Incident: NetEase announced 23Q4 results: 23Q4 achieved net revenue of 27.1 billion yuan, YoY +7.0%, lower than Bloomberg's agreed expectations; adjusted net profit from continuing operations of 7.4 billion yuan, YOY +53.4%.
Comment: Revenue fell short of expectations or was due to the fact that the popularity of games such as “Against the Cold” and “Egg Party” continued to push up market expectations. The main business growth trend is still steady, and gross margin is increasing. 1) Net revenue of 23Q4 games and related value-added services was 20.9 billion yuan, YoY +9.6%; gross profit margin of 69.5%, YoY+10.4pcts. Self-developed games contributed more and gradually tried to guide players to pay on the official website, and the cost of the casual game “Egg Boy Party” was lower. 2) 23Q4 had net revenue of 1.5 billion yuan, YoY +1.8%; gross profit margin of 49.9%, YOY-3.4pcts. 3) 23Q4 Cloud Music's net revenue was 2 billion yuan, YoY -16.4%; gross profit margin was 30.3%, YoY+12.5pcts, which is an increase in membership subscription revenue and improved cost control. 4) 23Q4 Innovation and other net revenue of 2.75 billion yuan, YoY +12.9%; gross profit margin 34.4%, YoY+2.9pcts.
5) Deferred revenue (contract liabilities) at the end of the period was $13.4 billion. The year-on-year growth rate picked up compared to the previous two quarters.
Sorting out the NetEase game product line: 1) MMO: The flagship products “Journey to the West” and “Dream Journey to the West” are still high in the 23Q4 rankings but have declined year over year, or due to adjustments in the diversion and purchasing strategy stages. The popularity of the “Against the Cold” mobile game remained popular in 23Q4, and it is expected to continue to contribute to the increase in traffic for 24 years. As of 24M1, the 6 yuan fashion sold against the cold was close to 200 million pieces. 2) Category expansion: With the advantages of rich map gameplay, a certain size and stickiness of game community groups, and easier to use UGC features brought about by the first-mover advantage, “Egg Party” has maintained the stability of rankings and revenue data compared to competitors. The “Egg Boy Party” data continues to improve, and it is expected to achieve an incremental contribution to the company's turnover in 24Q1. 3) Going overseas: “Peak Speed” The mainland performed well, then went overseas, and overseas studios invested more and looked forward to deep drilling. 4) New products: A new round of key product peaks may be launched in late 24M3. The three major products, “Eternity”, “Eternity” mobile game (3.8 million Taptap pre-orders), and “The Sixteen Voices of Yan Yun”, are gradually being launched. It is hoped that they will upgrade audiovisual and operational gameplay in the martial arts category NetEase is good at, and have the potential to exceed expectations.
Profit forecast, valuation and rating: 23Q4 performance fell short of expectations or was driven up by short-term hot new games, which did not hinder the company's long-term investment value. At the end of 24M3, “Eagle” is in public beta, and a new round of key product cycles is approaching. The mobile game “Eternity” and “16 Voices of Yan Yun” and other boutiques were gradually launched after 24 years.
On the one hand, new products are expected to contribute to performance growth. Core products such as the “Against the Cold” mobile game may contribute to sustainable revenue growth. Combined with the continuous optimization of the gross margin levels of the company's various businesses, the company's 24-25 adjusted net profit forecast for continuous operation was raised to 340.2/38.25 billion yuan (+4.9/ +6.2% from the previous forecast), and the company's 26-year adjusted net profit forecast for continuous operation was added to 41.47 billion yuan.
On the other hand, the upward product cycle of game companies is expected to catalyze the strengthening of the company's stock price. Using SOTP valuation, we will give the online game service business 20xPE, Youdao/Cloud Music/Live Streaming, e-commerce and other businesses 2x/1xPS respectively, and maintain a target price of HK$205.4, maintaining a “buy” rating.
Risk warning: New game launches fall short of expected risks, competition in the game industry intensifies risks, transformation progress falls short of expectations, cloud music user payment rates fall short of expected risks