20251121-招银国际-3Q25_results_solid_games_business_outlook_on_quality_pipeline_and_evergreen_games_7页_1mb

NetEase (NTES US) 3Q25 Results and Outlook Summary

Key Developments & Current Performance

• 3Q25 Financial Results:
  • Total Revenue: Up 8% YoY to RMB28.4bn (below Bloomberg consensus).
  • Operating Income: Up 12% YoY to RMB8.0bn (below consensus).
  • Marketing expenses higher than expected, explaining some shortfall.
• Games Business Performance:
  • Games & related VAS revenue: Up 12% YoY to RMB23.3bn.
  • Strong legacy titles: Fantasy Westward Journey (3.58mn concurrent players), Eggy Party (DAU ex. 30m, record playtime), Where Winds Meet (international success).
  • Contract liabilities rose 25% YoY to RMB19.5bn, indicative of installment-based game bookings.
  • Adjusted GPM: 64.1% (up 1.2 ppt YoY).
  • Adjusted OPM: 28.3% (up 1.0 ppt YoY).
• Non-Gaming Businesses:
  • NetEase Cloud Music: Slight YoY revenue decline (2%) dragged down total non-game revenue but music games show resilience.
  • Youdao: Significant online marketing services growth (+51%) offset other headwinds, driving 4% total non-game revenue growth.
  • Innovative Businesses: Decline (-19%) mainly due to eliminating certain inter-segment transactions.
  • Marketing & Sales (S&M) Expenditure: Up significantly (17% YoY) due to higher marketing activity.

Management Outlook & Valuation Updates

• Positive Outlook: Maintain "Buy" rating. Emphasize strong game pipeline including StarCraft II (Oct 28), Diablo IV (Dec 12), and future releases (Sea of Remnants, ANANTA, Blood Message).
• Valuation Adjustment: 3Q results NQ led to a slight downward revision to FY25-27E non-GAAP NI (-0-1%), but rolled forward valuation window to FY26E.
• Target Price: Updated to US$164.0 (up from US$160).
• SOTP Valuation: Based on 16x FY26E EBIT for games (+Industry avg.), 0.9x FY26E revenue for Youdao (+Industry avg.), 3.4x FY26E revenue for Cloud Music (+Industry avg.), and 1.0x FY26E revenue for innovative businesses.
• Peer Comparison: NetEase trades at a slight premium to industry average based on SOTP.

Financial Highlights (Q1Q3 2025)

• Strong game performance drove overall revenue and profit growth, primarily from domestic PC games.
• Gross margin is healthy and expanding.
• Strong cash flow generation.

Analyst Certification

• Views reflect personal opinions.
• No conflict of interest in reporting.
• Maintain "BUY" rating on NTES.