What happened
The stock of veteran Chinese tech company NetEase (NTES 1.09%) has been coasting over the past few days. As of market close on Thursday it was up nearly 15% from the end of last week on the back of news from a subsidiary and subsequent positive coverage from a pair of analysts following the stock.
So what
The subsidiary in question is education services provider Youdao, which announced late last week that it will no longer offer after-school tutoring services for subjects in the national curriculum. It's making this change, in its words, "as part of its efforts to fully comply with applicable [Chinese] regulatory requirements."
Image source: Getty Images.
Recently the government launched a crackdown on the for-profit education sector in the country. It's concerned that these occasionally pricey services could dissuade people from having more than one child to help support the nation's population-boosting ambitions.
So Youdao/NetEase is playing ball with the government, and investors seem to be breathing a sigh of relief.
Youdao is an important subsidiary for NetEase, but the parent company has numerous other irons in the fire. The company's considerable presence in the gaming segment is a key reason why CMB International Securities prognosticator Sophie Huang initiated coverage on the company with a buy recommendation. Her $123-per-share price target implies nearly 30% growth from current levels.
"NetEase is well-positioned to capture game premiumization trend with strong 2021-2022 pipeline and overseas expansion. Backed by its outstanding R&D and operation capabilities, we believe NetEase can keep solid growth (game +11% YoY in [full-year 2021]) and strengthen its leadership," Huang wrote in a research note made public on Tuesday.
That same day, China Renaissance, in the person of analyst Yiwen Zhang, lifted its price target on the stock to $134 per share from the previous $123.
Now what
Youdao's strategic retreat in after-school tutoring is shining a brighter light on NetEase's gaming operations, which are substantial. If the tech company can hit Huang's double-digit growth estimates, it should be able to attract even more investors back into its stock.
