Daiwa raised NetEase's target price to 235 yuan, new game product line is stable

AASTOCKS
2025.05.23 05:57

Daiwa published a report, expecting that NetEase-S (09999.HK) will see enhanced growth momentum in its gaming business, driven by a robust product line of new games and the resilience of traditional games. At its annual gaming day, NetEase showcased upcoming games, including "Marvel's Midnight Suns" (expected in the second half of 2025, not yet licensed), "Destiny: Stars" (expected in the second half of 2025, approved in China on May 21), "Forgotten Seas," "Supervive," "unVEIL the World," "No Man's Sky," "The Long Song of the People: Three Kingdoms," "Starry Sky Friends," and "Spirit Beast Adventure" (expected to launch in October). "Diablo II" recently received a license for re-release. The firm also noted that "Frostpunk" will be released on June 5. Regarding traditional games, "Fantasy Westward Journey" is expected to stabilize in the third quarter of 2024 and improve in the first quarter of 2025. "Party Animals" has recovered from minor protection measures, with strong player activity. Management expects "The Sixteen Sounds of Yanyun" to become a perennial game, as players shift from single-player mode to social mode.

The firm stated that the rising proportion of PC and console games is easing NetEase's margin performance. PC games distributed domestically offer high gross margins due to low platform fees, while globally distributed and intellectual property (IP) licensed games, such as "Marvel Rivals," have lower gross margins due to platform commissions (approximately 20% for Steam, about 30% for PlayStation) and IP revenue sharing. With the growth of cross-platform and international games, margins are expected to fluctuate, but overall profitability should remain stable through strict cost and resource management. However, marketing expenses are expected to rise from the levels in the first quarter of 2025, with a renewed focus on brand building in the coming quarters.

Based on higher gaming revenue forecasts, Daiwa raised its earnings per share estimates for NetEase for 2025 to 2027 by 2% to 5%, reaffirming a "Buy" rating and raising the 12-month target price based on a sum-of-the-parts valuation method from 210 yuan to 235 yuan

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