281 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 194: BIDU Annual Cash Flow Statement $ in millions 2007 2008E 2009E 2010E Net Income 84 155 209 304 Add Non cash Expenses/(income) Depreciation and Amortization 24 45 74 118 Extra-ordinaries - - - - Other Non-Cash Items 5 12 12 12 Changes in Working Capital: (Increase)/Decrease Receivables (5) (6) (6) (9) (Increase)/Decrease Inventories - - - - (Increase)/Decrease Other Current Assets (5) (15) (10) (15) Increase/(Decrease) Payables 27 34 33 49 Increase/(Decrease) Other Current Liabilities 16 38 30 48 Net Cash from Operations 146 263 342 506 Cash Flow from Investing Purchase of Property, Plant & Equipment (88) (78) (185) (217) Purchase / Sale of Other LT Assets (6) (8) - - Purchase / Sale of Investments (2) (1) - - Net Cash from Investing Activities (96) (86) (185) (217) Cash Flow from Financing Issuance/Repayment of Debt - - - - Change in other LT liabilities (1) (0) - - Change in Common Equity - net (1) 0 18 22 Payment of Cash Dividends - - - - Other Financing Charges, Net - - - (0) Net Cash from Financing Activities (1) (0) 18 22 Net Change in Cash & Cash Equivalents 57 197 179 311 Cash & Cash Equivalents at end of period 211 409 588 899 Source: Company reports and J.P. Morgan estimates. 282 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com China Finance Online, Neutral, ($7.05) We maintain our Neutral rating on China Finance Online (JRJC) due to the greater customer demand uncertainty in the near term and the continuing challenging domestic stock market environment. Our Jun-09 price target is US$8, which implies 10.7x FY08E and 12.3x FY09E GAAP EPS, or 7.4x FY08E and 8.6x FY09E adjusted diluted EPS. • We had downgraded our rating on JRJC to Neutral (on 15 Dec 2008) due to: (a) greater uncertainties around customer demand in the near term, especially with TopView (~20% of cash revenue in 2H08, as per our estimate) discontinuation from Jan 1, ’09, (b) JRJC’s individual subscribers (core business segment) turning cautious in their purchase activities since mid-September (on global equity market stress and slowdown in the real economy), (c) continuing tough environment from slowdown in China's stock market activities, and (d) 4Q08 guidance being significantly below prior expectations. • JRJC’s 3Q08 revenue was US$15.2MM, up 4% Q/Q, 109% Y/Y but 8% below our forecast (US$16.5MM) and 6% below consensus (US$16.2MM), and also below the guidance range (US$15.5-16.5MM). GAAP EPS was US$0.21, up 5% Q/Q, 148% Y/Y, in line with our and consensus estimates, though aided by a tax benefit and forex gain. JRJC’s 4Q08 guidance was significantly below prior estimates; guided revenue range was US$14.5-15.0MM, implying Q/Q decline of 1% to 5%, or Y/Y growth of 63% to 69%. The midpoint of guidance was ~22% below our prior forecast (US$18.9MM) as well as consensus forecast (US$18.7MM). • For 4Q08, we expect revenue at US$15.0MM, at the top end of guidance range, sequentially lower due to reduced cash flow and revenue estimates for the core individual subscriptions business. We expect 4Q08 margins to be largely similar to 3Q08 levels. Our revenue estimate for FY08 was reduced to US$56.0MM, at the bottom end of prior FY08 guidance (US$56-61MM). Given the demand uncertainties in the near to medium term, we had reduced our FY09 revenue / adusted. EPS estimates as well, on the back of lower individual subscriber cash inflows and lower margin assumptions. Thus, we expect FY09 revenue / adjusted EPS Y/Y change of -2% / -13%, respectively. • 2009 drivers: In our view, the key share price driver (on the upside and the downside) in 2009 will be a meaningful recovery, or further deterioration, in China's domestic stock market activities. Our financial estimates are in the table below: 283 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 195: China Finance Online Financial Snapshot $ in millions, except per share data 4Q'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y J.P. Morgan Revenue 15.0 56.0 54.8 57.0 116% -2% 4% EBITDA 6.2 23.0 23.3 25.0 174% 1% 7% GAAP EPS 0.18 0.74 0.65 0.67 nm -12% 2% Adj. EPS 0.25 1.08 0.94 0.94 135% -13% 1% Consensus Revenue 14.6 57.3 71.6 58.3 121% 25% -19% EBITDA 5.5 20.1 33.1 NA 138% 65% nm GAAP EPS 0.16 0.77 1.12 NA nm 46% nm Adj. EPS 0.19 1.07 1.19 0.80 134% 11% -33% Source: J.P. Morgan estimates and Bloomberg. *Note: Adj. EPS excludes share-based compensation expense. Our Estimates and Outlook for 2009 For FY09, due to expectations of customer demand uncertainties for the company in the near to medium term, especially with TopView (~20% of cash revenue in 2H08, as per our estimate) discontinuation from Jan 1, ’09, and continuing challenges from the business environment (A share market), we believe a cautious stance is warranted. We forecast net revenue of US$54.8MM in 2009, down 2% Y/Y, and GAAP diluted EPS of US$0.65, down 12% Y/Y, or adjusted EPS (ex-share-based expense) of US$0.94, down 13% Y/Y. We forecast gross margin at 81.9% for 2009, down from 83.5% for 2008. We expect adjusted operating margin (ex-share-based expense) of 36.9% for 2009, down slightly from 37.4% for 2008, and adjusted net margin of 39.0% for 2009, down from 43.9% for 2008 (partly due to higher tax rate of ~8% in 2009 vs. ~0% in 2008 due to tax benefits from a prior acquisition). Our Estimates and Outlook for 2010 For 2010, we forecast net revenue of US$57.0MM, up 4% Y/Y, and GAAP diluted EPS of US$0.67, up 2% Y/Y, or adjusted EPS of US$0.94, up 1% Y/Y. On margins, we forecast gross margin at 81.6% (largely stable Y/Y), adjusted operating margin of 36.6% (largely stable Y/Y) and adjusted net margin of 38.3% (slightly lower Y/Y). Price Target, Valuation and Rating Analysis We maintain our Neutral rating on JRJC due to the greater customer demand uncertainty in the near term (especially with TopView discontinuation from Jan 1, ‘09) and the continuing challenging domestic stock market environment. Our price target is US$8 (Jun-09), which implies FY08E / FY09E adjusted PE of 7.4x / 8.6x, or GAAP PE of 10.7x / 12.3x, on the back of FY08E / ‘09E / ‘10E adjusted EPS growth of 135%/ -13% / 1%. JRJC also has a net cash balance of US$3.6 / diluted ADS; our price target implies ex-cash FY08E / FY09E adjusted PE of 4.4x / 5.3x. We set our PT below our DCF valuation of ~US$10 (WACC of 13%, terminal growth 0%) due to the near-term uncertainties, which could keep the stock price under pressure. On the positive side, we note: (a) JRJC has demonstrated solid execution capability over the past couple of years, with seven back-to-back quarters (up to 2Q08) of record cash inflows in the retail subscription business, (b) JRJC’s significantly 284 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com enhanced telemarketing capability (ramped up through the course of 2008 to ~780 telemarketers at present, from 410 at end-2007) and product development capability, which have helped scaling up of revenues and earnings (through conversion of free users to paying