We expect NTES to report 2Q24 results in end August. We model 2Q24 total and core online game revenue to increase 8% YoY and 11% YoY respectively, -1%/ -3% below consensus. GPM/ Non-GAAP NPM remain solid at 62.2%/ 30.9%. We believe Co. will tap into a fruitful 2H24 with the launches of various new titles across game genres, terminals and geographies, as well as Blizzard games' resumptions domestically. We expect PC/ mobile game revenue will log 6% YoY/ 7% YoY respectively in 2H24 despite PC impact of monetisations/ functions and Treasury Pavilion adjustments of 3 legacy PC titles primarily in May 2024. Maintain BUY and TP of US$130/ HK$204.
Key Factors for Rating
Fruitful 2H24; Delayed WWM PC. We expect strengthened 2H24 financial visibility with official announcements of release dates of new titles amid intensified competition. In particular, we believe PC game revenue will resume positive QoQ territory in 2H24. Releases of Once human PC (七日世界) globally in July, WWM PC (燕云十六声) domestically in 2H24 (delayed from July 2024) and Rusty Rabbit (PC and console) overseas in September, as well as gradual Blizzard games resumptions domestically in 3Q24 will fully offset the impact of monetisations/ functions and Treasury Pavilion adjustments of legacy FWJ, Justice, WWJ PC in May 2024. Despite the high base, we still expect mobile game to grow 7% YoY in 2H24 mainly driven by Naraka mobile (est. RMB6bn grossing in 2024), evergreen titles, rejuvenated existing ones such as Infinite Borders and Identity V and potential new titles including Once human and WWM mobile. We expect Co. will be dedicated to their global vision and expect global 1P new titles to publish starting from 1H26E. According to our estimations on separate key titles with latest information, we nudge down our 2024-26E pure online game revenue forecasts by 2% while uplifting our 2025-26E adj. EPADS by 1% mainly due to uplifted GPM and stringent G&A.
2Q24 preview: resilient mobile while PC impacted; solid margin. We model total revenue to deliver 8% YoY to RMB25.9bn, -1% below consensus. Pure online game revenue will rise 11% YoY to RMB19.1bn, -3% miss consensus mainly due to monetisation/ function adjustments of FWJ, Justice and WWJ PC in May 2024. Mobile games remain solid at 18% YoY to RMB14.9bn, stably contributing c.78% of pure game revenue. GPM of 62.2% is in line with streets' expectation. GAAP OPM slightly exceeds consensus at 28.6%.
Key Risks for Rating
Downside risks: i) weak macro and online discretionary spending recovery; ii) game regulations; iii) delayed pipelines; iv) competition; v) destructive investments; vi) dampened partnerships; and vii) ADR delisting.
Valuation
Maintain BUY and our TP of US$130/ HK$204 derived from: i) US$110 on 15.0x FY2024E Non-GAAP EPADS of US$7.3; 2) US$2 from stake in Youdao and Cloud Music; and 3) US$18 from net cash.