网易：Inline 1Q24 results; upbeat on game revenue growth reacceleration in 2H24E

Investment Rating - The report maintains a "BUY" rating for the company, with a target price of US$131.50, representing a potential upside of 38.8% from the current price of US$94.74 [4][5]. Core Insights - The company reported a total revenue increase of 7% year-over-year to RMB26.9 billion in 1Q24, aligning with estimates. Non-GAAP net income grew by 12% year-over-year to RMB8.5 billion, exceeding consensus estimates due to strong performance in the games and music business [5]. - The forecast for FY24-26 non-GAAP net income has been raised by 2-5% to reflect better-than-expected gross profit margin (GPM) expansion [5]. - Game revenue is expected to accelerate in the second half of 2024, supported by a strong game pipeline, despite potential short-term volatility from game adjustments and competition [5]. Financial Summary - Revenue projections for FY24E, FY25E, and FY26E are RMB111.2 billion, RMB119.4 billion, and RMB126.9 billion, respectively, with a slight decrease of 0.7% from previous estimates [1]. - Gross profit is expected to reach RMB70.3 billion in FY24E, with a gross margin of 63.2%, reflecting a 1.5% increase from prior estimates [1]. - Adjusted net profit is projected at RMB33.9 billion for FY24E, with an adjusted net margin of 30.5% [1]. - The company’s cash flow from operations is expected to grow from RMB35.3 billion in 2023A to RMB34.9 billion in 2024E, indicating strong operational efficiency [3]. Growth and Profitability - Revenue growth rates are projected at 7.5% for FY24E, 7.3% for FY25E, and 6.3% for FY26E, with adjusted net profit growth rates of 4.1%, 7.3%, and 7.9% for the same periods [19]. - The overall gross profit margin is anticipated to improve to 63.4% in 1Q24, driven by strong GPM expansion in the games and music sectors [5]. Valuation - The sum-of-the-parts (SOTP) valuation methodology indicates a valuation of US$122.2 billion for the online game business, which constitutes 92.9% of the total valuation [26]. - The valuation for the Cloud Music business is estimated at US$3.0 billion, based on a multiple of 2.9x 2024E EV/revenue, aligning with industry averages [6][27].