股

票

研 [Table_Title] Jason Zhou 周桓葳 Company Report: NetEase (NTES US) 究 (852) 2509 5347 EquityResearch 公司报告： 网易 (NTES US) [email protected]

20 November 2020 Margin[Table_S ummaryUnder] Pressure but Positive on Top-Line Growth

利润率承压但对收入增长持正面看法

 NetEase's 3Q2020 Non-GAAP net income from continuing operations Rating:[Table_Rank ] Buy attributable to the Company's shareholders was higher than market Maintained 公 estimates by 70.3% but lower than our estimates by 17.9%, respectively, mainly due to higher-than-expected sales and marketing expense related to 司 评级： 买入 (维持) Youdao and online games services. 报  We have revised up online games services revenue from 2020 to 2022 6[Table_Price-18m TP 目标价] : US$106.00 告 by 0.5%, 0.6% and 0.8%, respectively, due to i) expected steady cash flow US$108.20

CompanyReport from main existing titles, ii) outstanding games operating capability of the Company and iii) rich games pipeline. We believe that the main existing ADS price ADS价格: US$89.220

signature games could still maintain steady cash flow in the following quarters under expected stable time spent on games of hardcore players. Stock performance  We believe that non-game segments will gain further growth 股价表现 momentum in our forecasted period. With expected enhancement of learning experience and further user expansion, we have further revised up 100.0 % of return 2020-2022 Youdao business revenue by 13.5%, 21.5% and 26.6%. Online 80.0 music is expected to be the main revenue driver on innovative business. In 60.0

addition, operating margin is expected to be further under pressure due to

expected promotion expense on the Company's learning products. 40.0 证

券  告 We maintain investment rating as "Buy", but revise down the TP to 20.0

US$106.00. With expected strong top-line growth but relative increase in 0.0 研 报

margin pressure, we have revised down Non-GAAP EPADS by 7.7%, 9.6%

(20.0)

究 究 and 9.4% in 2020-2022, respectively. The new TP represents 27.4x, 25.3x (40.0) 报 and 22.5x 2020-2022 Non GAAP PER.

研 Nov-19 Feb-20 May-20 Aug-20 Nov-20

告  2020 年第三季度网易非 GAAP 应占持续经营股东净利好于市场预期 70.3%但低于我们预 CCMP Index NETEASE INC-ADR 券 期 ，主要是由于高于预期的有道与在线游戏服务相关销售及市场费用。

17.9% EquityResearch Report

证 [Tab  我们分别上调 2020 至 2022 年在线游戏服务收入 0.5%、0.6%和 0.8%，因预计 i）主要存

Change[Table_PriceChange] in ADS Price 1 M 3 M 1 Y le_I 量游戏稳定的现金流，ii) 公司较好的游戏运营能力以及 iii) 丰富的游戏储备。我们认为在

硬核玩家稳定的时间支出下，存量主打游戏仍然可以在随后几个季度保持稳定的流水。 股价变动 1 个月 3 个月 1 年

nfo1 Abs. % 2.1 (6.2) 56.3 绝对变动  我们认为非游戏板块将在我们预测期内获得进一步增长动力。随着学习体验的预期提升以 % ] Rel. % to NASDAQ Index 及用户的进一步扩展，我们进一步上调有道业务 2020-2022 年收入 13.5%、21.5%和 (1.2) (11.9) 16.7 互 相对纳指变动 % 26.6%。在线音乐预计将成为创新业务的主要收入驱动力。此外，由于公司教育产品的促 Avg. ADS price(US$) 88.0 91.8 77.4 联 销费用预计增加，经营利润率预计将面临进一步压力。 平均股价（美元） 网 Sector Source: Bloomberg, Guotai Junan International.

