Overall performance was weaker than market expectations: the company's 4Q23 revenue was RMB 27.1 billion, up 7.0% year on year, lower than market expectations; gross margin increased 9.8pp to 62.0% year on year, mainly benefiting from the increase in revenue share of self-developed games and channels; adjusted net profit was 7.4 billion yuan, up 53.4% year over year, lower than market expectations of 7.1%, mainly affected by rising marketing expenses; adjusted net margin was 27.2%.
Mobile games continued to grow strongly, and “Egg Boy Party” maintained its leading position. The company's 4Q23 game revenue was 19.5 billion yuan, up 11.5% year on year. Among them, mobile game revenue increased 29% year over year, continuing strong momentum, mainly driven by new game products such as “Against the Cold”, “Peak Speed”, and “All-Star Street Ball Party”. With the launch of “Yuanmeng Star” by Tencent, the party game circuit ushered in fierce competition, leading to an increase in NetEase marketing investment, and the 4Q23 sales expenses rate increased by 2.1 pp over the same period last year.
In this competition, “Egg Boy Party” achieved a phased victory and a stable leading position. The cumulative number of registered users has exceeded 500 million, and the number of daily active users during the Spring Festival exceeded 40 million, a record high.
Game reserves have entered a new cycle, and overseas expansion is progressing steadily: the company's new game product cycle has begun, and game product reserves are abundant throughout the year, focusing on martial arts themes. Jin Yong's IP “Conjuring” will begin public beta on March 28; “Eternity Mobile Game”, a game with cold weapons and chicken, received a version in February and is expected to be launched in the second quarter of this year; the open world “16 Sounds of Yan Yun” is expected to be launched this year.
Additionally, games such as “Mission Zero” and “Operation Apocalypse” have been approved as game versions. Popular games such as “Against the Cold”, “Peak Speed”, and “All-Star Streetball Party” launched by the company in the middle of last year are expected to continue to increase in the first half of the year. In terms of overseas games, “Pinnacle Speed” has been launched in Hong Kong, Macao and Taiwan. The data performance is impressive, and it is expected to gradually expand into more mainstream markets; overseas studios have added Worlds Untold (Canada) and BulletFarm (US) to focus on AAA game development.
Maintain a “buy” rating and target price of HK$207/$133. We expect the company's FY24E revenue to increase 9% year over year as industry regulation and version numbers release signs of mitigation and the start of a new round of the company's product cycle. “Eggboy Party” has achieved phased victory in the party game circuit, and we expect marketing expenses to return to normal in 2024. We are optimistic about the company's strong R&D capabilities and innovation mechanism, which is expected to achieve breakthroughs in multiple categories, maintain the “buy” rating and target price of HK$207/$133, corresponding to FY24E 20x P/E.
Investment risks: Industry regulations are getting stricter; gaming performance falls short of expectations; competition intensifies.