NetEase Inc. Earnings Review: A Deep Dive Analysis
Broker Name: UOB Kay Hian
Date of Report: Friday, 15 November 2024
Company Overview
NetEase, Inc. is a prominent Chinese internet technology company that offers online services centered on content, community, communications, and commerce. The company is listed under the GICS sector Communication Services with the Bloomberg ticker: 9999 HK.
Stock Data and Performance
As of the report date, NetEase’s share price stood at HK\$119.50 with a target price of HK\$144.00, indicating a potential upside of 20.5%. The company has a market cap of HK\$385,358.9 million (US\$49,516.7 million) with a 3-month average daily turnover of US\$144.2 million. The stock has experienced a 52-week high of HK\$181.0 and a low of HK\$113.70.
Key Shareholders
- Lei Ding: 43.6%
- JPMorgan Chase & Co: 3.4%
- BlackRock Inc: 2.7%
3Q24 Earnings Miss
NetEase’s 3Q24 results fell below expectations, with revenue dropping 4% year-on-year (yoy) to Rmb26.2 billion, which was lower than both the company’s and consensus forecasts. The gross profit also dipped 3% yoy to Rmb16.5 billion, although the gross margin rose by 1 percentage point yoy to 63%. Non-GAAP operating profit fell 3% yoy to Rmb8.1 billion, with an operating margin of 29%. The non-GAAP net profit tumbled 13.3% yoy to Rmb7.5 billion, missing the consensus estimate, and the net margin shrank by 3 percentage points yoy to 29% in 3Q24.
Revenue Breakdown
NetEase’s revenue for the third quarter was categorized as follows:
- Online games: Rmb20.9 billion (down 4.2% yoy)
- PC games: Rmb6.1 billion (up 24.9% yoy)
- Mobile games: Rmb14.8 billion (down 12.6% yoy)
- Cloud Music: Rmb2.0 billion (up 1.3% yoy)
- Youdao: Rmb1.6 billion (up 2.2% yoy)
- Innovative business: Rmb1.8 billion (down 10.3% yoy)
Subdued Mobile Game Revenue Growth
NetEase’s online game revenue saw a sluggish decline of 4% yoy, primarily due to a 13% yoy drop in mobile game revenue. This was attributed to the high base of Naraka: Bladepoint and monetization challenges faced by Egg Party. However, mobile game revenue grew 4% sequentially, driven by the continued popularity of games like Identity V and Naraka: Bladepoint. PC games delivered resilient revenue growth of 25% yoy, mainly boosted by the relaunch of World of Warcraft and the impressive performance of Hearthstone.
Encouraging Game Pipeline
Looking ahead, NetEase has several highly anticipated titles scheduled for release, including Marvel Rivals and Where Winds Meet in December 2024, and FragPunk in early 2025. Marvel Rivals and FragPunk are PvP shooter games targeting global markets. NetEase is confident that its domestic studios will continue to produce high-quality content appealing to global audiences.
Financial Forecasts
NetEase’s financial forecasts for the coming years are as follows:
| Year |
2024F |
2025F |
2026F |
| Net turnover (Rmbm) |
105,941 |
114,404 |
122,124 |
| EBITDA (Rmbm) |
38,250 |
40,617 |
40,302 |
| Operating profit (Rmbm) |
34,785 |
37,868 |
37,678 |
| Net profit (adj.) (Rmbm) |
32,403 |
35,237 |
40,122 |
| EPS (Fen) |
999.1 |
1,083.8 |
1,234.0 |
| PE (x) |
11.1 |
10.2 |
9.0 |
| Dividend yield (%) |
2.4 |
2.6 |
3.0 |
Strategic Global Market Expansion
NetEase is strategically adopting a two-pronged approach to global market expansion:
- Collaborating with overseas first-party studios to develop games tailored for Western and Japanese markets.
- Focusing on its domestic studios to create games for global release, including in Europe, North America, and Japan.
The company aims to build on its recent success with Once Human, a game released earlier this summer.
Upcoming Release: Marvel Rivals
Marvel Rivals is set for release on 6 December. It is a team-based competitive shooting game that has already received a highly favorable review rate of nearly 95% from a large-scale closed beta test. Additionally, Marvel Rivals currently ranks #7 on the Steam wish list.
Returns to Shareholders
For 3Q24, NetEase has approved a dividend of US\$0.087 per share (US\$0.435 per American depositary share (ADS)). As of 30 September, 18.2 million ADSs had been repurchased for a total cost of US\$1.6 billion, representing 3.3% of the market cap.
Earnings Revision and Risks
The report maintains the 4Q24/2024 revenue estimates largely unchanged, implying revenue growth of 1%/2%, respectively. However, the 4Q24/2024 earnings forecasts have been cut by 7%/5% respectively due to softer margin expectations. For 4Q24/2024, the report forecasts a non-GAAP net profit of Rmb8.6 billion/Rmb32.4 billion, translating to a net margin of 31% for both periods.
Risks include weaker-than-expected performance of new games and uncertain performance of evergreen games.
Valuation and Recommendation
The report maintains a BUY recommendation with a lower target price of HK\$144.00 (US\$92.00), considering the lackluster mobile game growth. The target price implies a 12x 2025F PE, while the company is currently trading at 10x 2025F PE, lower than its historical mean of 15x.
Share Price Catalysts
- Strong performance of the game pipeline.
- Improving profitability of NetEase Cloud Music.
12-Month Forward PE Band
The company’s 1-year forward PE band is as follows:
- Mean: 15.3x
- +1 Standard Deviation: 20.3x
- -1 Standard Deviation: 10.3x
SOTP Valuation
The sum-of-the-parts (SOTP) valuation for 2025 includes:
| Segment |
2025F Revenue (Rmbb) |
Net Margin |
2025F Non-GAAP Earnings (Rmbb) |
Valuation (2025) PE/PS (x) |
Estimated Fair Value (Rmbb) |
Fair Value (HK\$) |
Fair Value per Share (HK\$) |
| Online games |
98 |
24% |
23 |
9 |
211 |
230 |
71 |
| Cloud music |
9 |
3% |
– |
26 |
28 |
– |
9 |
| Youdao |
7 |
3% |
– |
12 |
13 |
– |
4 |
| Innovative and others |
9 |
1% |
– |
9 |
9 |
– |
3 |
| Total EV |
258 |
– |
– |
– |
280 |
– |
86 |
| Net Cash |
171 |
– |
– |
– |
187 |
– |
57 |
| Target price (HK\$) |
– |
– |
– |
– |
– |
– |
144.00 |
