There's more than meets the eye at NetEase.com (NASDAQ:NTES).

On the surface, last night's report was a winner. Total revenue surged 28% to $104.4 million for China's online gaming juggernaut. Earnings clocked in at $0.49 a share, well ahead of the $0.34 a share it rang up a year ago. Wall Street was looking for a profit of just $0.39 a share on $99 million in revenue.

Don't break out the party hats just yet, though. NetEase's results were peppered by a business tax refund that accounted for roughly a fifth of the company's gross profit. In other words, analysts weren't as far off as you may think in nailing the company's bottom line.

Since Netease was the lone multiplayer game specialist to miss expectations in China three months ago, it's only natural for investors to be skeptical this time around. Hiding behind a tax break isn't helping, as the company didn't formally break out its net earnings per share figure without the one-time windfall.

That's probably as far as you should pull in with the cynicism, because there were plenty of things to like about the report.

  • Revenue growth accelerated during the period.
  • Online gaming is the key driver here, at 83% of the revenue mix, but online advertising through the company's portal saw revenue there climb 60% higher.
  • The company's coffers continue to grow, closing out the quarter with $722.4 million in cash, or $5.58 a share.

If that flurry of positive activity isn't enough to warm up to NetEase, maybe a Blizzard will do the trick.

The wizards of Blizzard
Shares of NetEase climbed 6% yesterday, ahead of last night's report, bucking the trend of weakness at its rivals. The catalyst for yesterday's gains was a deal with Activision Blizzard (NASDAQ:ATVI) to license several of its Warcraft and Starcraft games in China.

The deal doesn't include the iconic World of Warcraft franchise. That is still The9's (NASDAQ:NCTY) baby in China. However, it's definitely a welcome form of validation when the world's largest video game company chooses you as a licensee in the world's largest nation.

The news also slammed The9's stock, since so much of that company's financial performance is dependent on Blizzard's global online powerhouse. If NetEase is able to catch that kind of lightning in a bottle in any of its licensed releases, revenue growth that is already accelerating after a temporary lull can really get cranking.

The name of the game is value
The most surprising aspect in all this is that the online gaming sector in China is trading at ridiculously low multiples. Peers like Perfect World (NASDAQ:PWRD), Shanda Interactive (NASDAQ:SNDA), and Giant Interactive (NYSE:GA) are all trading at low forward P/E ratios, despite the sector's breakaway growth and chunky margins.

 

Price
8/13/08

2009

EPS est.

2009

P/E

Perfect World

$24.79

$2.27

10.9

NetEase.com

$24.05

$1.66

14.5

Shanda Intl.

$25.16

$2.46

10.2

Giant Intl.

$9.95

$1.05

9.5

The9

$18.16

$2.22

8.2

If you like NetEase at less than 15 times next year's earnings, you're going to love its rivals trading at pre-teen multiples. Compare that to stateside behemoths Activision Blizzard and Electronic Arts (NASDAQ:ERTS), trading at multiples of 24 and 21, respectively.

Obviously there are risks here. The Chinese government can be restrictive. It has cracked down on underage players and regulated the opening of Internet cafes in the past. This is also still a nascent industry. Who knows if China's youth will still fancy these multiplayer fantasy games in a few years?

However, when you see growth stocks fetching value stock prices, you tend to forgive the potential potholes. You look past the worst-case scenario. You forgive the business tax refunds inflating the bottom line.

It's how you play -- and win -- the game.

Three more ways to play in China:

NetEase and Shanda are Motley Fool Rule Breakers recommendations. Electronic Arts and Activision Blizzard are Motley Fool Stock Advisor picks. A free 30-day subscription offer is available for either newsletter service.

Longtime Fool contributor Rick Munarriz has been a fan of China’s high-margin gaming stocks for a long time. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.