Revenue growth is steady, and net profit has declined from a high base compared with the same period last year. 22Q4 achieved revenue of 25.35 billion yuan, an increase of 4% over the same period last year, and a net profit of 3.95 billion yuan, down 30.6% from a high base and 41% from a month earlier, and a net profit of 4.81 billion yuan with Non-gaap, down 27% from a year earlier and 35.6% from a month earlier. 22Q4's deferred revenue after removing youdao business was 11.45 billion yuan, down 11.3% from the previous month. We believe that it is mainly due to the lack of new games launched by the company in the third and fourth quarters of 22. In 2022, the company achieved 96.496 billion yuan in revenue, an increase of 10.2 percent over the same period last year, and its net profit was 20.34 billion yuan, an increase of 20.7 percent over the same period last year.

The "egg party" has a lot of stamina, paying attention to the progress of new games such as "swimming against the current" and so on. 22Q4's game business achieved revenue of 17.52 billion yuan, an increase of 0.7% over the same period last year and 0.9% from the previous year, of which revenue from mobile games was 11.63 billion yuan, down 2.1% from the same period last year and 2.4% from the previous year. Classic games such as 22Q4's "Fantasy Journey to the West" and "A Chinese Odyssey" have performed steadily. The company's "Egg Party" game, which was launched in May 22, has an eye-catching performance, ranking at the top of the best-selling list of IOS games in January 23, and has become the company's highest DAU game product in history. We expect this product to bring significant revenue and performance contribution to the company over the past 23 years. In terms of product reserve, since November 22, the company has obtained version numbers for many games such as "against the cold" mobile games, "A Chinese Odyssey: return", "extraordinary Vanguard", "Top Speed" and so on, and the new products are rich in reserves. 22Q4's revenue from PC PC games reached 5.89 billion yuan, an increase of 6.7% over the same period last year and 7.9% from the previous month. The gross profit margin of 22Q4 games and value-added services is 59.1%, which is slightly lower than the same period last year and month-on-month. We think it is mainly due to the one-time confirmation by 22Q4 of the impact of some agent game copyright fees.

The revenue of the online music business has maintained high growth and its profitability has improved significantly. The net income of 22Q4 Yiyun Music was 2.38 billion yuan, an increase of 25.8% over the same period last year and 0.8% from the previous month. Gross profit margin increased to 17.8%, 3.6 percentage points higher than Q3. Driven by reducing costs and increasing efficiency, 22H2 achieved an adjusted net profit of about 100 million yuan. In terms of music content supply, by the end of 2022, the company has more than 116 million music repertoire. Under the copyright anti-monopoly environment, the company has signed cooperation agreements with top music manufacturers such as Fumao Records, SM Entertainment, and Shifengjun, bringing many singer works such as Zhang Shaohan, Super Junior and Girl Age to the platform. At the beginning of 2023, the company successfully signed a copyright cooperation agreement with believe Music, which supplemented the copyright content library of musicians such as Li Zongsheng and May Tian. we believe that with the improvement of the music copyright environment in the future, the company's content supply is expected to be further enriched and improved. In addition to copyrighted music, the company also continues to train and encourage independent musicians. By the end of 2022, the company has provided services to more than 611000 registered independent musicians with 2.6 million music tracks from the company's registered musicians. Independent musicians and platform-made music works are expected to effectively optimize the company's content costs and enhance the company's profitability.

AI technology is expected to be deeply combined with youdao business, NetEase, Inc strict selection of gross profit margin improved significantly. 22Q4's youdao business achieved revenue of 1.45 billion yuan, an increase of 9% over the same period last year and 3.7% from the previous year, of which learning service was 810 million yuan, an increase of 39.2% over the same period last year. Dagger AI technology has been well applied in the company's go, oral and other related courses, and is expected to be combined with business scenarios in the future to meet the needs of users. 22Q4 youdao gross profit margin is 53.3%, 10.8% higher than the same period last year. 22Q4's innovative business (Yan Xuan, mailbox, NetEase, Inc News, etc.) achieved revenue of 2.44 billion yuan, an increase of 3.4% over the same period last year, 23.9% month-on-month growth, and 31.5% gross profit margin, which was significantly higher than the same period last year and month-on-month, mainly due to the improvement of NetEase, Inc's strict election gross profit margin.

Earnings forecast assumptions and valuation. 1) We believe that the company has rich reserves of new products, "against the cold" mobile games, "A Chinese Odyssey: return", "extraordinary Vanguard", "Top Speed", "Harry Potter: magic Awakening (overseas)" is expected to lead to steady growth of mobile game business revenue in 2023-2025. The base of "forever robbing forever" is relatively high, and the growth rate of end-to-end games will slow down from 2023 to 2025. 2) the company's youdao business will terminate the compulsory education discipline training business at the end of 2021. At present, the impact has been completely cleared, and the quality education and education hardware equipment from 2023 to 2025 are expected to drive the business to resume high growth. 3) with the continuous promotion of anti-monopoly policy, NetEase, Inc Cloud copyright resources are expected to be gradually enriched, future revenue is expected to maintain rapid growth, and with the promotion of cost reduction and efficiency, gross profit margin is expected to be fully improved. 4) the company's innovation business will maintain a steady growth rate in the future, and the gross profit margin will be basically stable.

The revenue of the company's cloud music, youdao and other business sectors is relatively low. We think that the profitability has gradually recovered in 2023, which has little impact on other major Internet industries such as games, so we use the holistic method to value the company. We estimate that the company's net profit from 2023 to 2025 will be 236.37 yuan, 252.24 yuan and 29.415 billion yuan respectively. With reference to the relevant comparable companies, we will give the company 20-23 times dynamic PE in 2023. Based on the latest equity and exchange rate (RMB: HKD = 1.14), the corresponding reasonable value range is HK $164.11-HK $188.73 per share, maintaining an "better than market" rating.

Risk hint: original game research and development is not as risky as expected; competition such as Cloud Music and youdao aggravates the risk.