Core Viewpoint - Citigroup's research report indicates that NetEase's FWJ PC version servers are performing strongly, while the FWJ mobile version and "Yan Yun Shi Liu Sheng" show resilience, leading to expectations that Q3 performance may meet or slightly exceed forecasts [1] Group 1: Performance Insights - The strong seasonal recovery is noted as a key factor in the expected performance [1] - The company is continuously launching new games, with four titles released in October: "Marvel Secret Law Frenzy," "Destiny: Stars," "unVEIL the World," and "StarCraft II" [1] - Upcoming releases include "Nirvana in Fire" on November 7 for overseas markets and "Diablo IV" in China on December 12 [1] Group 2: Investment Outlook - Citigroup maintains a target price of $158 for NetEase ADR and continues to rate it as a "buy," viewing it as a defensive stock in investment portfolios [1]

Core Viewpoint - The article discusses the current challenges faced by NetEase in the gaming industry, highlighting executive departures, underwhelming game launches, and internal management issues, while contrasting its performance with Tencent's growth [6][11][13]. Group 1: Executive Departures and Internal Challenges - Recent departures of key executives, including the producer of "World Beyond" and the head of NetEase's tenth business unit, have raised concerns about the company's stability and future direction [7][10]. - The internal management structure is under strain, with a notable shift in talent from the Guangzhou team to the rapidly rising Hangzhou headquarters, indicating a potential imbalance in resource allocation [15][20][21]. - The company has faced issues with internal corruption, which, while not directly impacting revenue, could lead to broader organizational dysfunction [24]. Group 2: Game Launch Performance - Despite launching three new games in October, the market response has been disappointing, with "Marvel Secret War" achieving only 292,000 downloads and 2.88 million in revenue in its first week, which is considered underwhelming for a title with a well-known IP [10][11]. - The overall gaming revenue for NetEase in Q2 was 228 billion yuan, reflecting a 13.7% year-on-year growth, but this was below market expectations, indicating potential issues in sustaining growth [11][12]. - Compared to Tencent's gaming revenue of 592 billion yuan, which saw a 17% increase in the domestic market, NetEase's performance appears lackluster [13]. Group 3: Strategic Direction and Market Position - The article suggests that NetEase's current strategy of frequent new game launches may not be a coherent plan but rather a reaction to market pressures, as none of the new titles have emerged as hits [31][32]. - The gaming industry is shifting towards deeper value creation, where success is increasingly tied to emotional resonance and user engagement rather than just monetization strategies [33]. - The need for NetEase to reconnect with its original passion for game development is emphasized, as the company faces competition from both Tencent and emerging players like miHoYo [29][33].

Group 1 - The A-share market opened positively on October 24, with the Shanghai Composite Index rising by 0.17%, the Shenzhen Component Index increasing by 0.51%, and the ChiNext Index up by 0.83% [1] - The storage concept is gaining momentum, with commercial aerospace, quantum technology, and GPU concepts leading the gains, while short dramas, cultivated diamonds, and coal sectors experienced slight declines [1] - The gaming sector showed a slight upward trend, with the gaming ETF (159869) experiencing a minor increase. As of October 23, the gaming ETF has seen a net inflow of 256 million yuan over the past five trading days, indicating strong investor interest, with a total product scale of 11.115 billion yuan [1] Group 2 - On October 22, the National Press and Publication Administration announced that 159 domestic games received approval for release in October, along with 7 imported games, totaling 166 games, maintaining a high approval level [2] - In 2025, a total of 1,440 games have received approval, including 1,354 domestic games and 86 imported games, reflecting a robust gaming market [2] - The gaming sector is experiencing multiple catalysts, including AI, content, and commercialization model transformations, with the gaming ETF (159869) tracking the performance of the A-share listed companies in the animation and gaming industry [2]

