NetEase (NTES)

Total return at 5 years: 19.4%/year = 17.5% appreciation + 1.9% dividend. The target price ($262) is ex-dividend; the $15 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $251 · Multiples $223) exceeds the market price ($117).

Today — with margin of safety: at $117 trades ~47.6% below its value discounted to today (~$223) — the wide discount we require (≥38%, equivalent to a ~15% annual return); the risk is covered by the margin, not the rate.

At 5 years — Muy infravalorado: the target price ($262) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years comfortably exceeds the risk-free rate (4.5%) — and the discount reaches the required margin of safety.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($117) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-14.7%/year) than we project (6.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~CNY 14.3 bn of owner earnings in year 5 (vs ~CNY 42.4 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on Resultado operativo después de impuestos (EV/NOPAT), suma de las partes. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Currency: NetEase reports in renminbi (RMB) and trades in dollars on Nasdaq via depositary receipts (ADS). The entire model —revenue, margins, cash, debt and value per ADS— is in billions of RMB and is converted to dollars once, at the close of the cascade, at the live exchange rate. The ADS ratio is one ADS per five ordinary shares (20-F 2025, note to the share table), so the model's count is 643.6 million ADS-equivalents (3,218.2 million diluted ordinary shares for fiscal year 2025 ÷ 5). The anchor market value (RMB511.1 billion) crosses the price of US$117.02 per ADS with the exchange rate from the 6-K of Aug 20, 2026 as of Jun 30, 2026 (RMB6.7851 per dollar), more current than the 20-F's own convenience rate as of Dec 31, 2025 (RMB6.9931 per dollar). Year-0 = fiscal year 2025 (annual reporter via 20-F): the XBRL carries no quarters. The second-quarter 2026 release (6-K of Aug 20, 2026, exhibit 99.1) was identified by hand and carries no revenue or earnings guidance for 2026, so the trajectory starts from the trend and is checked against that release: in the first half of 2026 revenue grew 7.0% (RMB60.7 against RMB56.7 billion), games grew 8.3% (RMB50.7 against RMB46.9 billion) and operating income grew 26.9% (RMB24.7 against RMB19.5 billion). The base-case year 1 starts at +7.0%, within the band of the trajectory (7.2% · 1.8% · 7.0%) and in line with the half, and decays geometrically to 4.0% by year 5, the durable rate of a mature, highly recurring game catalog. The adverse scenario stresses year 1 to +4.0% and the favorable scenario takes it to +9.0%. Operating margin: 31.8% in 2025 (26.8% in 2023, 28.1% in 2024), with the first half of 2026 at 40.8% against 34.4% a year earlier; the base case takes it to 35.5% in year 1 and to 36.0% at terminal, without extrapolating the half-year peak. Investment impairments (RMB2.7 billion in 2025) and the foreign-exchange loss (RMB0.78 billion) are non-operating and do not touch the metric. Tax rate: the XBRL effective rate, 14.8%. Sum of the parts: the 20-F does not report operating income by segment, only revenue and gross margin (games 69.7%, Youdao 44.3%, Cloud Music 35.7%, innovative businesses 40.8%). Each piece's share of the terminal metric is assigned in proportion to its 2025 gross profit —games 88.7%, Youdao 3.6%, Cloud Music 3.9%, innovative businesses 3.8%—, an analyst assumption and the model's largest source of uncertainty; it likely favors the smaller pieces, whose real operating margin is lower. Cash: liquid cash is the balance-sheet figure as of Dec 31, 2025 —cash RMB47.17, current time deposits RMB92.64, short-term investments RMB22.80 and non-current time deposits RMB3.00 billion, total RMB165.61 billion— against short-term borrowings of RMB6.38 billion. Restricted cash and long-term investments in equity interests (RMB18.46 billion) are excluded, treated as optionality. Cash accumulates: retention is drawn from the real 2025 cash flow (RMB49.67 billion) against dividends paid of RMB13.83 and buybacks of RMB0.64 billion, and the liquid balance effectively grew from RMB140.6 to 165.6 billion over the year. No share count path is modeled: the net reduction in the diluted count runs below 1% a year. Declared limitation: the non-controlling interest in Youdao and Cloud Music (RMB1.03 billion, 3.1% of net income) is not deducted from the bridge.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $262 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $117, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $262 in 5 years plus $15 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $223. Against the current market price ($117), the margin of safety is 47.6% (trades below the maximum → there is margin) and the total return at that price would be 19.4% annually.

