NTES(US:NTES) Zhao Yin Guo Ji·2024-05-24 03:22Investment Rating - The report maintains a Buy rating for NetEase (NTES US) with a target price of $131.5, slightly adjusted from the previous target of $130.5 [4][5] Core Views - NetEase's Q1 2024 revenue grew 7% YoY to RMB 26.9 billion, in line with expectations, while non-GAAP net income grew 12% YoY to RMB 8.5 billion, 2% above consensus, driven by better-than-expected performance in gaming and music businesses [4] - The report is optimistic about game revenue growth re-accelerating in 2H24E, supported by a strong pipeline of new games, including Where Winds Meet (July 2024) and Marvel Rivals (3Q24E) [4] - Non-gaming businesses, particularly cloud music and Youdao, showed quality growth, with cloud music revenue up 4% YoY to RMB 2.03 billion and Youdao revenue up 20% YoY to RMB 1.39 billion [4] - Gross profit margin (GPM) improved by 3.9 percentage points YoY to 63.4%, driven by strong expansion in gaming and music GPM [4] - Operating profit margin (OPM) is expected to increase from 26.8% in FY23 to 28.6% in FY24E and 29.7% in FY25E, supported by GPM expansion and efficiency improvements [4] Financial Forecasts - Revenue is projected to grow from RMB 103.5 billion in FY23 to RMB 126.9 billion in FY26E, with a CAGR of 7.1% [4][14] - Adjusted net income is expected to grow from RMB 32.6 billion in FY23 to RMB 39.3 billion in FY26E, with a CAGR of 6.4% [4][14] - Gross margin is forecasted to improve from 60.9% in FY23 to 64.2% in FY26E, while operating margin is expected to rise from 26.8% in FY23 to 30.8% in FY26E [4][14] Valuation - The Sum-of-the-Parts (SOTP) valuation method is used, with the target price of $131.5 comprising: - Online gaming business: $122.2 (92.9% of total valuation), based on 14x 2024E EV/EBIT [19] - Cloud music business: $3.0 (2.3% of total valuation), based on 2.9x 2024E EV/Revenue [8] - Youdao business: $2.0 (1.5% of total valuation), based on 2.8x 2024E EV/Revenue [1] - Innovative businesses: $2.3 (1.8% of total valuation), based on 1.2x 2024E EV/Revenue [20] - Net cash: $2.0 [8] Industry Comparison - NetEase's gaming business valuation multiple (14x 2024E EV/EBIT) is in line with industry peers such as Tencent (17x) and Electronic Arts (16x) [26] - The cloud music business valuation multiple (2.9x 2024E EV/Revenue) is comparable to Spotify (3.3x) and Tencent Music Entertainment (5.3x) [26]