Strength of Evergreen titles to continue; Raise TPs, reiterate Buy | NTES | 12m Price Target: $161.00 | Price: $152.80 | Upside: 5.4% | | --- | --- | --- | --- | | 9999.HK | 12m Price Target: HK$252.00 | Price: HK$236.40 | Upside: 6.6% | NetEase's share price has rallied 74% YTD and 19% post 2Q25 results recently, outperforming China's Internet sector. We believe the strength has been underpinned by a better than expected trend for Evergreen titles (led by FWJ) and likely accelerating sales growth into 3Q25 ...

Financial Performance - NetEase's market capitalization was $854 billion as of August 13, 2025[9] - Net revenues for 2Q25 reached $39 billion[9] - Net income attributable to the company's shareholders for 2Q25 was $12 billion[9] - Basic net income per ADS (GAAP) for 2Q25 was $188[9] - Net cash as of June 30, 2025, amounted to $198 billion[9] Revenue Breakdown (2Q25) - Games and related value-added services generated $3184 million in net revenues[12] - Youdao's net revenues were $198 million[20] - NetEase Cloud Music's net revenues reached $275 million[23] - Innovative businesses and others contributed $237 million in net revenues[26] Games Performance - Online games accounted for 97% of games and related value-added services revenue in 2Q25[12] - Fantasy Westward Journey Online reached over 293 million peak concurrent players in August[18] ESG Ratings - NetEase received an AA rating from MSCI[9, 40] - NetEase's Sustainalytics rating indicates a low-risk company[40]

Summary of Key Points from the Conference Call Company and Industry - **Companies Involved**: NetEase, Bilibili, Kuaishou - **Industry**: China Digital Entertainment Core Insights and Arguments 1. **Stock Performance**: China digital entertainment stocks have seen significant YTD performance with Kuaishou, NetEase, and Bilibili rising by +75%, +57%, and +30% respectively, compared to HSI's +27% [1][11] 2. **Downgrade Ratings**: NetEase and Bilibili have been downgraded from Overweight (OW) to Neutral due to less attractive risk-reward profiles after recent stock rallies [1][11] 3. **NetEase Earnings Outlook**: Limited earnings upside for NetEase is anticipated due to rising game promotion expenses and a lack of blockbuster game launches in the second half of 2025. The estimated P/E ratio for 2025 is 16x, with a projected EPS CAGR of 6% for 2026-2027 [1][11][26] 4. **Bilibili Revenue Growth**: Bilibili's revenue growth is expected to decelerate from over 20% in the first half of 2025 to 5% in the second half, primarily due to a high comparison base from mobile games [1][11] 5. **Investment Recommendations**: The report suggests accumulating stocks with reasonable valuations (less than 20x P/E) and double-digit profit CAGR, favoring Kuaishou with a 14x P/E and 20% profit CAGR [1][11] Financial Forecasts and Changes 1. **NetEase Financials**: - Revenue forecast for 2025 is RMB 113.54 billion, with an adjusted net income of RMB 39.87 billion [22] - Expected net profit growth to slow to -1% in Q4 2025 and -9% in Q1 2026 [11][26] 2. **Bilibili Financial Revisions**: - Net revenue for 2025 revised down by 1% to RMB 30.20 billion, with mobile games revenue down by 6% [5] - Advertising revenue forecasted to decline by 3% [5] Other Important Insights 1. **Market Conditions**: The digital entertainment sector is influenced by themes such as AI and the experience economy, which are seen as safer investments compared to e-commerce and local services [1] 2. **Competition and Regulation**: Increased competition in the gaming market and potential regulatory changes in China pose risks to revenue growth for both NetEase and Bilibili [11][15] 3. **Valuation Metrics**: NetEase's valuation is at a 20% discount to its five-year average P/E, reflecting a cautious outlook on its future performance [14][17] Conclusion The conference call highlights a cautious outlook for NetEase and Bilibili amidst strong past performance, with concerns over rising costs and competition. The recommendation is to focus on companies with solid growth potential and reasonable valuations within the digital entertainment sector.

