy fourth-quarter net loss, an additional indication of tough times for Asia's ad-heavy dotcoms.

The company reported a net loss that was at the bottom of the range of analysts' expectations, despite the fact that its sales of online advertising grew 24 percent from the previous quarter.

Analysts are shunning Chinese Internet stocks like Netease that rely heavily on online ads but remain on the lookout for takeover opportunities initiated by Internet blue chips.

Netease reported a net loss, excluding stock compensation costs, for the quarter of $5.7 million, or 19 cents per American Depository Share, versus a net loss of $5.04 million, or 16 cents per American Depository Share, in its third quarter.

Fourth-quarter revenue was $3.18 million, a 24.6 percent increase over third quarter revenue of $2.55 million, but below the $3.4 million in revenue that analysts had expected.

$100 million market

Industry analysts are pessimistic about growth in China's online advertising market.

"Given the weak online advertising market, we suggest investors to remain cautious when investing in Chinese portal companies," say Merrill Lynch Asia Pacific Internet analysts David Cui and Matei Mihalca in a recent industry report.

Portal sites Netease, Sohu.com, Sina and Chinadotcom are all vying for control of China's limited $100 million Internet advertising market.

Though ad revenues have increased over the quarter for Netease, there is concern about continued growth during the next two quarters.

"Netease revenues will be down Q1 and Q2," says ABN Amro Internet analyst Jahanzeb Nasser.

"They are also saying gross margins will drop from current level of 40 percent right now to the 20 percent range -- this is an indication that the overall market for online advertising is weakening."

Last month, China portal competitor Sohu.com posted weak fourth quarter revenues.

Scrambling for dollars in China's crowded online ad market, Sohu.com spent $2.07 million to generate $2.17 million in revenues with total operating costs doubling to $9.53 million.

Market talk

Drawing attention away from China's battered online ad market however, is speculation about a possible takeover of Netease.

"Something on that front bay be brewing -- market talk is AOL through a Hong Kong company," says Nasser.

An AOL spokesman says that though no announcements can be made at the moment, the company is actively exploring business opportunities in China, as well as South Korea and India.

Netease was up 1/16 to $1-15/16 in regular trade on Nasdaq on Wednesday, near its year-low of $1-12/16 and far away from its year-high of $17-4/16.

22.5 million Net users in China
February 19, 2001
Sina ranks as top China portal
February 1, 2001
Yahoo! Asia top exec calls it quits
February 19, 2001
New standards set for online ads
February 27, 2001

Netease
Sohu
AOL

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