Duan Yongping’s NetEase Investment: Do Your Homework, Then Hold On

Duan Yongping’s Investment Philosophy “I was not the only person who bought NetEase at $0.80, but few kept holding until $100. Investing is not about worrying over a missed opportunity; it is about never taking the wrong one.” There may be many reasons to sell a stock. The one reason not to use is “I’ve already made money.” Otherwise, you may sell a good company you worked hard to find at a cheap price. The same applies to buying. There may be many reasons, but the stock’s previous price should not be one. My criterion is whether it offers value. ---- NetEase listed on Nasdaq on June 29, 2000. Shortly afterward, it encountered a stock-market crash as the internet bubble collapsed. The Nasdaq index fell from a peak of 5,048 to a low of 1,114, a decline of nearly 80%. Then troubles multiplied. In the second quarter of 2001, NetEase was found to be suspected of accounting fraud. After a new audit, it had to announce that actual 2000 revenue was $4 million rather than $8.3 million—roughly half as much. Nasdaq suspended trading in NetEase shares on September 4, 2001. By then, the price had fallen from $15.50 at listing to $0.64, a 96% decline. Founder Ding Lei was only thirty. He dismissed several senior executives and began a four-month appeal process with US regulators. He later recalled that his most urgent wish early in 2001 was to sell NetEase, but nobody dared buy. By September, even selling was impossible. Meanwhile, Duan Yongping was considering prospecting among the ruins left by the internet bubble. He believed the internet itself was not a bubble; it had simply been overhyped. “We use this every day. How could it be a bubble?” he said. He contacted Chinese internet companies including Sina, Sohu, NetEase, and Ourgame to understand their businesses, and tentatively bought small holdings in several portals. But he remained doubtful about their models and prospects and did not fully understand them. Early in 2002, NetEase was preparing to release the online game 大話西遊2 (Dahua Xiyou 2). Marketing was Ding Lei’s weakness. Thinking about who did it best in China, he thought of Duan. They soon met. Duan learned about NetEase at its lowest point: large losses the previous year, a share price below $1, the constant threat of delisting, and litigation. Yet its valuation looked attractive. A company with a $20 million market capitalization had $60 million in cash and only $14 million in liabilities. Its SMS value-added services for China Mobile and China Unicom were growing rapidly. Most importantly, it was preparing a major move into online gaming. Having built Xiaobawang, Duan knew gaming well and understood the market’s size. He could not predict precisely how much NetEase would earn, but said: “There is no reason it should be less than what I did at Xiaobawang in 1995. Back then, our revenue was already on the order of hundreds of millions.” He judged it a good business. There were still dangers, especially legal ones. Many worried about the litigation. Duan consulted specialist lawyers and found that NetEase was unlikely to lose; even a loss would require little compensation. He felt he understood the risk. In April 2002, Duan and his wife spent $2 million in the public market on 1.52 million NetEase shares, or 5.05% of its total share capital. That $2 million was almost all the money he could mobilize. He later said: “After doing my homework, I used essentially all my available money to buy NetEase.” He subsequently increased his holding to 2.05 million shares, or 6.8% of the company. The business soon improved and the stock soared. Ding Lei briefly became China’s richest person. Duan’s investment multiplied dozens of times in only two years. Making money was not the hardest part. More remarkable was that, after such gains, Duan remained unmoved and did not sell. He ultimately held the stock for more than five additional years before gradually selling, with a final gain exceeding a hundredfold. #得到張瀟雨商業經典案例課 (Dedao; Zhang Xiaoyu’s Classic Business Case Course)