Core View - Company is expected to report 2Q25 results in late August 2025, forecasting an 11% YoY topline growth and a 16% YoY increase in pure online game revenue, which is slightly below consensus estimates [1][3] - Anticipated strong performance in PC games with a 67% YoY growth to RMB7.6 billion, while mobile game revenue is expected to remain flat YoY at RMB14.8 billion [1][3] - Adjusted net profit is projected to rise 28% YoY to RMB10.0 billion, exceeding consensus by 4%, with a forecasted 20% YoY growth in adjusted profit for 2025 to RMB40.3 billion [1][2] Revenue Forecast - Total revenue for 2Q25 is modeled to increase by 11% YoY to RMB28.2 billion, which is 1% below consensus [3] - Pure online game revenue is expected to jump 16% YoY to RMB22.4 billion, also 2% below consensus [3] - Cash revenue is forecasted to grow 17% YoY to RMB20.6 billion [1][3] Game Pipeline and Growth Drivers - The company is expected to experience a relatively light game pipeline in 2025, with key launches including "Marvel Mystic Mayhem" and "Supervive" [2] - Sustainable profitable growth is anticipated due to stable existing game franchises, channel optimizations, and a structural shift in game revenue mix [2] - The company is expected to achieve a gross profit margin (GPM) of 63.8% and an adjusted net profit margin (NPM) of 35.4%, both exceeding market expectations [3] Valuation and Target Price - The company maintains a BUY rating with an increased target price of US$150.0/HK$236.0, based on various valuation components including adjusted EPADS and stakes in Youdao and Cloud Music [4]

Investment Rating - The report maintains a positive outlook on experience and learning-related services consumption names, recommending eight quality consumer services with an average forward P/E of 17x and 19% year-on-year sales growth [31]. Core Insights - Despite overall lackluster consumption trends in China post-reopening, selected "new consumption" stocks have significantly outperformed the MXCN index, with an average weighted index for Lunar New Year consumption rising by 21% compared to 10% for MXCN through June 12 [5][6]. - The ACGN sector has shown remarkable performance, with stocks like Pop Mart and Bloks rising by 155% and 94% respectively, while other sectors like Hainan travel/shopping and e-bikes lagged behind [5][6]. - The report highlights a structural shift in consumer behavior towards services over goods, with services consumption categories such as Transport & Communications and Education, Culture & Recreational Services growing at 15% and 18% year-on-year in 2023, compared to overall consumption growth of 9% [5][6]. - The report identifies nine experience and learning-related consumption names that are expected to benefit from favorable seasonal spending trends during the summer [5][31]. Summary by Sections New Consumption Trends - Two key trends identified are affordable treats, including ACGN goods and government-subsidized trade-ins, and experience-related consumption such as movies and travel [6][31]. - The report notes that leading affordable treats have outperformed year-to-date, indicating a shift in consumer preferences towards smaller pleasures rather than big-ticket items [5][6]. Valuation and Growth Potential - Valuation levels for top new consumption names are now comparable to established global brands, with significant upside potential for future growth [5][6]. - The report emphasizes that the ability to surprise on future growth is crucial for maintaining valuations in the new consumption space [5][6]. Recommendations - The report recommends focusing on experience and learning-related services, which are expected to benefit from seasonal trends and a structural shift towards services consumption in China [31]. - Specific companies highlighted include Tencent, NetEase, Trip.com, and Kuaishou, which are positioned well for growth in the digital entertainment and travel sectors [31].

