HSBC reviews NetEase's financial report: Live streaming profits drag down with limited impact, the market may be overly pessimistic
HSBC believes that the market is overly pessimistic about NetEase. The company's Q2 was mainly affected by live streaming, but the core game business remains stable. The strong game product lineup will help reassess the company's mid-term prospects, with a 26% upside potential in the stock price
NetEase's latest second-quarter report shows a double-digit year-on-year decline in profits, with overnight US stocks falling by 11%. However, HSBC's assessment of NetEase's financial report suggests that the market may be overly pessimistic, maintaining a "buy" rating for the company with a target price of $117, representing a 26.4% upside potential.
On August 23, HSBC released a new research report stating that the lower-than-expected second-quarter report has weakened the market's confidence in NetEase's mid-term revenue prospects. In the second half of this year, the gaming market is highly competitive, posing significant challenges for NetEase's games such as "Justice" (逆水寒), "Fantasy Westward Journey" PC version, and "Egg Party."
At the same time, HSBC also pointed out that the market may be overly pessimistic. Although the market sentiment towards NetEase may be negative in the short term, there are several aspects of NetEase that the market has underestimated:
The lower-than-expected revenue in the second quarter for NetEase was due to the cleaning up of the NetEase CC live broadcast reward ecosystem, not its gaming division. The profit margin of NetEase's live broadcast business is relatively low.
The retention rate data for NetEase's mobile game "Endless Hegemony" (永劫无间) is stable, and the game has brought in new users for NetEase. Despite underperforming in monetization, HSBC believes that the game has not reached its peak yet, and monetization takes time.
NetEase's classic games "Fantasy Westward Journey" mobile game and "Identity V" (第五人格) have achieved record-high revenues.
Blizzard games and "Once Human" are expected to contribute to performance in the second half of 2024. A strong product line and the ability to extend the lifespan of games will help reassess NetEase's mid-term prospects. HSBC believes that accelerating share buybacks in the coming months can also support valuation.
Looking ahead to the second half of the year, HSBC believes that NetEase still has many highlights. For example, NetEase's free game "Once Human" has exceeded 10 million downloads globally since its release, with the PC version ranking among the top five most popular games globally, and the mobile version is expected to be launched soon.
After the collaboration between Blizzard games and NetEase was announced, Blizzard's card game "Hearthstone" will also return to the Chinese server and will be relaunched on September 25.
Furthermore, the game "Marvel Duel" developed by NetEase in cooperation with Marvel Entertainment is expected to be launched in China on August 29, with strong performance overseas