 我们维持投资评级为“买入”，但下调目标价至 106.00 美元。鉴于预计强劲的收入增长但 行 相对增加的利润率压力，我们分别下调 2020-2022 年非 GAAP 每份 ADS 7.7%、9.6%和

业 9.4%。新目标价相当于 27.4 倍、25.3 倍和 22.5 倍 2020 至 2022 年非 GAAP 市盈率。

Y[Table_ear End Turnover Net Profit Earnings/ADS Earnings/ADS PER BV/ADS PBR DP ADS Yield ROE

年结Profit ] 收入 股东净利 每份 ADS 净利 每份 ADS 净利变动 市盈率 每份 ADS 净资产 市净率 每份 ADS 股息 股息率 净资产收益率

[Tab 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) le_I 2018A 51,179 8,291 12.813 (27.5) 47.9 79.454 7.7 2.226 0.4 18.1 2019A 59,241 13,275 20.610 60.9 30.1 113.402 5.5 13.726 2.2 24.9 nfo2 2020F 72,538 13,789 21.466 4.2 27.7 121.175 4.9 5.025 0.8 20.1 中] 2021F 84,458 15,144 23.680 10.3 25.1 131.056 4.5 5.543 0.9 19.4 2022F 96,130 17,317 27.219 14.9 21.8 141.682 4.2 6.372 1.1 20.5 外 ADS in issue (m) 总 ADS 数 (m) 691.0 Major shareholder 大股东 Mr William Lei Ding 44.7% 网运 [Table_BaseData] Market cap. (US$ m) 市值 (US$ m) 61,651.0 Free float (%) 自由流通比率 (%) 64.9 易

输 3 month average vol. 3 个月平均成交股数 (‘000) 2,387.5 FY20 Net gearing (%) FY20 净负债/股东资金 (%) (27.0) 52 Weeks high/low (US$) 52 周高/低 (US$) 103.530 / 53.171 FY20-FY22 PEG 2.1

Source: the Company, Guotai Junan International.

NetEase (NTES US)

See the last page for disclaimer Page 1 of 10

[Table_PageHeader] NetEase (NTES US)

Industry Updates

] 1 r a M t h g i R _ e l b a T [

China's mobile games market is expected to keep its growth momentum in 4Q20. China’s mobile games market maintained its growth momentum in 3Q20, even with online user time spent returning back to normal from March during the quarantine period. According to QuestMobile, a third-party data company, average daily time spent on mobile internet devices peaked at 7.3 hours in March and returned to normal levels, which is 6.1 hours, in both June and September. In addition, according to CNG, a third-party data company, China’s mobile games market scale increased 24.6% yoy and 3.1% qoq in 3Q20,

reaching RMB50.8 billion. We believe that the market growth was mainly due to 1) expanding player base during the summer 20 November2020 holiday period and 2) momentum from strong titles such as Hok and Peacekeeper Elite. In addition, with expected rich pipeline of top games companies and strong performance of new games in October, such as Moonlight Blade Mobile by , we forecast China’s mobile games market scale to keep growing in 4Q20 and reach RMB53.5 billion. Looking ahead, we believe that the new supply of game titles will be the main driver of mobile games industry growth in our forecasted period. The total amount of new licensed games approved by the National Press and Publication Administration (NPPA) was boosted in September, with 188 domestic games licenses granted. In addition, 78 domestic games and 1 imported game have been approved for game licenses, granted by the NPPA in November.

Figure-1: China Mobile Games Market Scale Figure-2: Average Daily Time Spent on Mobile Internet Devices

] 2 r a M t h g i R _ e l b a T [

Average daily time spent on mobile internet devices (billion) China Mobile Games Market Scale qoq (hours) 8.0 60.000 50.00% 55.4 7.3 53.5 7.0 50.8 37.6% 49.3 40.00% 50.000 6.0 6.1 6.1 6.0 5.8 5.9 40.8 30.00% 39.2 40.2 40.000 37.9 5.0 20.00% 30.000 4.0

5.1% 10.00% 4.2% 4.1% 3.1% 3.0 20.000 -1.4% 3.6% 0.00% 2.0

10.000 -10.00% 1.0

-11.0%

0.000 -20.00% 0.0 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20E Jun.2019 Sep.2019 Dec.2019 Mar.2020 Jun.2020 Sep.2020

Source: CNG, Guotai Junan International. Source: Questmobile, Guotai Junan International. (NTES US)

Figure-3: Amount of Licensed Games Approved by NPPA 网易

Approved Domestic Games in 2020 Approved Imported Games in 2020 NTES Games

200 NetEase 188

180 169

160

140

120 110 109 106 103 100 100

80 78 67 60 55 57 55

40 27

20 2 2 3 2 1 0 1 2 3 1 1 0 Jan.20 Feb.20 Mar.20 Apr.20 May.20 Jun.20 Jul.20 Aug.20 Sep.20 Oct.20 Nov.20

Source: NPPA, Guotai Junan International.

