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NetEase Shares Tumble as Game Unit Posts Sluggish Growth

By Ye Zhanqi and Doug Young

NetEase Inc. posted a 42% profit growth in the latest quarter, but its shares fell sharply after the news came out as the company posted its slowest revenue increase in nearly two years.

Shares of China's second-largest online-game company — whose titles include the popular World of Warcraft series — have nearly doubled since April, as it previously posted strong revenue growth in a fiercely competitive gaming industry where many others are reporting declines.

But competition remains stiff, especially from industry leader Tencent Holdings Inc., and a company's prospects can quickly change based on the success or failure of one or two new titles.

NetEase reported a third-quarter profit of 2.7 billion yuan ($398 million), up 42% from 1.9 billion yuan year-on-year.

But revenue rose by a slower 38%, to 9.2 billion yuan, representing the slowest growth rate since the fourth quarter of 2014. The company's core online-game business, which accounts for about 70% of its total revenue, grew by a sluggish 26%. Online game revenue grew by about 75% in the previous quarter.

Following the report's release, NetEase shares fell nearly 5% in after-hours trading in New York.

NetEase began its life as an online news and information portal, and is one of China's oldest Internet companies. But it later found greater success in online games, banking on popular self-developed titles based on Chinese themes and a strong partnership with leading global game developer Activision Blizzard.

The company is trying to diversify beyond its reliance on online games, and reported its net revenue from email and e-commerce doubled in its latest quarter to 2.1 billion yuan, or more than a fifth of its total. But the company is also trying to spin off its older, slow-growth portal business, and last month announced that it had made an initial filing to separately list the unit in New York.

Contact reporter Doug Young (dougyoung@caixin.com); editor Ken Howe (kennethhowe@caixin.com)

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