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Summary of NetEase, Inc. 2Q25 Earnings Call Company Overview - **Company**: NetEase, Inc (NTES) - **Industry**: China Internet and Other Services - **Market Cap**: US$86,501 million - **Stock Rating**: Overweight - **Price Target**: US$151.00, representing a 12% upside from the close price of US$134.90 on August 13, 2025 Key Financial Highlights - **Revenue**: - 2Q25 revenue increased by 9% YoY to Rmb27.9 billion, with online game revenue rising by 15% YoY to Rmb22.1 billion, exceeding Morgan Stanley's estimate by 2% [1][3] - **Gross Profit**: - Gross profit rose by 13% YoY to Rmb18.1 billion, with a gross profit margin (GPM) improvement to 64.7%, driven by a shift towards PC games [2][3] - **Operating Profit**: - Adjusted operating profit increased by 24% YoY to Rmb10 billion, also 2% above estimates [2] - **Net Profit**: - Adjusted net profit grew by 22% YoY to Rmb9.5 billion, slightly above estimates but below heightened market expectations due to increased sales and marketing expenses [3][6] Segment Performance - **Online Games**: - Revenue from online games was Rmb22.1 billion, reflecting a 15% YoY growth [1] - **Youdao**: - Revenue increased by 9% YoY to Rmb1.4 billion [3] - **Music**: - Revenue decreased by 4% YoY to Rmb1.97 billion [3] - **Innovative Business and Others**: - Revenue fell by 17% YoY to Rmb2.36 billion [3] Expense and Margin Analysis - **Sales and Marketing Expenses**: - The sales and marketing expense ratio increased to 12.8%, aligning with management's long-term target [2] - **Operating Margin**: - Operating margin for 2Q25 was reported at 35.9%, a 4.2 percentage point increase YoY [3] Market Outlook - **Growth Expectations**: - The company anticipates continued growth in the gaming sector, supported by strong contract liabilities, which are expected to positively impact 3Q performance [1] - **Investment Opportunity**: - Analysts suggest that any potential dip in share price presents a good opportunity for accumulation, given the long-term guidance of 13-14% growth [6] Risks and Considerations - **Market Risks**: - The company faces risks related to slower growth and limited overseas exposure compared to US/EU publishers [9] - **Performance Risks**: - Potential risks include weaker-than-expected margins and the performance of existing or new game titles [9] Conclusion NetEase, Inc. demonstrated solid financial performance in 2Q25, with significant growth in revenue and profit, particularly in the online gaming segment. The company is well-positioned for future growth, although it faces certain market risks that investors should consider.

Industry Overview - The Internet-Software & Services industry is closely tied to the economy, with initial estimates declining due to anticipated negative impacts from tariffs, inflation, and interest rate decisions [1] - The industry is currently experiencing operating leverage, leading to improved margins as revenue has rebounded alongside capital investments [1] Key Companies - Companies like Globant (GLOB) and NetEase (NTES) are notable for their global operations, which spread revenue and risk internationally [2] - Both companies have established client retention systems through subscriptions and platforms, and are leveraging AI in their operations [2] Long-term Outlook - The industry is considered the backbone of the digital economy, with a diverse range of players contributing to its resilience [3] - Valuations have significantly decreased, making the industry attractive at current levels [3] Technology Adoption - The level of technology adoption by businesses is crucial for growth, with many companies enhancing their platforms for AI development [7] - The increasing demand for cloud-based software and services is driving infrastructure buildout, which raises costs and affects profitability [7] Market Performance - The Zacks Internet – Software & Services Industry has outperformed the broader Zacks Computer and Technology Sector and the S&P 500, returning 41.8% over the past year compared to 29% and 20.3% respectively [12] - The industry is currently trading at a median forward 12-month price-to-earnings (P/E) ratio of 22.15X, which is a 2.4% discount to the S&P 500 and a 21.3% discount to the technology sector [15] Company Highlights: Globant (GLOB) - Globant has shown impressive growth with a revenue CAGR of 28.3% from 2014 to 2024, while improving customer concentration [21] - The company is focusing on AI-related opportunities and has a subscription model that provides steady revenue inflows [20] - In the last quarter, Globant's revenue grew 7% year-over-year, but it missed the Zacks Consensus estimate by 5.7% [23] Company Highlights: NetEase (NTES) - NetEase focuses on diverse online services, including gaming and education, and has a strong in-house R&D team [27] - The gaming segment has shown significant momentum, with recent titles performing well [28] - NetEase's shares have gained 43.8% over the past year, with earnings for the March quarter exceeding estimates by 23.5% [29]

