China's Hungry for More

There is still heady growth to be found in China. With NetEase.com (Nasdaq: NTES) posting healthy earnings last night -- just weeks after fellow Rule Breakers newsletter recommendation Shanda Interactive (Nasdaq: SNDA) came through with a nod-worthy quarter -- is 2005 just 2003 revisited?

After all, that was the last time the country's stocks were fancied by Wall Street's momentum investors. While Sohu (Nasdaq: SOHU) and SINA (Nasdaq: SINA) have stumbled lately due to weakness in the once-booming wireless messaging services market, the area's potential is now being tapped by companies like NetEase, Shanda, and The9 (Nasdaq: NCTY) that are leading the way in online gaming.

As for NetEase, while it too was once a heavy feeder on the mobile front, 75% of its net fourth-quarter revenue came from its growing online games business. That helped guide the company to a 59% spike in revenues while earnings per diluted share rose by 36% for a $0.45 showing. If you like your net profit margins fat, you'll relish NetEase's chubby 47% effort.

On the year, earnings per share have grown from $1.16 in 2003 to $1.54 in 2004. Given the company's growth and the region's populous potential, NetEase appears to be a bargain at just 26 times last year's profits.

Naturally, investing in overseas companies is not without its risks. The fact that the market soured so quickly on wireless messaging services is also a concern, though it was refreshing to see NetEase make a fast recovery by turning to online gaming. Internet advertising is now the company's second biggest source of revenue and it's hard not to get excited about a country where the vast majority of the population goes online at Internet cafes because they don't have wired connections at home. In time, that will change, as will the ability of leading game companies to charge more for their virtual playthings as the country's overall economy improves.

While both NetEase and Shanda have dipped since they were recommended as part of the Rule Breakers newsletter service, their outlooks remain positive. Some of the world's biggest dot-com players seem to agree after buying into the region over the past year. Amazon (Nasdaq: AMZN) acquired online retailer Joyo.com, while eBay (Nasdaq: EBAY) scooped up Chinese auction site EachNet. Yahoo! (Nasdaq: YHOO) partnered with SINA to launch an auction site last year as well. 2005 may be a bit different now that Shanda is taking an interest in SINA. In other words, Chinese companies may be looking to nibble at their own, and that kind of consolidation may be just the catalyst to reintroduce investors to the region's equity potential.

More about China:

• We were excited about the region a couple of years ago.
• The prospects remain strong.
• Shanda nailed it three weeks ago.
• Talk about the investing potential in our China Connection discussion board
• Find out what stocks the Rule Breakers team is unearthing these days

Longtime Fool contributor Rick Munarriz believes in the sector, but he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.