Event: NetEase 1Q24 revenue of 26.9 billion yuan, YoY +7.2%. Net profit attributable to mother was 7.6 billion yuan, YoY +13.0%; non-GAAP net profit to mother was 8.5 billion yuan, YoY +12.5%.
Game revenue has been growing steadily, and subsequent reserves are abundant. 1Q24's net game revenue was 21.5 billion yuan, YoY +7.0%. Among them, mobile game net revenue was 161 billion yuan, YoY +19.4%, and mobile game net revenue was 4.4 billion yuan, YoY -15.1%. The popularity of the classic games “Egg Boy Party”, “Fifth Personality”, and “Tsuchihama” continued; the new Q1 game “Out of the World” reached the top of the iOS download list and third in the iOS bestseller list; in the second half of the year, we followed developments in key products such as “16 Voices of Yan Yun”, “Eternity” mobile games, “Seven Day World”, and “Marvel Battle”.
Cloud Music's profitability continued to improve, with a gross margin of +16pct year over year. Cloud Music's 1Q24 net revenue was 2 billion yuan, YoY +3.6%. Due to the one-time adjustment of certain copyright fees and the increase in membership subscription revenue and continuous improvement in cost control, Cloud Music's gross margin continued to rise, and 1Q24 gross margin increased 15.6pct to 38.0% year over year.
AI-driven performance growth was significant, and revenue was +19.7% year-on-year. YouDao's 1Q24 net revenue was 1.4 billion yuan, YoY +19.7%. Among them, revenue from learning services/smart devices/online marketing services reached 718/1.81/493 million yuan, YoY -2.0%/-14.8%/+125.9%, respectively. AI+ education applications have gradually been recognized by users, and commercialization has accelerated. Q1 Youdao AI subscription service has sales of about 50 million, YoY +140%; the number of users of the new AI translation function has exceeded 5 million, and the number of uses has reached 20 million times.
Recently, the “YouDao Xiao P” app, Hi Echo 3.0, and qAnything's three major AI innovations have been launched.
Profit prediction and investment suggestions: The company's business fundamentals are steady, the game matrix continues to be rich, and the performance of new games is impressive, which is expected to continue to contribute to increased performance; the profitability of cloud music continues to improve, and AI empowered is expected to accelerate growth. We expect NetEase's revenue for 2024/2025/2026 to be 1176/1276/138 billion yuan, +14%/+9%/+8% YoY; non-GAAP net profit of 368/406/42.4 billion yuan, +13%/+10%/+4% YoY. Maintain a “buy” rating.
Risk warning: New game sales fall short of expectations, game overseas performance falls short of expectations, and competition in the game market is fierce.