Matters:
NetEase 23Q4 achieved revenue of 27.140 billion yuan (yoy +7.04%, qoq -0.48%), of which gaming and related value-added services revenue was 20.921 billion yuan (yoy +9.62%); Youdao business revenue was 1,481 billion yuan (yoy +1.8%); innovation and other business revenue was 2,752.7 billion yuan (yoy +12.90%); and cloud music business revenue was 19.86 billion yuan (yoy -16.44%). The company achieved net profit of 6.582 billion yuan (yoy +66.52%).
Non-Ifrs net profit to mother was $7.379 billion (yoy +53.38%). There was a significant year-on-year increase in the profit side in Q4. We believe that the increase was mainly due to the excellent performance of “Mobile Game Against the Water Cold” since its launch in June 2023, the long-term stability of the next new game “Egg Party”, and the continued increase in overall gross margin.
Commentary:
The mobile game side maintained high-quality growth, and the overall gross margin of NetEase 23Q4 achieved revenue of games and related value-added services of 20.921 billion yuan (yoy +9.62%): of which 2023Q4 mobile game revenue was 14.987 billion yuan (yoy +28.83%), mobile game revenue was 4.553 billion yuan (yoy -22.66%), and deferred revenue reached 13.362 billion yuan (a decrease of 826 million yuan compared to the previous quarter).
Overall delays have been released; the overall game business maintained year-on-year growth, but there was a month-on-month decline. We believe the overall month-on-month decline was due to a slight decline in the new mobile game “Against the Water Cold”. The year-on-year decline in mobile game revenue is mainly due to the cancellation of Blizzard series game contracts.
It is worth noting the improvement in overall revenue quality. The gross margin of Q4 games and related businesses increased from 59.10% in the same period last year to 69.50%, and continued to increase month-on-month; it is expected to be mainly due to an increase in the ratio of official channels+self-developed games, which is expected to become a long-term trend.
Game revenue is expected to continue to grow at a high rate, and overall business cost reduction and efficiency are in progress, and we look forward to 2024H1. We believe that NetEase's game revenue will continue to grow at a high rate; mainly due to the continued excellent performance of the company's next new game “Egg Party” this year, which reached the top 3 bestsellers during the Spring Festival and maintained a high level of discussion. The innovative MMO game “Mobile Game Against the Water Cold” was launched for 9 months, and it still remains basically within the top 10 mobile game bestsellers. We believe that innovation stemming from its commercialization is expected to drive sustainability better than conventional MMO mobile games in the past; it has brought a marked increase compared to the same period last year.
Furthermore, we have observed that the company's business has also benefited from cost reduction and efficiency, and multiple businesses have improved from a gross profit perspective; for example, the gross margin of Cloud Music increased from 14.4% in 2022 to 26.7% in 2023, and the gross margin of innovation and other businesses increased from 26.6% in 2022 to 29.7% in 2023. The gross margin for games and related value-added services increased from 62.7% in 2022 to 68.2% in 2023.
Product reserves are abundant. Next year, we will focus on “16 Sounds of Yan Yun” and “Eternity Mobile Game”. The company has a number of new products in stock. We think the products we can focus on in 2024 include the martial arts chicken-eating mobile game “Everlasting Mobile Game” (the mobile game maintains a new high level of DAU) and the open world game “16 Sounds of Yan Yun”. In addition, the company also has products that can be watched for a long time, such as “Code Name: Infinity”. We believe that the company has clear strategic goals and excellent commercialization capabilities. We are optimistic about the company's stock resilience in the short term, optimistic about the launch of products from Lightning in the medium term, and optimistic about the expansion of overseas European and American markets in the long term.
Profit forecasting, valuation and investment ratings
Based on the 2023 Q4 results, we adjusted our performance expectations; we forecast that the company's net profit from 2024 to 2026 will be 30.9 billion yuan/33.4 billion yuan/35.4 billion yuan, respectively. The current stock price for 2024-2026 PE is 14.2/13.1/12.4X, respectively, and the net profit for non-Gaap is about 34.3 billion yuan/37.1 billion yuan/39.1 billion yuan, respectively. Valuation is carried out using the SOTP method: based on the company's historical valuation and the current slowdown in industry growth, the gaming business was given 20 times PE; the leading business is owned by NetEase 1.1 billion yuan according to the current US stock market value; Cloud Music belongs to NetEase 113 billion yuan according to the current market value, and 2XPS is given to other businesses. After aggregation, it corresponds to the 2024 target price of HK$211, maintaining the “Recommended” rating.
Risk warning: game version restrictions; game launch falls short of expectations; overseas policy risks.