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 assigns an "Attractive" investment rating to the China Internet and Other Services industry, specifically focusing on Entertainment and OTAs [1]. Core Insights - The report highlights a sharp recovery in the gaming sector, particularly driven by PC games, with a low base effect expected to end in Q3 2025 [5]. - The gaming revenue forecast indicates a significant year-on-year growth, with PC games grossing expected to reach Rmb 39,471 million in FY25, reflecting a 54% growth from the previous year [14]. - The report emphasizes the importance of new game releases and the expansion of mobile and PC gaming as key drivers for revenue growth [12][14]. Summary by Sections Online Entertainment - The gaming industry is experiencing a recovery, with a notable increase in PC game contributions [6]. - The report provides a detailed game pipeline for NetEase, showcasing upcoming titles that are expected to enhance revenue streams [12]. Revenue Forecasts - Total game revenue is projected to grow significantly, with mobile games grossing expected to stabilize around Rmb 56,800 million in FY25, showing a 0% growth year-on-year [14]. - The report outlines specific revenue forecasts for various game titles, indicating a diverse portfolio that supports revenue stability [14]. Market Share - The report analyzes the market share of major players in the gaming industry, with Tencent and NetEase being the leading companies [11]. - It highlights the competitive landscape and the potential for market share shifts as new games are released [10]. Financial Performance - Non-GAAP net profit margins are expected to improve, driven by effective cost management and revenue growth strategies [16][46]. - The report indicates a strong capital return strategy, with buybacks and dividends projected to increase over the coming years [21]. OTA Sector - The report notes that Trip.com is positioned for solid profit growth in its core OTA business, with revenue expected to grow 14% year-on-year in 2025 [98]. - The analysis of the overseas total addressable market (TAM) presents significant opportunities for growth in international travel services [89].