June 2, 2020 / 5:46 AM / a month ago

Breakingviews - NetEase fortifies itself against global disarray

People play online games in an internet cafe in downtown Shanghai August 6, 2009. As China attempts to scrub clean its virtual worlds and ensure only wholesome games reach its millions of ardent gamers, most at risk are foreign game companies who may find it harder to enter the market. A high ranking official with China's video game regulatory body told an industry conference late last month that China would begin closely monitoring Internet-based games that enter the mainland to ensure fair competition and wholesome content. To match analysis CHINA-GAMES/ REUTERS/ Nir Elias (CHINA ENTERTAINMENT SOCIETY BUSINESS SCI TECH)

HONG KONG (Reuters Breakingviews) - The creator of “Fantasy Westward Journey” has embarked on a compelling trip eastward. Chinese video-game producer NetEase, which made its debut on the Nasdaq 20 years ago, is preparing to raise $2.6 billion in Hong Kong. The secondary listing closer to home should help fortify it against global disarray. 

Rule relaxations a couple of years ago made it easier for Chinese companies trading in New York to sell shares in the former British territory, too. Alibaba blazed the trail in November. After initially delaying its plans, the e-commerce titan overcame anti-government protests that were roiling the city to raise $13 billion.

That is an indication of how the stars are aligning for NetEase and boss William Lei Ding. Originally founded as an internet portal in 1997, its pandemic-friendly business model has proven resilient by keeping quarantined gamers busy playing self-developed titles and licenced ones such as “World of Warcraft”. Game sales increased 14% in the first quarter from a year earlier to 13.5 billion yuan ($1.9 billion). Revenue from its Youdao online education business more than doubled.

The success has powered a roughly 50% rise in NetEase’s market value, to $51 billion, since mid-March. That performance defies a backlash which has prompted U.S. lawmakers to seek to delist Chinese companies from American bourses if they don’t comply with domestic accounting oversight.

A Hong Kong listing provides an extra layer of protection. Alibaba’s success on the venue provides an encouraging sign, too. Its American depositary receipts have been converting to Hong Kong shares at a healthy clip, according to an analysis of Hong Kong Exchanges and Clearing data. The stock price is up 15% since the new listing and got an extra pop last month when the creator of the benchmark Hang Seng index said it was rewriting its rules to allow dual-listed companies to be included. Despite all the upheaval in the world, NetEase seems to be moving from an unlikely position of strength.

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