subscribers), and (c) JRJC’s paying subscriber base of 115k as of 3Q08, up from 56.2k at end-2007, with further room for upside in conversion rate (active paying subscribers as a percentage of free registered users, currently still only ~1.1%). Risks to Our Rating and Price Target Key upside risks to our rating and price target include: (1) meaningful recovery in China’s A share market activities (positively impacting customer demand for JRJC’s products), (2) higher than expected revenue growth in core subscription business, and (3) further strategic partnerships and acquisitions to expand its core business. Key downside risks include: (1) further deterioration in domestic stock market activities, (2) increase in competition in financial analysis software, and (3) management challenges of managing the larger business scale. 285 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 196: JRJC Annual Income Statement $ in millions INCOME STATEMENT 2007 2008E 2009E 2010E Revenue 25.90 55.97 54.84 57.01 Subscriptions 22.69 50.70 49.04 50.35 Online Ads 1.56 2.83 3.02 3.33 Wireless (Stockstar) / others 1.66 2.43 2.77 3.33 COGS -4.41 -9.26 -9.93 -10.50 Gross Profit 21.49 46.71 44.90 46.51 Operating Expense -16.99 -33.36 -31.12 -32.10 Sales & Mktg. expenses -6.79 -13.14 -13.16 -13.68 G&A expenses -5.12 -7.71 -7.13 -7.41 R&D expenses -2.15 -4.96 -4.39 -4.56 Other expenses 0.00 0.00 0.00 0.00 Share-based compensation expense (123R) -2.95 -7.56 -6.44 -6.44 EBITDA 8.41 23.02 23.34 25.03 EBIT 4.50 13.35 13.78 14.41 Adj. EBIT (ex-123R expense) 7.45 20.91 20.23 20.86 Net Interest Income 1.11 1.66 2.47 3.01 Net Other Income -10.56 1.63 0.40 0.40 Pre Tax Profit -4.95 16.64 16.65 17.83 Tax Expense/(Credit) -0.81 -0.10 1.73 2.43 GAAP Net Profit -4.13 16.99 14.92 15.40 Adj. Net Profit (ex-123R expense) 9.94 24.55 21.37 21.84 Pre Tax EPS (USD) -0.26 0.84 0.84 0.89 EPS (USD) -0.22 0.86 0.75 0.77 Diluted EPS (USD) -0.22 0.74 0.65 0.67 Adj. Diluted EPS (ex-123R exp., USD) 0.46 1.08 0.94 0.94 Margins (%) Gross Margin 83.0 83.5 81.9 81.6 Adj. Operating Margin (ex-123R option expense) 28.7 37.4 36.9 36.6 EBITDA Margin 32.5 41.1 42.6 43.9 Net Margin -15.9 30.4 27.2 27.0 Adj. Net Margin (ex-123R option expense) 38.4 43.9 39.0 38.3 Sequential Growth (%) Revenue 263.4 116.1 -2.0 4.0 Gross Profit 272.4 117.3 -3.9 3.6 Adj. EBIT 1,448.0 180.8 -3.3 3.1 Pre Tax Profit nm -435.8 0.1 7.0 Adj. Net Profit 1,599.7 146.9 -13.0 2.2 Adj. Diluted EPS 1,508.4 134.6 -13.1 0.9 Source: Company reports and J.P. Morgan estimates. 286 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 197: JRJC Quarterly Income Statement $ in millions 1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08E 1Q'09E 2Q'09E 3Q'09E 4Q'09E Revenue 4.00 5.72 7.30 8.88 11.06 14.68 15.23 15.01 14.30 13.63 13.46 13.44 Subscriptions 3.39 4.93 6.38 7.99 9.85 13.40 13.78 13.67 13.01 12.21 11.96 11.86 Online Ads 0.25 0.40 0.50 0.41 0.59 0.76 0.76 0.73 0.65 0.75 0.79 0.83 Wireless (Stockstar) / others 0.36 0.40 0.42 0.49 0.62 0.52 0.68 0.61 0.63 0.67 0.71 0.75 COGS -0.82 -1.08 -1.19 -1.32 -1.72 -2.10 -2.77 -2.67 -2.56 -2.46 -2.45 -2.46 Gross Profit 3.18 4.64 6.11 7.56 9.34 12.58 12.46 12.34 11.74 11.17 11.01 10.98 Operating Expense -2.81 -3.59 -4.67 -5.93 -7.36 -9.00 -8.56 -8.44 -8.05 -7.75 -7.67 -7.66 Sales & Mktg. expenses -1.22 -1.33 -1.85 -2.39 -2.39 -3.57 -3.58 -3.60 -3.43 -3.27 -3.23 -3.23 G&A expenses -0.87 -1.25 -1.16 -1.83 -1.64 -2.23 -1.88 -1.95 -1.86 -1.77 -1.75 -1.75 R&D expenses -0.32 -0.42 -0.58 -0.83 -0.97 -1.23 -1.48 -1.28 -1.14 -1.09 -1.08 -1.08 Other expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Share-based compensation expense (123R) -0.39 -0.60 -1.08 -0.88 -2.37 -1.97 -1.61 -1.61 -1.61 -1.61 -1.61 -1.61 EBITDA 0.94 1.87 2.78 2.82 4.77 6.00 6.10 6.16 6.00 5.78 5.76 5.80 EBIT 0.37 1.05 1.44 1.63 1.97 3.58 3.90 3.90 3.70 3.42 3.34 3.32 Adj. EBIT (ex-123R expense) 0.77 1.65 2.52 2.51 4.34 5.54 5.52 5.51 5.31 5.04 4.95 4.93 Net Interest Income 0.25 0.25 0.24 0.36 0.34 0.35 0.52 0.45 0.57 0.60 0.63 0.67 Net Other Income 0.06 0.11 0.04 -10.77 0.87 0.55 0.11 0.10 0.10 0.10 0.10 0.10 Pre Tax Profit 0.69 1.41 1.73 -8.78 3.19 4.47 4.52 4.45 4.37 4.12 4.07 4.09 Tax Expense/(Credit) -0.09 -0.15 -0.18 -0.40 -0.06 -0.09 -0.25 0.30 0.45 0.43 0.43 0.43 GAAP Net Profit 0.78 1.56 1.90 -8.37 3.51 4.56 4.77 4.15 3.92 3.69 3.65 3.66 Adj. Net Profit (ex-123R expense) 1.17 2.16 2.98 3.63 5.88 6.53 6.38 5.76 5.53 5.31 5.26 5.27 Pre Tax EPS (USD) 0.04 0.07 0.09 -0.45 0.16 0.23 0.23 0.22 0.22 0.21 0.20 0.21 EPS (USD) 0.04 0.08 0.10 -0.43 0.18 0.23 0.24 0.21 0.20 0.19 0.18 0.18 Diluted EPS (USD) 0.04 0.08 0.08 -0.43 0.15 0.20 0.21 0.18 0.17 0.16 0.16 0.16 Adj. Diluted EPS (ex-123R exp., USD) 0.06 0.11 0.13 0.16 0.26 0.28 0.28 0.25 0.24 0.23 0.23 0.23 Margins (%) Gross Margin 79.6 81.1 83.7 85.1 84.5 85.7 81.8 82.2 82.1 81.9 81.8 81.7 Operating Margin (ex-123R option expense) 19.2 28.8 34.5 28.2 39.3 37.8 36.2 36.7 37.1 36.9 36.8 36.7 EBITDA Margin 23.6 32.6 38.0 31.8 43.1 40.9 40.0 41.0 41.9 42.4 42.8 43.1 Net Margin 19.4 27.3 26.0 -94.2 31.7 31.1 31.3 27.6 27.4 27.1 27.1 27.2 Net Margin (ex-123R option expense) 29.2 37.7 40.8 40.9 53.1 44.5 41.9 38.4 38.7 38.9 39.1 39.2 Sequential Growth (%) Revenue 58.4 43.2 27.6 21.6 24.5 32.8 3.7 -1.4 -4.7 -4.7 -1.3 -0.1 Gross Profit 65.7 46.1 31.6 23.7 23.5 34.7 -0.9 -1.0 -4.8 -4.9 -1.5 -0.3 EBIT ex-123R option expense -248.6 115.0 52.9 -0.6 73.0 27.7 -0.5 -0.1 -3.6 -5.2 -1.7 -0.4 Pre Tax Profit -138.9 104.6 22.2 -608.8 -136.3 40.1 1.2 -1.6 -1.8 -5.6 -1.3 0.4 Net Profit ex-123R option expense n.m. 84.8 38.2 21.8 61.7 11.1 -2.2 -9.8 -3.9 -4.1 -0.9 0.3 Diluted EPS ex-123R expense n.m. 85.1 25.0 17.3 66.3 10.1 -1.4 -9.7 -4.1 -4.2 -1.1 0.1 Source: Company reports and J.P. Morgan estimates. 287 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 198: JRJC Annual Balance Sheet $ in millions 2007 2008E 2009E 2010E Cash & Cash Equivalents 74.7 104.0 126.6 157.0 Accounts Receivable 1.5 3.3 2.9 3.4 Inventory - - - - Total Other Current Assets 8.6 12.2 10.8 11.5 Total Current Assets 84.8 119.5 140.3 171.9 Gross Fixed Assets 6.7 12.1 16.9 23.1 Accumulated Depreciation (1.2) (3.1) (5.8) (9.7) Net Fixed Assets 5.5 9.0 11.1 13.5 Other Long Term Assets 12.1 14.4 14.1 13.8 Long Term Investments and Associates 1.5 1.5 1.5 1.5 Total Long Term Assets 19.1 25.0 26.6 28.7 Total Assets 103.9 144.4 166.9 200.6 ST Debt and Current Portion of LT Debt - - - - Accounts Payable (Accrued expenses, etc.) 10.5 11.5 9.2 9.7 Other Current Liabilities 20.5 30.0 26.9 31.0 Total Current Liabilities 31.0 41.5 36.1 40.7 Long Term Debt - - - - Other Long Term Liabilities 5.5 6.2 4.4 3.1 Total Long Term Liabilities 5.5 6.2 4.4 3.1 Share Capital 0.0 0.0 0.0 0.0 Share Premium 58.7 62.5 77.4 92.3 Other Reserves 4.5 13.0 13.0 13.0 Retained Earnings 4.1 21.1 36.0 51.4 Preferred Stock - - - - Total Equity 67.4 96.6 126.5 156.8 Total Liabilities and Equity 103.9 144.4 166.9 200.6 Source: Company reports and J.P. Morgan estimates. 