Zhao Yin Guo Ji·2026-02-12 01:24Investment Rating - The report maintains a BUY rating for NetEase, indicating a potential return of over 15% over the next 12 months [19]. Core Insights - NetEase reported a total revenue increase of 3% year-over-year to RMB 27.5 billion in 4Q25, which was 4% below Bloomberg consensus estimates due to slower-than-expected games revenue growth and a prolonged revenue recognition period [1]. - Operating income grew by 6% year-over-year to RMB 8.3 billion, also falling short of consensus estimates by 6% [1]. - Contract liabilities increased by 34% year-over-year in 4Q25, suggesting a positive outlook for revenue growth in FY26, supported by several highly anticipated game launches [1][8]. - The target price for NetEase has been slightly adjusted to US$161.5 from the previous US$164.0, reflecting a 30.7% upside from the current price of US$123.52 [3][12]. Financial Performance - For FY26E, total revenue is projected to reach RMB 120.8 billion, with adjusted net profit expected at RMB 41.4 billion, reflecting a growth of 10.5% year-over-year [2][9]. - Gross margin is expected to improve to 64.8% in FY26E, while operating margin is projected to be 33.0% [9][10]. - The company has maintained a decent shareholder return of RMB 14.5 billion in 2025, which is approximately 3% of its market capitalization [8]. Business Segments - The online games segment is valued at US$142.1 billion, accounting for 88% of the total valuation, based on a 17x EV/EBIT multiple for FY26E [12]. - Youdao and NetEase Cloud Music are valued at US$0.7 billion and US$3.4 billion, respectively, based on industry-average multiples [12]. - The innovative businesses segment is valued at US$1.5 billion, with net cash contributing an additional US$13.8 billion to the overall valuation [12]. Market Position - NetEase's market capitalization stands at approximately US$78.7 billion, with an average trading volume of US$92.3 million over the past three months [4]. - The stock has experienced a decline of 11.3% over the past month and 13.2% over the past three months, indicating some volatility in its performance [5]. Future Outlook - Several highly anticipated game launches are scheduled for FY26, including "Sea of Remnants" and "YaoYaoQi," which are expected to drive revenue growth [1][8]. - The integration of AI into various phases of game development is expected to enhance quality and efficiency, positioning the company favorably in the competitive landscape [8].