NetEase Might Be Poised for a Rebound

China’s NetEase (NTES) may be primed for a turnaround after winning approval for a new video game for the first time since Chinese regulators froze all licensing in 2021 as part of a crackdown to curb gaming addiction. NetEase traded sideways since April, when the company missed out on previous rounds of approvals of new games from regulators.

The global video game industry has faced a tough year as it deals with supply chain issues, inflation, and a lack of a ‘must have’ video game.  Video game interest has also declined as pandemic measures ease.  In China, where pandemic lockdowns are still commonplace, there is the added regulatory risk given the government’s crackdown on the sector.

Optimism about NetEase has prompted traders to bid up bullish options contracts on the stock, sending its put-to-call ratio to the lowest level since October.  NetEase has fallen -23% from its high for the year in June, and the put-to-call ratio dropped by as much as 42% during that period. NetEase is considered a bellwether of China’s online gaming industry, with almost 80% of its revenue coming from the sector and more than 90% of its revenue coming from China.

The approval of a new video game for NetEase might be the step needed for a turnaround in the stock and broader gaming share sentiment, since it suggests China’s crackdown on the sector may be easing.  Morningstar, which has NetEase as its top pick in the sector, said they have “no question” that the company will soon get more games approved.

Shares of NetEase are also beginning to look attractive to value investors.  According to Bloomberg data, the stock’s PEG ratio, the price-earnings multiple divided by its earnings growth rate, is one of the lowest among all global peers.  However, NetEase will need to continue offering top-grossing video games that are approved by regulators to boost its revenue prospects.  Credit Suisse said, “given the absence of titles with significant grossing potential and the continued drag from macro weakness, industry revenue momentum likely will remain soft in the near term.”

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