Report

Company

See the last page for disclaimer Page 2 of 10 [Table_PageHeader] NetEase (NTES US)

3Q20 Results Review

] 1 r a M t h g i R _ e l b a T [

The Company’s Non-GAAP net income from continuing operations attributable to the Company's shareholders in

3Q2020 declined 22.4% yoy to RMB3,669.2 million, higher than market estimates by 70.3% but lower than our estimates by 17.9%, mainly due to higher-than-expected sales and marketing expense related to Youdao and online games services. Net income from continuing operations attributable to the Company’s shareholders under GAAP was down 27.5% yoy to RMB2,998.2 million, higher than market estimates by 100.0% but lower than our estimates by 21.4%, respectively. On

the revenue side, net revenue from online games services increased 20.2% yoy to RMB13,862.0 million. The yoy increase in 20 November2020 net online games services revenue was primarily due to the outstanding performance of its popular existing mobile games such as Fantasy Westward Journey and Life-After. Revenue contributed by innovative business and others was up 41.6% yoy to RMB3,900.1 million, mainly due to increased net revenues from NetEase Cloud Music. On the cost side, selling and marketing expense increased 112.6% yoy to RMB3,442.8 million due to increasing marketing expenditures related to Youdao business and online games services, and accounted for 18.5% of total net revenue, up 7.4 ppts yoy. In addition, the board of directors approved dividend of US$0.1950 per ADS for 3Q20.

Table-1: Netease’s Income Statement Analysis RMB (Billion) 3Q20 3Q19 YoY 1-3Q20 1-3Q19 YoY Comments 18.7 14.6 53.9 43.5

Total net revenue 27.5% 23.9% ] 2 r a M t h g i R _ e l b a T [

Increased revenue contribution from -Online game services 13.9 11.5 20.2% 41.2 34.8 18.4% mobile games including Life-After. Increased net revenues from learning -Youdao 0.9 0.3 159.0% 2.1 0.9 130.4% services and products. Contribution from NetEase Cloud -Innovative business and others 3.9 2.8 41.6% 10.6 7.8 36.5% Music.

Gross profit 9.9 7.9 25.6% 29.1 23.3 23.9%

Increased marketing expenditures S&M expenses (3.4) (1.6) 112.6% (7.6) (4.1) 70.9% related to online game services.

G&A expenses (0.8) (0.8) 4.0% (2.6) (2.3) 13.7%

R&D expenses (2.8) (2.2) 29.0% (7.3) (6.1) 14.2%

Operating profit 2.9 3.3 (13.9%) 11.5 10.8 15.7%

Income tax (0.3) (0.1) 289.6% (2.5) (2.0) 10.1%

Shareholder’s net income 2.8 12.8 (78.1%) 11.4 18.3 48.3% (NTES US)

Continuing operations attributable 3.0 4.1 (27.5%) 11.1 10.2 32.9% 网易 to the Company’s shareholders

Non-GAAP Shareholder’s profit 3.7 4.7 (22.4%) 13.1 12.0 29.8%

EPADS (RMB) 4.43 6.41 (30.8%) 16.87 15.88 6.2% NetEase

Gross profit margin 53.0% 53.8% (0.8ppts) 53.9% 53.7% 0.2ppts

Non-GAAP net profit margin 19.7% 32.3% (12.6ppts) 24.3% 27.6% (3.3ppts) Source: the Company, Guotai Junan International.

