20211117-招银国际-More_bullish_on_4Q21E___FY22E_outlook_5页_880kb

NetEase Inc. (NTES US) Equity Research Summary

Core Content

NetEase Inc. (NTES US) reported strong performance in Q3 2021, with revenue and adjusted net profit growing by 19% and 5% YoY, respectively, and beating consensus estimates by 4% and 0%. The company's game business outperformed, with PC and mobile games growing by 29% and 9% YoY, driven by key titles such as Naraka and Harry Potter: Magic Awakened. Deferred revenue (excluding Youdao) showed a strong 24% QoQ increase, further supporting the upbeat outlook for the fourth quarter of 2021 and fiscal year 2022.

The research firm, CMB International Securities, has upgraded its earnings forecast for FY21-23E by 0.3% to 2%, citing a robust game pipeline and overseas growth potential. The updated target price is US$132, implying a 27.6x and 24.2x P/E multiple for FY22E and FY23E, respectively. The company is maintained as a BUY recommendation, with an upside of +18.9% from the current price of US$111.

Key Financial Highlights

Revenue and Earnings

• Revenue (RMB mn): FY19A - 59,241; FY20A - 73,667; FY21E - 88,112; FY22E - 103,336; FY23E - 118,561
• YoY growth (%): FY19A - 15.8; FY20A - 24.4; FY21E - 19.6; FY22E - 17.3; FY23E - 14.7
• Adjusted Net Income (RMB mn): FY19A - 15,663; FY20A - 14,706; FY21E - 17,507; FY22E - 20,945; FY23E - 24,173
• EPS (RMB): FY19A - 24.1; FY20A - 22.0; FY21E - 25.9; FY22E - 30.8; FY23E - 35.2
• YoY growth (%): FY19A - 45.8; FY20A - (8.9); FY21E - 18.1; FY22E - 18.8; FY23E - 14.2

Valuation Metrics

• P/E (x): FY19A - 29.7; FY20A - 32.6; FY21E - 27.6; FY22E - 23.2; FY23E - 20.4
• P/S (x): FY19A - 7.9; FY20A - 6.5; FY21E - 5.5; FY22E - 4.7; FY23E - 4.2
• Target Price (US$): US$132
• Current Price (US$): US$111
• Equity Value (RMB bn): RMB579
• Enterprise Value (RMB bn): RMB490
• Net Cash (RMB mn): RMB89

Main Drivers of Outlook

• Game Performance: Strong performance in Q3 2021, with Harry Potter: Magic Awakened and Naraka contributing significantly to revenue.
• Upcoming Titles: Diablo: Immortal, Justice Mobile (based on Naraka), and Lord of the Rings are expected to drive growth in the coming quarters.
• Overseas Expansion: The international launch of Harry Potter: Magic Awakened is anticipated to boost revenue and earnings.
• Game License Resumption: Expected to provide additional momentum in FY22E.
• Deferred Revenue: A 24% QoQ increase (excluding Youdao) indicates strong future revenue potential.

Key Ratios

• Gross Margin (%): FY19A - 55.0; FY20A - 53.8; FY21E - 53.4; FY22E - 53.2; FY23E - 53.4
• Operating Margin (%): FY19A - 26.3; FY20A - 22.9; FY21E - 18.6; FY22E - 19.3; FY23E - 19.5
• Adj. Net Margin (%): FY19A - 24.7; FY20A - 28.7; FY21E - 19.9; FY22E - 20.3; FY23E - 20.4
• ROE (%): FY19A - 21.4; FY20A - 15.7; FY21E - 16.9; FY22E - 18.5; FY23E - 18.3
• ROA (%): FY19A - 14.0; FY20A - 10.4; FY21E - 11.4; FY22E - 12.4; FY23E - 12.4

Shareholding and Performance

• Market Cap (US$ mn): 74,600
• Average 3-month Turnover (US$ mn): 351.45
• 52-week High/Low (US$): 134.3/78.0
• Total Issued Shares (mn): 671
• Share Performance (1-mth): +16.3% absolute, +9.3% relative
• Share Performance (3-mth): +24.0% absolute, +15.9% relative
• Share Performance (6-mth): +5.5% absolute, -10.6% relative

Key Investors

• BlackRock: 3.61%
• Orbis Allan Gray: 2.75%
• Invesco: 2.58%

Analyst Ratings

• CMBIS Rating: BUY
• CMBIS Target Price: US$132
• Potential Return: >15% over 12 months

Conclusion

CMBIS maintains a BUY rating for NetEase Inc., citing improved game performance, strong deferred revenue, and the upcoming launch of key titles. The updated earnings forecast and higher target price reflect the firm's confidence in the company's growth prospects. The outlook for FY22E is particularly optimistic, with the potential for continued acceleration in the game segment and overseas expansion.