Netease's chairman sells $73 million of stock

The chairman and CEO of Chinese online game and portal operator Netease.com last night raised $73.16 million from the placement of 2 million American depositary shares, taking advantage of a doubling in the share price since late February.

The deal, which was arranged by UBS, was launched and completed before the US market opened and was done at a fixed price, perhaps to ensure a speedy execution. Chairman and CEO William Ding, who also founded the company in 1997, offered the 2 million ADSs, which correspond to 1.6% of the outstanding share capital and just about one day's worth of trading volume, at a 4% discount to the previous day's close of $38.10 -- resulting in an absolute price of $36.58 per unit.

A source close to the offer confirmed last night that the placement had been completed and that it had generated pretty good interest from investors, but wasn't able to provide any further details about the transaction. There was no statement or filing by Netease regarding the sale by the time the US market closed this morning.

However, aside from a slightly lower opening and a dip around mid-session, Netease's Nasdaq-listed stock held above the placement price for most of the US trading session and closed at $36.66 -- down 3.8% on the day, but 0.2% above the deal price. This suggests that while some of the buyers in the placement may have decided to flip the stock straight away, there is still solid support for the company in the market. Some of the underperformance overnight -- the Nasdaq Composite index rose 0.5% and the Dow Jones index was up 0.37% -- may have been due to the fact that it was Ding who was selling, although given the small size of the deal, this seems rather unlikely.

According to the latest available shareholder information filed with the US Securities and Exchange Commission, Ding held 46.3% of the company as of March 2008 and isn't known to have sold any shares until yesterday. However, there will be no lock-up on his remaining shares, which means he is free to sell more, should he wish to do so.

Netease has been trading up with the general market in recent months, but contrary to most other stocks, the company is currently in record territory -- this being the first time since its listing on Nasdaq in 2000 that it is trading above $30, based on split-adjusted data. Before the losses overnight, the stock had rallied 104% since February 25 and on Tuesday this week closed at a record $38.22.

In April the company won the rights to host Activision Blizzard's World of Warcraft online game in China for three years after The9's licence expired earlier this month. The popular role-playing game will be on offer alongside a portfolio of other games, including self-designed Westward Journey II and Fantasy Westward Journey, which are among the most popular online games in China.

Last month, the company said its net profit rose 55% to $61 million in the first quarter thanks to a 30% gain in online gaming revenues to $106 million. However, analysts were still disappointed with the results due to a larger-than-expected slump in advertising revenues, which meant that it lagged rivals such as Baidu, Tencent and Perfect World in terms of attracting advertisers.  

In a statement issued together with the first quarter earnings report, Ding acknowledged that advertisers had remained cautious during the first quarter as the global economic slowdown continued, but added that the Chinese government's stimulus measures and the expanding consumption power in China "have delivered some initial signs of recovery".

"To accommodate future market stability and an expected return to online advertising spending growth later this year, we remain on plan to complete several new products and upgrades to our existing channels and to add new channels by the end of the first half of 2009 to create more premium ad space for our advertisers," Ding said.