The bottom of the cycle has passed, and the focus is on new products. “Marvel Clash” and “Yan Yun” are on the market. We are looking forward to “Infinity” for 25 years: 1) Marvel IP 6V6, the new heroic tactical shooter game “Marvel Clash” is scheduled for December 6. 24M12 The reservation data is ideal. It is expected to absorb a large number of overseas players with a high degree of restoration of Marvel heroes, and achieve long-term user retention and monetization with popular overseas tactical shooter gameplay and detailed hero modeling. 2) The mobile game of the new martial arts Open World product “The Sixteen Sounds of Yan Yun” is expected to be launched at the end of December.

The transition content between single and multiplayer gameplay was optimized, and the PC version was first launched on the mobile side to further optimize the adaptation.

After the adjustment, there may be a chance that it will be better than previously expected. 3) The innovative two-dimensional open world game “Code Name: Infinity” was tested at the end of December. It has innovative game art and innovative gameplay, which is expected to open up room for imagination in this category of games and further expand NetEase in two-dimensional games. 4) Product line sorting: R&D & product capabilities ensure the continuous production of new products with a rich matrix, focusing on “FragPunk,” “Marvel's Secret Method Frenzy,” and “Destiny: Rise.” Classic games are under pressure year over year, and the core “Journey to the West” and “Against the Cold” are expected to stabilize month-on-month. The flagship game ranking is still high. The “Dream West Journey” mobile game users are younger and the gameplay is lightweight, and it is expected to collaborate with the “Dream West Journey” mobile game to establish a stable basic version of the Evergreen game.

The 24Q3 mobile game “Against the Water Cold” ranked 15th on the Chinese iPhone game bestseller list. As a result, the previous high base is clearly declining compared to the same, and the high user stickiness and player return rate are expected to prolong the life cycle. “Egg Boy Party”'s third party ranking decline was partly due to the gradual transfer to the official website for payment, and it is expected that it will continue to lead the main competition “Yuanmeng Star” in the future. The official website recharge channel's attempt to reduce channel share is expected to raise the level of gross margin.

The decline in games and related value-added services put pressure on revenue in the short term, and gross margin was better than expected. NetEase 24Q3 net revenue was 26.2 billion yuan, YoY -3.9%, lower than Bloomberg's agreed forecast; gross profit margin of 62.9%, surpassing Bloomberg's unanimous estimate of 0.4 pcts; adjusted net profit from continuing operations of 7.5 billion yuan, YoY -13.3%. 1) Net revenue from games and related value-added services was 20.9 billion yuan, YoY -4.2%. The return of Blizzard games increased the share of mobile game revenue. Deferred revenue at the end of the period was 15.5 billion yuan, which was a year-on-year increase compared to 24Q2. 2) Youdao's net revenue was 1.6 billion yuan, YoY +2.2%, and digital content and online marketing services showed a strong growth trend. 3) Cloud Music's net revenue is 2 billion yuan, YoY +1.3%; Innovation and other net revenue is 1.77 billion yuan, YoY -10.3%.

Profit forecast, valuation and rating: Considering the decline in game revenue under the high base of some products in 24Q3, the company lowered its 24-26 adjusted net profit forecast for continuing operations to 31.29/33.47/35.51 billion yuan respectively (-8.0%/-12.5%/-14.4% compared with the previous forecast).

Using the SOTP valuation, the company was given 18xPE for its 25-year online gaming service business, 2x/2x/1xPS for Youdao/Cloud Music/Live Streaming, e-commerce and other businesses respectively, and the target price was lowered to HK$180.0. The bottom of the NetEase product line & performance cycle has passed. I am optimistic that 24M12 “Marvel Battle” has a large international IP and mature tactical shooter gameplay, and the reservation data is ideal; “16 Sounds of Yanyun” is expected to gradually meet the needs of the user base through research and improvement of product quality and commercial exploration and adjustment. With the launch of new boutique products, it is expected to usher in an upward period in the product cycle, thereby catalyzing stronger stock prices and maintaining a “buy” rating.

Risk warning: the launch of new games falls short of the expected risk; competition in the game industry increases the risk; the risk that AI projects are not progressing as well as expected; the increase in cloud music user payment rates falls short of the expected risk.