288 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 199: JRJC Annual Cash Flow Statement $ in millions 2007 2008E 2009E 2010E Net Income (4.1) 17.0 14.9 15.4 Non cash Expenses/(income) - - - - Depreciation and Amortization 1.0 2.1 3.1 4.2 Extraordinaries (0.0) (0.3) - - Other Non-Cash Items 13.4 7.6 6.4 6.4 Changes in Working Capital: (Increase)/Decrease Receivables 0.0 (1.8) 0.3 (0.5) (Increase)/Decrease Inventories - - - - (Increase)/Decrease Other Current Assets (4.3) (3.6) 1.4 (0.7) Increase/(Decrease) Payables (0.0) 1.0 (2.3) 0.5 Increase/(Decrease) Other Current Liabilities 22.5 9.5 (3.1) 4.1 Net Cash from Operations 28.4 31.6 20.8 29.5 Cash Flow from Investing Purchase of Property, Plant & Equipment (4.8) (5.4) (4.8) (6.2) Purchase/Sale of Other LT assets - (2.6) - - Purchase/Sale of Investments - - - - Net Cash from Investing Activities (4.8) (8.0) (4.8) (6.2) Cash Flow from Financing Issuance/Repayment of Debt - - - - Change in other LT liabilities - 0.7 (1.9) (1.3) Change in Common Equity - net 3.2 4.7 8.5 8.5 Payment of Cash Dividends - - - - Other Financing Charges, Net - 0.3 0.0 - Net Cash from Financing Activities 3.2 5.7 6.6 7.2 Net Effect of Exchange Rate Changes 3.0 - - - Net Change in Cash and Cash Equivalents 29.8 29.3 22.6 30.4 Cash & CE at End of Period 74.7 104.0 126.6 157.0 Source: Company reports and J.P. Morgan estimates. 289 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com NetEase, Neutral, ($22.10) We remain Neutral on NetEase. While we like NetEase in the long run, we believe NetEase lacks near-term drivers; we still don’t have confidence that TianXia 2 and other upcoming item-based games will be significant revenue contributors in 2009. Our price target is US$25 (Jun-09), which implies 16.3x FY08E and 11.7x FY09E GAAP EPS, or 15.4x FY08E and 11.1x FY09E adjusted EPS. • NetEase is one of the leading online game developers and operators in China. However, we believe NetEase still lacks the next big game to drive earnings growth in the near to medium term. While we are impressed by the consistent growth of flagship games FWJ and WWJ2 (even after approximately five years and seven years, respectively, since launch), 2009 growth is still expected to be largely in line with the market growth. In addition, the Blizzard JV and Starcraft will likely not contribute revenue until 2H09. • Despite the ongoing transition period in its online games, we remain positive on NetEase in the long run. We believe NetEase differentiates itself by: (1) its deep penetration of sales & marketing teams into small cities (where there is less competition), and (2) taking a long-term view in game development (and upgrade) and customer monetization. As one of the leading online game developers (with ~1,200 engineers) in China with proven game operating capability, we believe NetEase is well positioned to capture growth in China’s online games industry in the long run. In addition, NetEase has the largest free email user base in China; we believe it can leverage this user base and portal traffic to monetize better over time through online ads and search services. • 2009 drivers: In our view, the following factors will drive shares in 2009: (1) the performance of new games such as TX2 and Legend of Westward Journey (item-based version of WWJ3), (2) potential upside from new Blizzard games and in-house games in 2009, (3) performance of existing games (following periodic release of new upgrade packs), and (4) share buyback of up to US$100M over the next few quarters. Our current and newly introduced 