Group 1 - The Hong Kong internet sector is experiencing a rebound, with stocks such as Black Sesame Intelligence, Weishi Jiajie, and UBTECH rising over 5% [1] - The Hang Seng Internet ETF (513330) has followed the index's upward trend [1] - In October, the proportion of new game releases from well-known game manufacturers is increasing, with titles from NetEase and other companies covering various subcategories [1] Group 2 - Zheshang Securities believes that traditional internet business has bottomed out, and with the Federal Reserve's interest rate cuts, the AI business is rapidly developing [1] - The valuation of the Hong Kong internet sector remains at historical lows, indicating potential for early recovery [1]

Core Insights - NetEase is undergoing significant personnel changes, particularly in its Dream Division, which is being restructured following the departure of key executives [1][3][58] - Despite these changes, the company continues to launch new games, with three titles released in early October, although their initial performance has been underwhelming [5][57] - The overall trend indicates a tightening of new game releases compared to previous years, with a focus on PC gaming and international expansion for mobile titles [56][57] Group 1: Personnel Changes - The producer of the game "World Beyond" has left due to disagreements with management regarding position adjustments, raising industry concerns [1] - Key executives, including the heads of the Dream Division and the Tenth Division, are also leaving, indicating a major restructuring within the company [3][58] - The Dream Division will be split and restructured, with significant titles being reassigned to different divisions [3] Group 2: New Game Releases - In October, NetEase launched three new games: "Marvel Secret Tactics," "Destiny: Stars," and "unVEIL the world," aiming to boost its product lineup [5][57] - The initial performance of these games has been disappointing, with daily revenues failing to exceed one million [7][12][20] - "unVEIL the world" has shown relatively better performance compared to the other two titles, despite lacking a major IP [34] Group 3: Market Trends - The number of new mobile games released by NetEase has decreased significantly compared to previous years, with only four major titles launched this year [37][56] - The game "Yanyun Sixteen Sounds" has performed well, achieving a total revenue of 6.43 billion RMB since its launch, indicating a strong long-term product [37][53] - The overall market share of NetEase in the top-selling games has been declining, facing competition from rivals like Tencent and emerging companies [56][57]

Core Insights - Over 20 new games are set to launch in October, with key titles from major companies like NetEase, Tencent, and Bilibili, showcasing a diverse range of genres and trends in the gaming industry [2][3] Game Releases - NetEase is releasing three major titles: tactical team RPG "Marvel Secret Wars," multiplayer sci-fi shooter "Destiny: Stars" (domestic version), and strategy adventure RPG "unVEIL the world" [3] - Tencent is launching the card RPG "Kaeas Dream" overseas, marking its entry into the sub-genre of anime games [3] - Other companies like Hero Game, Dream Creation, and Bilibili are also releasing new titles, indicating a crowded market in October [3] Industry Trends - The new games reflect three core trends: a pursuit of high-quality products, continuous revaluation of IP value, and ongoing micro-innovations in gameplay [2] - Multi-platform releases have become a common strategy, allowing companies to expand user reach while ensuring a consistent experience across platforms [6] Market Dynamics - The gaming industry is experiencing a surge in new releases, driven by increased interest and a normalization of game license approvals, with 156 licenses issued in September alone [4] - The delay of "GTA6" to May 2026 has led to speculation about its impact on the market, but analysts suggest that the concentration of new releases is a broader trend rather than a direct consequence of this delay [4] Performance Metrics - "Destiny: Stars" has seen significant pre-launch interest, with over 10 million players completing reservations [5] - "Kara Bichu" mobile version has surpassed 10 million pre-registrations, indicating strong market demand [3] - "Escape from Duckov," published by Bilibili, has performed well in both domestic and international markets, showcasing its global appeal [5]

