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NetEase, Inc. Message Board

  • knight44rider knight44rider May 16, 2013 1:26 PM Flag

    NTES is being penalized by an accounting mirage

    From Investor's Business Daily's article, "But sales excluding taxes rose 11% to $346.6 million, missing Wall Street's forecast for $348.1 million."

    Wall Street say NTES missed the top line.


    Total revenue is 363.6M and Total Net Revenue is 346.6M. The difference is 17M in sales tax.

    But if you look at the company's announcement, "...The increase in sales taxes was mainly due to a change in the tax ruels in China,... As the increase in value-added tax was substantially offset by a reduction in business taxes.... this change in the tax rules in China did not have a significant impact on gross profit of the Company's online game services business segment..."

    Or, in other words, Chinese government is starting to convert some income tax into sales tax. The overall tax stay the same. Sales tax increases while income tax decrease by about the same level.

    But Sales tax is deducted in the calculation of Total Net Revenue.

    The total tax stayed the same.

    Thus, comparing of Total Net Revenue is just an accounting mirage, and NTES is being penalized for it.

    NTES had a great quarter and beat the revenue by a great deal. But due to an accounting illusion, people think it under-performs in revenue.

    Sentiment: Strong Buy

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    • Let me use the exact numbers to illustrate my point:

      In 4Q2012, the sales tax is 8.96M and the income tax is 29.57M. Thus the total tax is 38.53M.

      In 1Q2013, the sales tax is 16.98M and the income tax is 23.00M. Thus the total tax is 39.98M.

      Comparing the two, the total tax stays pretty much the same (off by 1.4M). But the difference in Sales Tax is 8M.

      Total Net Revenue only takes into account of sales tax and not income tax. By only considering Total Net Revenue, it penalizes Netease based on an accounting illusion.

      Finally, to summarize my point. Netease had a blow out quarter in both revenue and profit.

      Chinese government wants to convert some income tax into sales tax (the overall tax stays about the same) to reduce rampant tax dodging in China.

      Some Wall Street analysts don't seem to understand this (the increase in Sales Tax is just a mirage since the overall tax stay the same), NTES is being penalized for it.

    • Good analysis, Knight rider! Looks like a beat on both earnings and revenues and good news on dividend, stock repurchase, and new product fronts. What's not to like.

      Added to my position after the drop.

      Sentiment: Strong Buy

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