According to the Chinese MMORPG Industry Development Report 2008-2009, released by iResearch, the Chinese MMORPG industry has reached RMB20.8 bn with 52.2% y-o-y growth in FY 2008. It grew by 77.7% in 2007 and is estimated to grow at the rate of 20% per year until 2010. By FY 2012 the industry is expected to reach RMB68.8 bn, driven jointly by strong additions to subscriber-base and increased usage despite the current economic downturn. In FY 2008 NetEase entered into an alliance with Blizzard Entertainment to license and operate titles in China, which will enable the company to further diversify its game offerings and could boost top-line performance. StarCraft II (SC2), from Blizzard is expected to be launched soon and to be operated in China by NetEase. In addition, we expect the online game industry to be less impacted than other industries by the current economic downturn, as online games are considered a cheaper mode of entertainment compared to more expensive social activities. The increasing number of Internet users and improving quality of games in China has provided growth potential for the online game industry and NetEase. NetEase.com Inc (NetEase) has signed an agreement to become the official sponsor for the Guangzhou 2010 Asian Games, which we expect will further drive top-line from increased Advertising revenues. However, at current levels, we see limited upside potential and therefore hold a cautious outlook for the NetEase ADR over our investment horizon.

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