• Entry multiple. 12× on after-tax operating income, with net cash outside enterprise value.
• Estimated return. +19% annual in the base case; the state is Very undervalued.
• Adverse scenario. With growth of 2-4% and the multiple at the floor of the band, the return is +19%.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (104%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. 18.3% on capital contributed, with cash included in the base; above the 10% bar.
• Cash conversion. Free cash flow of RMB49.7 billion against net income attributable of RMB33.8 billion in 2025.
• Stock-based compensation. 3.2% of revenue and 7.3% of free cash flow: not material.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

In games, revenue is the number of active players times average spend on virtual items, but the 20-F does not quantify players or spend per user, so the drivers are shown as segment revenue in billions of RMB. In Cloud Music, subscriptions grow (+RMB639.9 million in 2025) and social entertainment declines (−RMB830.6 million); in Youdao, online advertising grows (+RMB563.8 million).

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (31-dic-2025): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Games. +10.2% in 2025 and +8.3% in the first half of 2026.
• Rest of the group. Cloud Music −2.4% and innovative businesses −15.9% in 2025 (roughly −6.7% excluding intersegment eliminations); Youdao +5.0%.
• Guidance. The second-quarter 2026 release carries no annual revenue or earnings guidance.

• Catalog recurrence. Franchises active since 2001 and 2004 still generate revenue after two decades of updates.
• Capital intensity. Capital spending of RMB1.07 billion against operating cash flow of RMB50.74 billion in 2025.
• Diversification. 81.8% of revenue in games; the other three segments have lower gross margins.
• Dependence on platforms and licenses. Third-party stores charge fees and licensed games are already 9.5% of revenue.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $159.2 bn
• –Interest coverage (EBIT / interest)no data
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 104% of ROIC
• ✓Value creation (ROIC − 10% bar)+8pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.5x — no over-investment
• –Float / working capitalNeutral WC
• !Dilution (SBC % of revenue + shares)SBC 3.2% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Net cash. RMB159.2 billion of net cash at year-end 2025.
• Debt. Only short-term borrowings of RMB6.4 billion; no long-term debt.
• Cash composition by currency. Only 27.8% of cash and time deposits (RMB39.7 billion) sits in mainland China; roughly 58% is denominated in dollars (RMB83.0 billion).

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

Shares of what was invested and distributed in 2025: capital spending RMB1.07, dividends RMB13.83 and buybacks RMB0.64 billion. Outside that accounting, about 70% of the RMB49.7 billion free cash flow was retained as cash.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Alignment. The founder and chief executive owns 45.5% of shares as of Feb 28, 2026.
• Capital allocation. Dividends of RMB13.8 billion in 2025 and small buybacks; most of the cash flow is retained as cash.
• Corporate governance. Founder control and the variable interest entity structure limit minority shareholder rights.

• Variable interest entity structure to operate in China, which adds a structural risk the market discounts; since Jun 30, 2026 the listing became dual with Hong Kong as the primary exchange, where most of the volume already trades, which weakens the missing-buyers argument based on listing only in the United States.
• Visible regulatory risk: an expired publishing license under renewal and already-in-force limits on minors' gaming.
• Currency risk on a portion of cash: 27.8% of cash and time deposits sits in mainland China and is subject to repatriation controls, although most of it (roughly 58%) is denominated in dollars outside the country.

The gap between perception and reality lies in the quality of the cash flow: the market prices a multiple for a business at risk, while the first half of 2026 shows revenue +7.0% and operating income +26.9%, even though net income attributable fell 6.6% for the half on an investment loss of RMB2.95 billion and an effective tax rate of 21.7% (against 15.0% a year earlier). The over-discount holds as long as the institutional risk does not materialize.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +13%/year (+83% total): the margin of safety protects the downside. The bull (+24%/year, +193% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Corporate structure. Operations in China depend on contracts with variable interest entities controlled by the founder.
• Expired license. The company's own online publishing license is expired and under renewal.
• Minors' gaming. One hour per day between 20 and 21 hours, only on Fridays, Saturdays, Sundays and holidays, with additional regulatory proposals pending.
• Exchange rate. Value is generated in renminbi and the price is paid in dollars.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 18% above the 10% bar, with a +48% margin → a quality business at a good price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 6% at a multiple/growth of 1.9 → reasonable for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 10% (EBIT/EV) + ROIC 18% → makes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -15% vs our 6%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +11%/yr, bull-scenario ceiling +22%/yr over 5y and a +48% margin → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: intangibles, efficient scale, network effects, switching costs → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -15%, within what we project (6%) — the story squares with the numbers.