China Shines On

The game is afoot at NetEase (Nasdaq: NTES  ) as the Chinese portal continues to make headway in that country's booming online-gaming market. It delivered another market-busting quarter, earning $0.83 a share in the June quarter. Analysts were expecting profits to come in at a mere $0.66 a stub.

Even Wall Street's targets may have seemed ambitious. NetEase had earned just $0.36 a share a year earlier, and it was coming off sequential profits of $0.53 for each American depositary share (ADR) in the March quarter.

Revenue soared by 90%. The major reason for the upside surprise is the popularity of the company's Web-enabled multiplayer games. In fact, 82% of the June quarter's revenue came from online games. That's become a major industry in China, as leisure-starved residents flock to Internet cafes to live out enchanting virtual lives. NetEase's Fantasy Westward Journey had as many as 710,000 gamers playing at the same time.

NetEase shares were recommended to Motley Fool Rule Breakers newsletter subscribers in the January issue. The stock fetched $51.39 at the time. Last night, shares were trading just shy of the $70 mark after the company's blowout report.

Market leader Shanda Interactive (Nasdaq: SNDA  ) as well as other promising players like The9 (Nasdaq: NCTY  ) , SINA (Nasdaq: SINA  ) , TOM Online (Nasdaq: TOMO  ) , and Sohu (Nasdaq: SOHU  ) have been quick to serve a country that is 1.3 billion residents strong with a steady diet of games, websites, and mobile services.

The competition is fierce, especially when upstarts and envious overseas developers catch a glimpse of the kind of margins that these companies are working on. Corporate-friendly tax rates and lean operations in a highly scalable niche found NetEase delivering net margins of 58%. Think about that. Of every dollar in revenue that was generated, 58 cents made it to the bottom line.

If online gaming in China sounds intriguing, come check out the other ultimate growth stocks in dynamic industries that are being singled out each month in our Rule Breakers newsletter service.

More about China:

• We were excited about the region a couple of years ago.
• Like NetEase and Shanda? Then come see what else the Rule Breakers team is unearthing these days.
• Talk about the investing potential on our China Connection discussion board.

NetEase and Shanda are Rule Breakers selections; SINA is a Motley Fool Stock Advisor recommendation.

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