Game Releases - NetEase's "Marvel Secret War" began its Android paid test on September 15, focusing on team-building strategy and character development in a card RPG format, featuring Marvel superheroes like Doctor Strange and Iron Man [1] - ByteDance's "Shadow Hunter" launched its first domestic test on September 16, achieving over 180,000 concurrent players within 90 minutes and climbing to 7th place on Steam's global sales chart [3] - miHoYo's "Honkai: Origin Spirits" started its first closed test on September 17, combining sprite collection with auto-chess combat mechanics [6] - "Dungeon Castle 4: Knights and the Broken Chronicle" was officially released on September 17, continuing the dark dungeon adventure RPG series with 3D graphics and strategic gameplay [8] - Tencent's "The Finals" (translated as "Ultimate Contest") began its second limited test on September 19, developed by members of Embark Studios, featuring a PVP shooting game set in famous global cities [10] Industry News - Tencent's "Delta Force" celebrated its first anniversary on September 21, reporting a daily active user (DAU) count of 30 million, up from 12 million in April and 20 million in July [11] - McDonald's announced a collaboration with "Black Myth: Wukong" on September 19, launching limited-time meal sets and promotional items for the Mid-Autumn Festival [14] - "Love and Producer" revealed a new voice actor for the character Li Zeyan on September 20, following the departure of the previous actor [16] - Zulong Technology was ordered to pay 150,000 yuan for trademark infringement and unfair competition against Suzhou Die Paper Network Technology, due to improper use of registered trademarks in advertising [20] - miHoYo established two new companies in Shanghai, focusing on software development and AI applications, with a registered capital of 10 million yuan each [21]

Core Viewpoint - NetEase's Q2 financial report for 2025 showed growth but fell short of market expectations, indicating challenges in the gaming sector and potential impacts on future performance [2][4]. Financial Performance - NetEase reported Q2 net revenue of 27.9 billion RMB, a year-on-year increase of 9.4%, but below the market estimate of 28.4 billion RMB [2][4]. - The net income from gaming and related value-added services was 22.8 billion RMB, up 13.7% year-on-year [2]. - Other segments showed mixed results: Youdao's revenue was 1.4 billion RMB (up 7.2%), while NetEase Cloud Music's revenue decreased by 3.5% to 2 billion RMB, and innovative and other businesses saw a 17.8% decline to 1.7 billion RMB [2]. - Non-GAAP net profit attributable to shareholders was 9.5 billion RMB, a 21.8% increase, with R&D investment at 4.4 billion RMB, representing an R&D intensity of 15.6% [2]. Market Reaction - Following the earnings report, NetEase's stock price fell by 3.88% as of August 15, reflecting a cautious market response [3]. Gaming Sector Insights - Despite overall revenue growth, the slowdown in game category growth was highlighted as a significant factor affecting performance [4]. - Long-standing games like "Fantasy Westward Journey" and "Identity V" continued to perform well, with "Fantasy Westward Journey" achieving a peak of 2.93 million concurrent users, marking a new milestone in its 22-year operation [6][7]. - The success of these games is attributed to their ability to adapt and innovate, maintaining user engagement despite market challenges [7][8]. New Game Releases and International Expansion - New titles such as "Outsiders" and "Marvel's Secret Wars" have shown strong performance in overseas markets, with "Outsiders" achieving significant download milestones shortly after its release [11][16]. - The management anticipates continued growth in overseas gaming business over the next 2-3 years, with plans to launch more products tailored to international user preferences [16]. Blizzard Games Performance - Blizzard's titles, including "Hearthstone" and "World of Warcraft," have seen increased user engagement and revenue, with "Hearthstone" quickly climbing the iOS sales charts following a new expansion [17]. - The management noted that the current operations of Blizzard's games have surpassed previous levels before service interruptions [17]. Future Outlook - NetEase plans to launch new original titles, including an ocean adventure RPG titled "Forgotten Sea" in 2026, indicating a strategic focus on expanding its game portfolio [18]. - Analysts suggest that the latter half of the year could be crucial for new game launches, despite a competitive landscape in the gaming industry [18].

