Matters:
NetEase 24Q2 achieved revenue of 25.486 billion yuan (yoy +6.14%, qoq -5.08%), of which gaming and related value-added services revenue was 20.056 billion yuan (yoy +6.69%, qoq -6.54%); Youdao business revenue was 1.322 billion yuan (yoy +9.5%); innovation and other business revenue was 2.067 billion yuan (yoy +0.48%); cloud music business revenue of 2.041 billion yuan ( yoy +4.74%). The company achieved net profit of 6.759 billion yuan (yoy -18.00%). Non-Ifrs net profit to mother was 7.819 billion yuan (yoy -13.29%, qoq -8.12%). The overall stock of games remained resilient, and some new games weakened slightly month-on-month; exchange gains and losses dragged down current profit performance.
Commentary:
The mobile game side maintained year-on-year growth and declined slightly month-on-month. The overall gross margin of NetEase 24Q2 achieved revenue of 20.056 billion yuan (yoy +6.69%, qoq -6.54%): of which 2024Q2 mobile game revenue was 14.73 billion yuan (yoy +16.06%, qoq -8.3%), and mobile game revenue was 4.549 billion yuan (yoy -0.05%, qoq +4.04%), and deferred revenue reached 13.616 billion yuan billion yuan (decrease of 1.295 billion 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 that the overall month-on-month decline was due to a decline in the new mobile games “Against the Water” and “Egg Boy Party”, but overall growth was maintained. Mobile games are expected to enter a high base in Q3, but mobile games are expected to benefit from Blizzard's return to drive month-on-month performance.
Furthermore, the overall gross margin of the game-related business is still increasing, with 2024Q2 reaching 70% (0.5 pct increase over the previous month).
Youdao and Cloud Music's profit situation continued to improve, and exchange profits and losses dragged down the current profit performance of the Dao business in 2024Q2 to achieve revenue of 1.322 billion yuan (yoy +9.5%), achieving net profit to mother -0.099 billion yuan, a year-on-year narrowing of 66.75%; Cloud Music 2024Q2 achieved revenue of 2.041 billion yuan (yoy +4.74%), and H1 achieved profit of 0.81 billion yuan (yoy +175.69%), and the profit situation continued to improve; innovation The business and other revenue achieved revenue of 2.067 billion yuan (yoy +0.48%), which remained stable overall.
From a year-on-year perspective, the current exchange loss was 0.239 billion yuan, and the profit and loss for the same period last year was 1.465 billion yuan; therefore, foreign exchange also dragged down this quarter's profit performance.
Diversified product reserves. “Eternity Mobile Game” has already been launched. Follow the launch progress of “16 Sounds of Yan Yun”
In terms of products, the company has a number of new products in stock. The second new product, “Everlasting Mobile Game”, has already been launched, and is currently ranked third in the iOS bestseller list; follow-up attention is being paid to whether stable DAU user accounts can be formed in the long term.
In the medium term, we think products worth paying attention to include projects such as “16 Voices of Yan Yun”, “Marvel Clash”, and “FragPunk”. Follow up on product line performance.
Profit forecasting, valuation and investment ratings
Based on the 2024 Q2 results, we adjusted our performance expectations; we forecast that the company's net profit from 2024 to 2026 will be 29.8 billion yuan/33.3 billion yuan/35.9 billion yuan, respectively (previously 30.9 billion yuan/33.4 billion yuan/35.3 billion yuan). The current stock price for 2024-2026 PE is 11.8/10.5/9.8X, respectively, and the net profit for non-Gaap is approximately 33.5 billion yuan/36.8 billion yuan/39.4 billion yuan, respectively. Valuation using the SOTP method: based on the company's historical valuation and the current slowdown in industry growth, the gaming business was given 15 times PE. According to the current US stock market value, the Dao business belongs to NetEase 0.8 billion yuan; according to the current market value, Cloud Music belongs to NetEase 11 billion yuan, and other businesses are given 2XPS.
After aggregation, it corresponds to the 2024 target price of HK$156, maintaining the “Recommended” rating.
Risk warning: game version restrictions; game launch falls short of expectations; overseas policy risks.