NetEase with More Difficulty

The following excerpts explain why Zacks senior information technology analyst Paul Cheung, CFA remains neutral on NetEase.com, Inc. (NTES), the online content provider:

'NetEase's revenue from online games for the third quarter slightly declined sequentially. Its revenue exceeded market consensus, but EPS did not meet the consensus due to higher marketing expenses of online games. We think NetEase's results demonstrate that it has the ability and experience to expand the life cycle of its online games despite the fierce competition in the Chinese online gaming market.

'However, we are concerned that NetEase's current games have gotten long in the tooth, and new games may not be as successful as its current games. Therefore, we are maintaining our Hold rating on NetEase. Based on our estimate for fiscal year 2008 earnings per ADS, the stock is trading at 15.3x, which is well below the industry average and its Chinese peers.

'Based on our estimate for fiscal year 2009 earnings per ADS, the company is trading at 13.5x, which is far below the industry average. Using a P/E multiple of 14x our fiscal year 2009 earnings per ADS estimate yields a target price of $19.50 which we believe reflects the company's prospects.'

Pre-Earnings, XL a Hold

An update has just come out today on XL Capital Ltd. (XL), in which Zacks insurance sector analyst Eric Rothmann is restating his Hold rating on the company. We excerpted the following details:

'XL is expected to issue 4Q07 results on February 5, 2008 with a conference call scheduled the next day. The company pre-released its expectations to report a loss in 4Q07, primarily from charges and reserves relating to its investment in Security Capital Assurance. While this has put pressure on the shares of late, we continue to think XL's lower valuation multiple reflects skepticism over the company's several-year string of prior-period reserve additions, stemming from the NAC Re acquisition and softening casualty lines pricing (more than half of XL's P&C portfolio).

'While the price-to-book multiple has been in the 1.2-2.7x range over the past nine years, it will be difficult to envision the shares achieving even the low end of the range over the near-term. We expect the negative news of late (Fitch lowering its ratings, increased loss reserves, and the shoring up of its SCA investment), needs to be fully digested before investors will come back to this name.

'At the current price level, XL's shares trade at 4.5x our revised 2007 EPS and 0.79x its 3Q07 book value of $56.29 per share; representing a 35.6% discount and 26.1% discount, respectively, to its peer group medians. We are maintaining our Hold recommendation until 4Q07 results have been issued. Our new six-month price target of $45 per share, down from $79 per share, incorporates a multiple of 0.8x (1.3x previously) to our estimated book value of $56 per share at June 31, 2008, and implies a total annualized return of 4.1%.'

Uncertainties Remain for Sinopec

The following excerpts explain why Zacks senior Chinese market analyst Paul Cheung, CFA remains neutral on China Petroleum and Chemical Corporation (SNP), the petroleum and petrochemicals company:

'Sinopec recently reported strong financial results for the first three quarters of 2007. While a number of uncertainties remain, we believe that the near- to-medium-term environment supports its continued upstream production growth and downstream capacity expansion. Moreover, Sinopec's integrated petrochemical and refining businesses are expected to benefit from possible price reform for refined products in China.

'Our key concern about Sinopec continues to be its refining margins under the environment of high crude oil price. Though the Chinese oil companies are able to charge close to market prices for their crude oil volumes (though typically with about a one-month lag), the government plays a major role in refined product (particularly gasoline and diesel) pricing. The government controlled the price of refined products to keep the inflation level at a reasonable level. It is estimated that Sinopec could lose more money in the refining business if oil prices stay at more than $60 a barrel.

'Currently, SNP ADRs are trading at 11.5x our 2008 earnings estimate, slightly higher than its global peers but lower than its Chinese peers. SNP ADRs are also trading at 11.4x our 2009 earnings estimate, slightly higher than its global peers. Our $123 price objective reflects a P/E multiple of 12x our 2008 earnings estimate. Overall, we think the stock is fairly valued. Therefore, we are maintaining our Hold recommendation for Sinopec.'

Keep Buying ASML Shares

Zacks senior semiconductor analyst Ken Nagy, CFA has reiterated his Buy rating to original equipment manufacturer of photolithography systems ASML Holding N.V. (ASML). Here we bring you his latest report:

'ASML is the largest OEM of advanced photolithography systems used within the semiconductor manufacturing industry. December quarter revenue and EPS outperformed consensus estimates. Going forward we expect revenue to climb as ASML continues to win market share.