Looking Back at My NetEase Call

Although I believe in long-term investing, I recently recommended investors to buy NetEase (NTES) for trading purpose. I called the stock a buy pre-earnings as I was expecting the company to beat share better-than-expected results. The company delivered upon my expectations as net revenues of $1.047B were ahead of the expected $876.5M, after the company doubled its biggest segment, online games. On the earnings front, the company reported Q3 EPS of RMB14.22 beating the analysts’ estimate by RMB2.97.

As a result, NetEase’s shares have jumped almost 15% since the time I recommended buying it.
Whilst the stock has enjoyed significant upside in the last few days, I am still bearish on the prospects of China, which is why I think investors should consider book profits and sell NetEase.

China’s Economy

The Chinese government may have stepped in to stop the stock market crash, but history shows a government intervention just delays the crash and makes it worse. During the crash, IPOs were momentarily halted, shorting stocks was banned and analysts were held accountable for writing anything negative about the Chinese economy. Clearly, the government was desperate to stop the crash.

While the government may have managed to kick the can further down the road, a massive dip in Chinese equities is imminent. Recent numbers show China’s GDP growth slowed down to 6.9%. Although the numbers were above the consensus estimate of 6.8%, the growth fell below 7% for the first time in years.

In addition, China’s stock market has appreciated massively as investors have pushed the prices into the bubble territory thanks to margin trading. With millions of people taking on debt in order to invest in the stock market, a widespread correction is imminent. A market crash could prove to be disastrous for many people in China, which is why I think investors should stay away from Chinese equities and slowly build a short position to profit from an eventual crash.


After roughly 15% appreciation, I reckon investors should consider booking profit by selling NetEase. I am reaffirming my bearish stance on Chinese equities and I would recommend long-term investors to stay clear of these stocks. Moreover, investors with enough conviction can also short Chinese equities going forward. Hence, I think NetEase is a sell after the recent rally.
Published on Nov 25, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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