The company's recent situation
NetEase, Blizzard Entertainment, and Microsoft Games announced on April 10 that games owned by Blizzard Entertainment will return to the mainland China market one after another starting this summer in accordance with the updated game distribution agreement. NetEase also reached an agreement with Microsoft Games to try to bring new NetEase games to Xbox and other platforms.
reviews
NetEase and Blizzard have renewed their cooperation agreement and will cooperate more extensively with Microsoft. The cooperation period between NetEase and Blizzard dates back to August 2008, when the license was granted to Shanghai NetEase to operate as an agent in mainland China; it was announced on November 16, 2022 that the license agreement between the two parties expires on January 23, 2023, suspending most Blizzard game services in mainland China. With the restart of this cooperation, NetEase and Blizzard also stated that they reached an agreement after a year of continuous discussions. The updated game publishing agreement will cover all national service games under the previous agreement: “World of Warcraft,” “Hearthstone,” and other games based on the “Warcraft,” “Overwatch,” “Diablo,” and “Starcraft” series. NetEase's main partners will be jointly responsible for the Guangzhou team and the Hangzhou Thunderfire team. In addition, NetEase also announced that it will cooperate with Microsoft Games to bring more NetEase game products to Xbox and other platforms.
Blizzard-related products may increase PC game revenue after the national service is restarted. According to Activision Blizzard's previous disclosure, related products covered by the license agreement accounted for about 3% of Activision Blizzard's consolidated net revenue in 2021. According to our estimates, the relevant agreement involved revenue accounting for about 5% of NetEase's total revenue in 2021 (the company's 3Q22 results will be expressed as a low single-digit share), accounting for about 7% of NetEase game revenue, and a corresponding annual net profit ratio of about 3%.
Considering that related products will gradually return this summer (the company said that the first game will return this summer, and each model will be launched in sequence), we expect to increase PC game revenue from 3Q24, or partially hedge against the effects of the weaker than expected performance of the previous “Journey to the West” game and the brief fluctuation of “Dream Journey to the West”.
The first test of the “Eternal Evil” mobile game is underway, and there are plenty of reserves for the future. The company launched “Eagle” on 3/28. iOS ranked 20-40 in the game bestseller list, and the performance was weaker than expected. Subsequent key products during the year include: 1) The “Eternity” mobile game, which began its first test on 4/1 and continued for 14 days. According to the official public account, this test was the first test with the largest number of people in the history of Thunderstorm. Officials also adjusted and communicated in terms of image quality, perspective, and key positions in response to user feedback. 2) “16 Sounds of Yan Yun” will begin its first PC beta in Canada & the US on 4/19, and the public beta period will be announced within April. At the same time, you can also follow the scheduled performance of products such as “Seven Day World” (iOS reservation shows launch time 2024/8/8) and “Task Zero” during the year.
Profit forecasting and valuation
Considering that the recent performance of some games was slightly weaker than expected, the restart of Blizzard's national service is expected to increase revenue and maintain profit forecasts. Current Hong Kong/US stock prices correspond to 13/12 times and 13/11 times 24/25 non-GAAPP/E. Maintaining an outperforming industry rating and a target price of HK$2119/$139 based on the SOTP valuation method, corresponding 18/16 times the 24/25 non-GAAP P/E for Hong Kong/US stocks, with an upward margin of 34%/38%.
risks
The macroeconomy is sluggish, regulatory policies are becoming stricter, the game launch process or performance falls short of expectations, cost and cost investment exceeds expectations, overseas competition intensifies, and there is a risk of exchange rate changes.