Jingu Finance | First Shanghai issued a research report, indicating that in Q3 2024, Netease (09999) achieved revenue of 26.21 billion yuan, a year-on-year decrease of 3.9%, lower than the consensus expectation of 26.59 billion yuan. The return of Blizzard series PC games in this quarter led to a 290bps year-on-year decline in gross margin to 62.9%; operating profit margin was 27.3%, a 40bps year-on-year decrease. GAAP net income attributable to the parent company was 6.54 billion yuan, a 16.6% year-on-year decrease; Non-GAAP net income attributable to the parent company was 7.5 billion yuan, a 13.3% year-on-year decrease, lower than the consensus expectation of 8 billion yuan, diluted EPS was 11.63 yuan. The bank pointed out that the company's performance is under pressure due to the lack of new mobile games, while the return of Blizzard games has led to a re-growth in end-game revenue; Youdao achieved record high operating profit in the third quarter, with growth driven by smart hardware and advertising business. In addition, NetEase Cloud Music has entered the Hong Kong Stock Connect, with a Q3 gross margin of 33%.
The bank forecasts a company revenue CAGR of 10.5% for 2024-2026, and a Non-GAAP net income CAGR of 8.5%. Using a segmented valuation method, the gaming business is given a PEG ratio of 1.2, corresponding to a 12x PE ratio; Youdao and NetEase Cloud Music are valued based on Netease's shareholding market cap, with a 5% discount applied to the group's market cap. The target price is $108.00 / HK$168.05, corresponding to a PE ratio of 14.9x in 2025, with an upside of 26.05% / 24.39% for US and Hong Kong stocks, respectively, maintaining a buy rating.