Investment Rating - The report assigns a "Buy" rating to Tencent, NetEase, Alibaba, Kuaishou, and Bilibili, indicating a favorable outlook for these companies [8][9][10]. Core Insights - Content consumption in the gaming and entertainment sectors has shown resilience compared to goods and services year-to-date, creating a high entry barrier for new competitors, benefiting established players like Tencent and NetEase [2][3]. - The outlook for AI has been tempered by lower-than-expected capital expenditure and cloud revenue growth, but confidence is expected to return with improved user statistics and cloud growth acceleration [2][3]. - E-commerce remains highly competitive, with the 618 shopping festival seen as a pivotal moment for food delivery services, impacting the competitive landscape [2][3]. Summary by Sections Investment Preferences - The report favors sub-sectors with higher earnings visibility and less exposure to macroeconomic conditions, particularly online games, with Tencent expected to benefit from robust earnings growth driven by popular titles and new launches [3][8]. - NetEase is also highlighted for its recovery in mobile game growth and new game launches, while Alibaba is noted for potential cloud growth acceleration that could enhance its AI valuation [3][8]. - Bilibili has been upgraded due to improved margin outlook and resilient performance in games and advertising, while Kuaishou is recognized for its growth visibility in ads and attractive valuation [3][8]. Company Valuations - Tencent's target price is set at HKD630.00, reflecting a 22% upside from its current price of HKD515.00, with a PE ratio of 20.1x for 2025 [9][24]. - NetEase's target price is USD150.00, indicating a 17% upside from USD128.63, with a PE ratio of 17.0x for 2025 [9][24]. - Alibaba's target price is USD176.00, suggesting a 47% upside from USD119.96, with a PE ratio of 17.0x for 2025 [9][24]. - Kuaishou's target price is HKD75.00, representing a 38% upside from HKD54.50, with a PE ratio of 15.0x for 2025 [9][24]. - Bilibili's target price is USD22.50, indicating a 22% upside from USD18.48, with a PE ratio of 27.1x for 2025 [9][24].

Summary of NetEase, Inc. Conference Call Company Overview - **Company**: NetEase, Inc (NTES.O, NTES US) - **Industry**: China Internet and Other Services - **Market Cap**: US$78,716 million - **Stock Rating**: Overweight - **Industry View**: Attractive - **Price Target**: US$138.00, with a 12% upside from the current price of US$122.76 as of May 15, 2025 [8][8][8] Key Points Overseas Expansion Strategy - NetEase has clarified its overseas expansion strategy, focusing on online games while de-emphasizing single-player games, which are seen as culturally specific and a barrier to global expansion [2][4][4] - The preview of the new game "Sea of Remnants" is viewed positively as a strong addition to its game pipeline [2][3] Upcoming Game Releases - Upcoming titles include "Destiny: Rising" and "Marvel Mystic Mayhem," both utilizing existing intellectual properties (IPs), which may result in lower gross profit margins (GPM) due to revenue-sharing agreements [3][3] - The company plans to launch "Where Winds Meet" globally and introduce e-sports for "Marvel Rivals" to boost its popularity [3][3] Financial Outlook - Management expects sales and marketing expenses to stabilize at 13-14% of revenue, recovering from previous volatility linked to "Eggy Party" [6][6] - The industry standard for marketing expenses is 20-25% of new games' annual revenue and 8-10% for existing titles [6][6] Gross Profit Margin (GPM) Concerns - The GPM is a focal point, with discussions around potential declines in revenue-sharing ratios with platforms like iOS and Android being more of an industry-wide issue rather than specific to NetEase [5][5] - NetEase is actively negotiating with platforms to lower costs, maintaining a track record of success in this area [5][5] Impact of AI on Game Development - NetEase has been a pioneer in integrating AI into game development but acknowledges that current AI technology is not yet ready for critical tasks like 3D asset modeling [7][7] - The company plans to reinvest manpower saved through AI into enhancing game quality [7][7] Management Insights - Management provided more visibility on operational expenditure (opex) outlook, indicating a strategic shift towards online gaming development [2][2] Additional Insights - The shift in strategy has led to the shutdown of certain studios, reflecting the company's commitment to its new direction [4][4] - The overall sentiment towards NetEase's future performance remains positive, with analysts expecting attractive growth in the gaming sector [8][8][8]