Summary of NetEase Inc. (NTES) Earnings Review Company Overview - **Company**: NetEase Inc. (NTES) - **Market Cap**: $85.6 billion - **Enterprise Value**: $66.4 billion - **Industry**: China Games, Entertainment & Healthcare Tech Key Financial Highlights - **2Q Performance**: - Game revenue increased by 15% year-over-year (yoy) - Deferred revenue rose by 28% yoy - Operating profit (OP) grew by 24% yoy - **Market Reaction**: Despite solid results, share price reaction was muted with a -2% decline in ADR post-results [1][2][22] - **Future Projections**: Expected to maintain at least mid-teens yoy game revenue growth for 3Q25 and steady margins for the rest of 2025E [1][2] Core Insights - **Defensive Business Model**: The results highlighted the strength and evergreen nature of NetEase's legacy titles, which continue to perform well despite a lack of major new game launches in 2Q [1][3][17] - **S&M Spending**: Sales and marketing (S&M) spending normalized to 13-14% of sales, with management indicating improved ROI from elevated promotional spending during July-August [18][24] - **Game Pipeline**: Focus on a limited number of high-quality games for global markets, with notable upcoming titles including "Destiny Rising" (launching August 28) and updates for "Ananta" [2][19][32] Financial Forecasts - **Revenue Forecasts**: - 2025E: Rmb 114.91 billion (up 0.4% from previous estimates) - 2026E: Rmb 124.07 billion (up 0.8%) - 2027E: Rmb 132.55 billion [20][21] - **Net Profit Projections**: Revised up by 1.2% to 2.0% for 2025E-27E due to improved gross margins [20][21] Important Metrics - **P/E Ratio**: Currently trading at 15X forward P/E, which is a discount compared to peers and historical averages [2] - **EPS Growth**: Expected EPS growth of 4.1% in 2025E, with further growth projected in subsequent years [12] Additional Insights - **Deferred Revenue**: Strong deferred revenue growth indicates future revenue potential, with a 28% yoy increase in 2Q25 [22] - **Market Position**: NetEase has built a solid user base and community for its titles, which is expected to sustain its evergreen nature in the coming quarters [17] - **Cash Flow**: Positive cash flow from operations projected to increase, with free cash flow expected to reach Rmb 42.18 billion in 2025E [15] Conclusion NetEase Inc. demonstrated solid financial performance in 2Q, driven by its legacy titles and effective marketing strategies. The company is well-positioned for continued growth with a strong pipeline of upcoming games and a focus on maintaining efficient spending. The market's attention is likely to shift towards its potential blockbuster titles as they approach launch dates.

Investment Rating - The report maintains a "Buy" rating for NetEase, with a target price increase to USD 130 from USD 120, implying a 21.4% upside from the current share price of USD 107.11 [6][11][100] Core Insights - NetEase's recent earnings report showed a 25% beat in earnings, a 5% beat in game revenue, and an 11% beat in deferred revenue, leading to a revision of EPS growth to +18% year-on-year in 2025 [2][11] - The strong deferred revenue growth of 19% year-on-year indicates potential for accelerating game revenue growth in the upcoming quarters [2][97] - Upcoming game launches, including Marvel Mystic Mayhem and Destiny Rising, are anticipated to be key focus areas following the annual product launch event [2][11] Financial Performance - In Q1 2025, NetEase reported total revenue of RMB 28,829 million, reflecting a year-on-year growth of 7% [91] - Online game revenue grew by 15% year-on-year, driven by strong performances from titles such as Identity V, Where Winds Meet, and Marvel Rivals [94] - The gross profit margin (GPM) for games and related value-added services (VAS) was reported at 67%, with a non-GAAP operating profit of RMB 11,393 million, representing a 34% year-on-year increase [91][94] Game Highlights - Mobile game revenue only fell by 4% year-on-year, outperforming consensus expectations of a 6% decline, thanks to strong performances from Identity V and Where Winds Meet [3][94] - PC game revenue saw an impressive growth of 85% year-on-year, significantly above the consensus estimate of 67%, driven by contributions from WWM PC and Blizzard titles [3][94] - The launch of Once Human mobile resulted in 6 million new users in its first week, boosting the PC version's revenue by 500% [3][94] Margin Discussions - The report notes an increase in games and related VAS gross profit margin quarter-on-quarter, attributed to a reduced focus on non-game businesses and a shift towards profitability [4][94] - The report anticipates that it will take a few quarters for sales and marketing expenses as a percentage of revenue to normalize [4] Valuation Metrics - The report provides estimates for future financial performance, projecting revenue of RMB 116,721 million for 2025, with a year-on-year growth of 11% [98] - The estimated price-to-earnings (PE) ratio for 2025 is 12.6, indicating a favorable valuation compared to historical averages [7][14] Pipeline and Future Outlook - The report highlights key upcoming titles such as Ananta, expected to launch in 2026, which could significantly contribute to future revenue streams [2][90] - The successful return of Overwatch in China has set new records for peak concurrent users, indicating strong market demand for NetEase's offerings [94]