23Q4 revenue increased 7% year over year, and adjusted profit margin increased 8 pct year over year. In 23Q4, the company achieved revenue of 27.1 billion yuan, an increase of 7% over the previous year. Revenue growth was mainly driven by the mobile game business, partially offset by a decline in PC gaming and cloud music revenue. In 23Q4, the company's total operating rate was 37%, an increase of 2 pct over the previous year. Operating expenses increased year-on-year, mainly due to increased marketing expenses and personnel costs due to the launch of new games, and the company increased its competitive marketing efforts for “Egg Boy Party” in 23Q4. Non-GAAP net profit was 7.4 billion yuan, up 53% year over year; non-GAAP net profit margin was 27%, up 8 pcts year over year.
Revenue from the online gaming business was 19.54 billion yuan, up 12% year over year. Among them, mobile game revenue was 15 billion yuan, an increase of 29% over the previous year, mainly due to the good performance of “Egg Boy Party” and “Peak Speed”. PC gaming revenue was 4.6 billion yuan, down 23% year over year. We estimate that total game sales have increased by about 16% this quarter. In 23Q4, the number of active users of “Against the Water” reached 100 million; during the Spring Festival in '24, the DAU for “Egg Boy Party” exceeded 40 million. Looking ahead to 24 years, the company has abundant reserve products and sufficient potential for growth. Key products that the company has now received editions include the mobile games “16 Voices of Yan Yun”, “Conjuring”, and “Eternity”. The open world RPG game “Eagle Shoot” will launch on March 28 this year. According to the results conference guidelines, the “Eternity” mobile game is expected to be launched in the second quarter of this year. Currently, the number of reservations on the official website exceeds 13.14 million; the “Eternity” mobile game was launched in 2021, and the mobile game volume for the first year was 40-50 billion.
Youdao's net revenue was 1.5 billion yuan, up 2% year over year. Among them: revenue from learning services was 780 million yuan, a decrease of 2% year on year; revenue from smart devices was 220 million yuan, a decrease of 45% year over year, affected by the reduction in marketing channels with lower ROI; revenue from advertising services was 4.7 billion yuan, an increase of 97% year over year, mainly due to rapid growth in performance advertising displayed through third-party platforms.
Cloud Music: The 23H2 subscription penetration rate increased by 3 pcts year over year, and the profit level continued to rise. In 23Q4, Cloud Music's revenue was 2 billion yuan, a year-on-year decrease of 16%. The decline in revenue is mainly due to the impact of ecological governance related to social entertainment services. In 23Q4, Cloud Music's gross margin was 34.4%, up 12.0pct year-on-year, thanks to continued improvements in cost control. Currently, the cloud music subscription business is developing steadily. According to Cloud Music's financial report, 23H2, the number of paying users increased 19% year over year; subscription payment penetration rate reached 22.7%, up 3 pct year on year.
Risk warning: policy risk; risk of delayed launch of new products; risk of intense competition in the game market.
Investment advice: raise profit forecasts and maintain a “buy” rating. Driven by new products, we expect NetEase to enter a period of strong performance starting in 24Q2. “Egg Party” will perform well under strong competition; “Peak and Speed” will continue to expand overseas; and there will be plenty of future reserve products. Taking into account the company's game production efficiency optimization and raising profit expectations, the adjusted net profit for 24-26 is estimated to be 360/386/41.2 billion yuan (margin +8%/+10% /-), respectively, maintaining the target price of HK$201-233. The excellent performance of many subsequent new products is expected to catalyze an upward trend in stock prices and maintain a “buy” rating.