Investment Rating - The report assigns a "Buy" rating for Tencent Holdings with a target price of HK$670, implying an expected share price return of 28.6% and a total return of 29.5% [3][10]. Core Insights - Tencent's 1Q25 results exceeded expectations, with total revenues growing by 13% year-over-year (yoy) to Rmb180.0 billion, driven by strong performance in domestic games and online advertising, which grew by 24% and 20% yoy, respectively [1][2]. - Non-IFRS net profit for 1Q25 was Rmb61.3 billion, reflecting a 22% yoy increase, surpassing consensus estimates [1][2]. - The report highlights the ongoing benefits of AI integration across Tencent's business segments, contributing to higher margins and revenue growth [6]. Revenue Breakdown - Total Value-Added Services (VAS) revenues increased by 17% yoy to Rmb92 billion, with online games revenues at Rmb59.5 billion, up 24% yoy [1][2]. - Online advertising revenues rose by 20% yoy to Rmb31.9 billion, exceeding expectations [1][2]. - Fintech and business services revenues grew by 5% yoy to Rmb54.9 billion, driven by consumer loan services and wealth management [1]. Deferred Revenues - Total deferred revenues increased by 15% yoy to Rmb127.4 billion, with current deferred revenues up 16% yoy [1][2]. Capital Expenditure - Tencent's capital expenditure for 1Q25 was Rmb27.5 billion, representing a significant increase of 91% yoy [1][6].

Investment Rating - The investment rating for Tencent Holdings Ltd. is "Overweight" with an attractive industry view [5][70]. Core Insights - The report indicates a modest upside and a modest revision higher in the earnings forecast, strengthening the overall investment thesis [2][7]. - Tencent's total revenues for 1Q25 reached RMB 180.022 billion, representing a year-over-year increase of 12.9% and beating consensus estimates by 2.6% [3][7]. - The gaming segment showed significant growth, with online games revenue increasing by 23.7% year-over-year, surpassing consensus by 7.6% [3][7]. - Gross profit rose by 19.8% year-over-year, with a gross margin of 55.8%, an increase of 3.2 percentage points compared to the previous year [3][7]. - Non-IFRS net profit increased by 22% year-over-year, also exceeding consensus expectations by 4% [3][7]. Financial Performance Summary - **Revenue Breakdown**: - Value-Added Services (VAS) revenue was RMB 92.133 billion, up 17.2% year-over-year, with online games contributing RMB 59.5 billion [3]. - Online advertising revenue was RMB 31.853 billion, reflecting a 20.2% increase [3]. - FinTech and Business Services revenue was RMB 54.907 billion, a 5% increase [3]. - **Profitability Metrics**: - Operating profit (Non-IFRS) reached RMB 69.320 billion, an 18.3% increase year-over-year [3]. - The diluted EPS for 1Q25 was RMB 5.1, a 16.9% increase year-over-year [3]. - **Future Projections**: - The fiscal year 2025 revenue is projected to be RMB 726 billion, with an expected EPS of RMB 23.30 [5][70]. Valuation and Price Target - The price target for Tencent Holdings Ltd. is set at HK$630.00, indicating a potential upside of 21% from the current price of HK$521.00 [5]. - The valuation methodology includes a discounted cash flow (DCF) approach with a 10% discount rate and a 3% terminal growth rate [8][9].