20241115-招银国际-Inline_3Q24_results__eyes_on_new_game_launch_in_December_7页_1mb

NetEase Financial Analysis Summary

As of November 15, 2024, NetEase (Ticker: NTES US) unveiled its 3Q24 financial results. Revenue declined by 4% YoY to RMB 26.2 billion, meeting Bloomberg consensus estimates. However, operating profit fell by 5% YoY to RMB 7.15 billion, marginally below the RMB 7.22 billion estimate. This performance was weighed down by the "high-base effect" and weaker-than-anticipated results from new game titles.

Looking ahead, key drivers for FY25E growth and valuation are the upcoming releases of Marvel Rivals and Where Winds Meet in December. The company has lowered its 2024-2026 revenue forecast by 5-6% to reflect subpar performance from recent game launches. The target price was revised downward to US$125.5, a ~6% downside from the current US$76.28 price.

Games Revenue underperformed due to a 10% YoY decline in mobile games, primarily from the high-base effect and limited incremental contributions from 2024 launches. Mobile games revenue fell by 10% YoY to RMB 14.3 billion. However, PC games revenue surged 29% YoY to RMB 5.9 billion, fueled by the relaunch of World of Warcraft and Hearthstone, reporting record DAUs (+50% and +150% YoY).

Non-gaming segments showed mixed results: NetEase Cloud Music grew 1% YoY to RMB 2 billion, while Youdao posted a 2% increase to RMB 1.6 billion, mainly driven by smart devices and online marketing. Innovative Businesses revenue dipped 10% YoY to RMB 1.8 billion due to declining advertising revenue.

NetEase's operating profit margin seen slightly weakening due to higher investments in sales & marketing, and R&D. The company however accelerated its share repurchase program, repurchasing 6.3 million ADSs at a cost of US$543mn (up 98% QoQ). Current valuation at 10x FY25E PE suggests a 31% discount to historical averages.

SOTP valuation stands complete at US$125.5, comprising primarily the online gaming business (94.3% weight). Peer comparisons show NetEase aligning with industry averages for key valuation multiples like EV/EBIT and price growth. Fiscal risks include legacy game declines, intensified competition, and tightening gaming regulations.

Balance Sheet snapshot: Strong cash positions, reduced gearing, healthy liquidity profiles. Internet services face continuing talent allocation pressures and strategic shifts in content investment.

In summary: NetEase maintains Buy but with a revised target, driven by execution in new titles and tempered forward guidance. Performance hinges on game launches, content monetization, and shareholder initiatives.