2010 estimates are in the table below: Table 200: NetEase Financial Snapshot $ in millions, except per share data 4Q'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y J.P. Morgan Revenue 122.0 433.5 529.7 589.2 47% 22% 11% EBITDA 82.1 288.7 345.7 378.5 55% 20% 9% GAAP EPS 0.51 1.54 2.14 2.33 21% 40% 9% Adj. EPS 0.54 1.63 2.25 2.44 19% 38% 8% Consensus Revenue 117.9 448.7 499.1 551.0 53% 11% 10% EBITDA 77.2 291.3 310.1 338.8 57% 6% 9% GAAP EPS 0.41 1.57 1.91 2.09 23% 22% 9% Adj. EPS 0.42 1.63 1.90 2.11 19% 16% 11% Source: J.P. Morgan estimates and Bloomberg. *Note: Adj. EPS excludes share-based compensation expense. 290 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Our Estimates and Outlook for 2009 We forecast net revenue of US$529.7M in 2009, up 22% Y/Y, and GAAP diluted EPS of US$2.14, up 40% Y/Y, or adjusted EPS (ex-share-based expense) of US$2.25, up 38% Y/Y. We forecast online game revenue of US$450.4M in 2009 (85% of total revenue), up 22% Y/Y, with FWJ revenue growth of 15% Y/Y, WWJ2 revenue growth of 6% Y/Y, and WWJ3 revenue growth of 17% Y/Y. For online advertising, we forecast revenue of US$67.4M (13% of total revenue), up 21% Y/Y (largely in line with market growth). We forecast gross margin at 82.5% for 2009, up slightly from 82.0% for 2008, mainly due to margin expansion in the online ad segment (with Olympics content spending going away). We expect adjusted operating margin (ex-share-based expense) of 60.9% for 2009, down from 63.1% for 2008 (due to expected higher SG&A and R&D expenses in 2009), and adjusted net margin of 55.8% for 2009, up from 48.4% for 2008 (due to net forex losses in 2008 and lower income tax rate of ~15% in 2009 vs. ~21% in 2008). Our Estimates and Outlook for 2010 For 2010, we forecast net revenue of US$589.2M, up 11% Y/Y, and GAAP diluted EPS of US$2.33, up 9% Y/Y, or adjusted EPS of US$2.44, up 8% Y/Y. On margins, we forecast gross margin at 81.1% (down slightly Y/Y due to the online game segment), adjusted operating margin of 59.5% (down slightly Y/Y), and adjusted net margin of 55.6% (stable Y/Y). Price Target, Valuation and Rating Analysis We maintain our Neutral on NetEase with a Jun-09 price target of US$25, which implies 16.3x FY08E and 11.7x FY09E GAAP EPS, or 15.4x FY08E and 11.1x FY09E adjusted EPS. Our price target is below our DCF valuation of ~US$37 due to relatively muted growth expectation in the near term, as we believe NetEase still lacks the next big game to drive earnings growth. While we are impressed by the delivery of consistent growth of FWJ and WWJ2 games, 2009 growth is still expected to be in line with the market growth. As such, we remain Neutral. The company currently has total cash balance of ~US$777M (US$5.9/share). Risks to Our Rating and Price Target Downside risks to our rating and price target include: (1) greater industry competition, (2) delays in game launches, (3) hacking or pirated server issues limiting user growth, and (4) significant increase in R&D expenses. Upside risks include: (1) better-than-expected acceptance of its new games, (2) extended life cycle of existing games on the back of new upgrade packs, and (3) upside in online advertising revenue. . Equity - net (1) 0 18 22 Payment of Cash Dividends - - - - Other Financing Charges, Net - - - (0) Net Cash from Financing Activities (1) (0) 18 22 Net Change. net 3.2 4.7 8.5 8.5 Payment of Cash Dividends - - - - Other Financing Charges, Net - 0.3 0.0 - Net Cash from Financing Activities 3.2 5.7 6.6 7.2 Net