20221118-招银国际-Preparing_for_next_strong_product_cycle_7页_1mb

Netease (NTES US) Summary

Core Content

Netease (NTES US) reported its 3Q22 results, showing total revenue growth of 10% YoY to RMB24.4bn, aligning with consensus estimates. Non-GAAP net income increased by 23% YoY to RMB4.7bn, excluding extraordinary gains. The company is currently focusing on preparing for the next strong product cycle, which is expected to take time due to supply and Banhao constraints. The company revised its FY22 earnings forecast upward by 9% to account for extraordinary gains, but trimmed FY23-24 forecasts by 1-4% due to the non-renewal of licenses with Blizzard. The SOTP-based target price was lowered by 2% to US$112.3, with a "BUY" rating maintained.

Main Points

• Revenue Growth: Total revenue in 3Q22 was RMB24.4bn, up 10% YoY, with online games contributing RMB18.7bn (up 9% YoY).
• Non-GAAP Net Income: Grew by 23% YoY to RMB4.7bn, with net margin increasing to 19.3%.
• Product Pipeline: Key upcoming titles include Naraka: Bladepoint Mobile and Justice Mobile, with the latter recording 10 million pre-registrations. Banhao approval for Westward Journey IP was obtained.
• Overseas Expansion: Plans to launch Harry Potter: Magic Awakened globally in 2023, and 3 & 4 games in Japan and the US respectively.
• Cloud Music: Revenue increased by 22% YoY to RMB2.4bn, with GPM rising to 14.2%.
• Innovative Businesses: Revenue grew by 14% YoY to RMB2.0bn, mainly due to Yanxuan growth.
• Youdao: Revenue rose by 1% YoY to RMB1.4bn, driven by learning services and smart devices, but affected by the cessation of K9 after-school tutoring.
• Earnings Forecast: FY22 revenue forecast revised up to RMB97.1bn, while FY23 and FY24 forecasts were trimmed by 1-4%.
• Target Price: Revised down to US$112.3, reflecting the impact of the license non-renewal.
• Valuation: The SOTP-based target price is derived from multiples applied to each business segment, with the online game business valued at US$103.4 based on 16x 2023 EV/EBIT.

Key Financial Metrics

Business Segments Overview

• Online Games: Key titles in development, with revenue up 9% YoY to RMB18.7bn (81% of total revenue), and a strong focus on global expansion.
• Cloud Music: Revenue up 22% YoY to RMB2.4bn (9.7% of total revenue), with a rising GPM.
• Innovative Businesses: Revenue up 14% YoY to RMB2.0bn (8.1% of total revenue), driven by Yanxuan.
• Youdao: Revenue up 1% YoY to RMB1.4bn (5.7% of total revenue), with growth in learning services and smart devices.

Analyst Notes

• Target Price: US$112.3, down from US$114.80.
• Current Price: US$71.60.
• 12-Month Price Performance: Notable price movements, with a chart provided for reference.
• Shareholding Structure: William Lei Ding holds 44.2%, Invesco holds 2.2%.
• Valuation Methodology: SOTP is used, with each segment valued based on different multiples.

Peer Comparison

• Online Games: NetEase's EV/EBIT multiple is higher than the industry average (14x), justified by its strong content development and overseas deployment.
• Education, Online Music, and E-commerce: Peer comparisons show varying growth and valuation multiples, with NetEase's Cloud Music segment showing a premium due to its growth outlook.

Financial Highlights

• Gross Margin: Improved from 53.2% in 3Q21 to 56.3% in 3Q22.
• Operating Margin: Stabilized at around 20.3-20.9%.
• Adjusted Net Margin: Increased to 22.8% in 3Q22.
• Net Debt to Equity: Remained stable at around 0.6-0.7x.
• Current Ratio: Improved to 2.3-2.6x.

Conclusion

Netease's performance in 3Q22 was resilient, with revenue and net income growth. The company is investing in future growth through new titles and global expansion, although the non-renewal of Blizzard licenses may affect future earnings. The SOTP-based valuation suggests a target price of US$112.3, with a "BUY" rating maintained. The company's financial health is solid, with improving margins and strong cash flow.