Financial Performance - Net revenue for the second quarter of 2025 was 27.9 billion yuan, representing a year-on-year increase of 9.4% [1] - Net profit attributable to shareholders was 8.6 billion yuan, down from 10.3 billion yuan in the previous quarter and up from 6.8 billion yuan in the same period last year [1] - Non-GAAP net profit attributable to shareholders was 9.5 billion yuan, compared to 11.2 billion yuan in the previous quarter and 7.8 billion yuan in the same period last year [1] Game Performance and Strategy - The game "Yan Yun Shi Liu Sheng" has shown stable performance, exceeding pre-launch expectations in terms of active users and commercialization [2] - "Seven Days World" experienced a revenue rebound due to a successful 2.0 version update and the introduction of a new PVP mode, ranking fourth on the Steam global sales chart [3] - The user and revenue distribution between China and overseas markets for "Seven Days World" is 1:1 and 1:1.5, respectively [3] Blizzard Games and Market Potential - Blizzard games have performed well, with data surpassing levels from before the last shutdown, indicating strong potential for attracting both new and returning players in China [4] - The company aims to create content that aligns with Chinese players' preferences to tap into the significant potential of Blizzard games [4] Shooting Game Market - The shooting game segment is highly competitive, with high user expectations for art quality and innovative gameplay [4] - The company plans to continue investing in shooting games to establish leading products in this space [4] Long-term Game Development - "Marvel Showdown" has seen revenue and daily active users stabilize after the launch of its third season, indicating effective new strategies [5] - "Forgotten Sea" is viewed as a potential top game, with a focus on its commercial model and target market [5] Evergreen Games Recovery - "Dream Journey" has shown recovery in performance, with a peak of 2.93 million concurrent users recorded [6] - "Egg Party" is expected to become a popular family game through continued investment in high-quality content and marketing [7] AI Integration and Overseas Expansion - The company is actively investing in AI to enhance game development and operations, with plans for AI-driven games in the near future [8] - The overseas market is seen as attractive, with successful titles like "Marvel Showdown" and "Seven Days World" achieving good results [9]

Financial Performance - Q2 revenue was 27.9 billion RMB, a year-on-year increase of 9.4%, but below the expected 28.4 billion RMB [1] - Gross profit was 18.1 billion RMB, a year-on-year increase of 12.5%, with a gross margin of 64.9% [1][9] - Net profit reached 8.6 billion RMB, a year-on-year increase of 27.25%, but a significant quarter-on-quarter decline of 16.5% [1][10] - The company announced a dividend of 0.57 USD per ADS and has executed a share repurchase plan of 2 billion USD [1] Core Business - Online gaming revenue was 22.8 billion RMB, a year-on-year increase of 13.7%, but a quarter-on-quarter decline of 5%, falling short of the market expectation of 23.37 billion RMB [2] - The gaming business's gross profit was 16.01 billion RMB, slightly exceeding expectations, indicating ongoing cost control pressures [3] - The game "Dream of Jianghu" reached a peak of 2.93 million concurrent players in August, showcasing the enduring appeal of this 20-year-old IP [4] Non-Gaming Business - Net revenue from NetEase Cloud Music was 2 billion RMB, a slight year-on-year decline of 3.5%, with a quarter-on-quarter increase of 5.3% [6] - Youdao's performance was relatively stable, with net revenue of 1.4 billion RMB, a year-on-year increase of 7.2% [7] - Revenue from innovative and other businesses was 1.7 billion RMB, a significant year-on-year decline of 17.8%, primarily due to decreased income from NetEase Yanxuan and advertising services [8] Profitability and Cash Position - The company maintained a strong cash position with net cash of 142.1 billion RMB, an 8.1% increase from the beginning of the year [10] - Operating cash flow was 10.9 billion RMB, although it declined by 10% quarter-on-quarter, still indicating a healthy level [10] Future Outlook - The CEO emphasized the importance of exploring new player experiences and expanding self-developed IP products, with upcoming titles like "Sea of Oblivion" and "Return to Tang" being critical for assessing innovation and international strategy [11] - The continued expansion of Blizzard games in the Chinese market, including new content for "Hearthstone" and the 20th anniversary of "World of Warcraft," may provide new growth opportunities for the company [11]