Incident: April 10, NetEase officially announced: A new game distribution agreement has been reached with Microsoft and Blizzard Entertainment. Blizzard games such as “World of Warcraft” and “Hearthstone” will return to the mainland China market one after another in the summer of 2024, and account data for international server players will be kept in full; NetEase will cooperate more widely with Microsoft and try to promote new NetEase games to Xbox and other platforms in the future.
Comment: The return of Blizzard games such as “World of Warcraft” is beneficial to NetEase's mobile game performance and has contributed relatively little to the company's overall growth rate. It has been observed that since Blizzard's national service was suspended, some players are still looking forward to Blizzard's return. This time, Blizzard's return is expected to attract old players who have temporarily gone to other servers and are waiting to return to the national service. Partially affected by the suspension of Blizzard's national service, NetEase's mobile game revenue fell by a total of 4.01 billion dollars in '23 (3.9% of NetEase's total revenue in '23), while mobile game revenue from 23Q1 to Q4 fell 10%, 20%, 17%, and 23% year-on-year respectively. The return of Blizzard games will benefit the recovery in NetEase's mobile game revenue growth. However, with the launch of key mobile game products such as “Egg Boy Party” and “Against the Cold,” NetEase mobile game revenue grew rapidly. As of 23Q4, NetEase mobile games accounted for 76.7% of game revenue. In the future, new products such as “Eternity” mobile games will also be launched. Dependence on Blizzard series products is expected to continue to decline in the long run.
The “Popular Game IP+ NetEase Technically Produced Product by Major Overseas Manufacturers” business model is expected to be replicated, or bring revenue growth to NetEase in the future. According to gamma data, the mobile game “Diablo: Immortal”, which Blizzard and NetEase previously collaborated on, is estimated to have sold over 900 million dollars in the first month, showing the growth potential of the Blizzard IP series of mobile games. Another collaboration with Blizzard may provide NetEase with mobile gamification and other top overseas game IP opportunities, continue NetEase's blockbuster product line, and enhance the game's long-term brand value and market competitiveness.
The new agreement with Microsoft may help NetEase games expand overseas. NetEase Vice **** Zhipeng said at 21M8 that NetEase games account for only about 10% of overseas market revenue. Considering how the popularity of “Egg Party” and “Against the Cold” boosted domestic revenue in '22 and '23, we think NetEase's share of overseas market revenue is still low. Compared with Tencent's 21/22/23 overseas games account for 26%/27%/30%, respectively. 23M3 NetEase launched the overseas distribution brand “Exptional Global” to launch games such as “Blood Strike.” The “Eternal Evil” mobile game has successfully landed on the Xbox platform. This time, we are collaborating more extensively with Microsoft to provide a new opportunity for NetEase to use the advantages of the Microsoft platform to promote new games developed by itself.
Profit forecast, valuation, and ratings: Considering that Blizzard's national service is expected to return in the summer of '24, which will have a slight positive effect on NetEase's subsequent revenue expectations; at the same time, after the launch of “Divine” on March 28, the iPhone bestseller list ranked low and showed a downward trend, or affected the 24Q2 follow-up revenue growth expectations, maintaining the company's 24-26 adjusted net profit forecast of 340.2/382.5/41.47 billion yuan, respectively. Considering that there are still many key products in the future, the 24M4 “Eternity” mobile game is also expected to be gradually launched after 24 years. New products are expected to contribute to performance growth. Using SOTP valuation, we are giving the online game service business 20xPE, Youdao/Cloud Music/Live Streaming, e-commerce and other businesses 2x/2x/1xPS respectively, maintaining 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