We have slightly revised up online games services revenue for 2020-2022 by 0.5%, 0.6% and 0.8%, respectively. Revenue of online games services in 3Q20 was higher than our expectations, with 20.2% yoy growth, 8.7 ppt higher than that of 3Q19. We believe that the strong growth rate in 3Q20 was mainly due to 1) outstanding performance from flagship titles such as Invincible, Fantasy Westward Journey and Onmyoji; 2) strong performances in overseas markets such as Knives Out, Life-After and Identity V in Japan; and 3) steady performance maintained for flagship PC titles such as Fantasy Westward Journey Online, New Westward Journey Online II and Justice. According to Qimai data, a third party data company for mobile games operations, the Company's main existing games such as Fantasy Westward Journey, Westward Journey, and Onmyojiand Invincible

maintained steady performance from August to October this year. In addition, we foundthat the Company's new game Fantasy

Westward Journey H5 ("FWJ H5") slightly underperformed in October, which dropped to rank range of 30-45. We think that this

is normal as FWJ H5 is a more casual game. In addition, according to our research, we believe that the Company has Report outstanding mobile games operating capability, with long-life cycle titles such as Fantasy Westwood Journey, Westward

Journey and Ghost could still maintain strong grossing revenue. Hence, we believe that the main existing signature games could still maintain steady cash flow in the following quarters under the expected stable time spent by hard core players. Company

Furthermore, we believe that The Lord of Rings: Harry Potter: Magic Awakened, and another 9 titles are expected to be the See the last page for disclaimer Page 3 of 10

pOtNpQsMrRxOtMnQtNtPxO6MbPbRnPnNnPqQlOoPqReRsQmMaQpNqRMYrRrQxNqQxP [Table_PageHeader] NetEase (NTES US)

games in NetEase’s pipeline in our forecasted period. Several of these titles, including Revelation mobile game is expected to

be released before the Chinese lunar New Year. In overseas markets, the Company is] expected1 r a M tot cultivath g i e theR _ Japanesee l b a T [

market and further expand into the Europe and America market. Therefore, with 1) outstanding operating performance of existing mobile games, 2) highly anticipated mobile games pipeline, and 3) further overseas games expansion, we expect online games services revenue to be RMB55.0 billion, RMB63.7 billion and RMB72.4 billion in 2020 and 2022, respectively.

Figure-4: Average last 30-day grossing revenue of Top NetEase mobile games on China iOS platform

(USD) 20 November2020 FWJ Moble 1,400,000 WJ Mobile 1,200,000 Invincible

Ghost 1,000,000 Onmyoji 800,000 FWJ H5

A Dream of Jianghu 600,000 Life-After

400,000 Bloomblade

Identity V 200,000

] 2 r a M t h g i R _ e l b a T [ FWJ 3D

0 (Years) 0 1 2 3 4 5 6

Source: QiMai data, Guotai Junan International.

Figure-5: the Company's Main Existing Games Rank in Figure-6: the Company's New Games Rank in China’s iOS China’s iOS Top Revenue Grossing Chart Top Revenue Grossing Chart

Fantasy Westward Journey Westward Journey Onmyoji All with the Boundaries Fantasy Westward Journey H5

0 0 3 3 3 2 4 4 3 5 7 5 5 5 5 6 5 6 4 6 7 7 7 5 9 9 7 7 10 9 10 11 8 9 9 10 10 11 11 15 15 16 16 14 16 1815 14 15 15 15 17 19 20 21 19 17 20 20 21 22

25 21 (NTES US)

25 26 25 27

30 26 网易 30 35 33 34

35 40 36 44 43 36 NetEase 40 45 44 46 41

50 45 07.Aug 14.Aug 21.Aug 28.Aug 4.Sep 11.Sep 18.Sep 25.Sep 02.Oct 09.Oct 16.Oct 23.Oct 30.Oct 07.Aug 14.Aug 21.Aug 28.Aug 4.Sep 11.Sep 18.Sep 25.Sep 02.Oct 09.Oct 16.Oct 23.Oct 30.Oct

Source: QiMai data, Guotai Junan International. Source: QiMai data, Guotai Junan International.

Table-2: Expected Key Pipeline of NetEase Games No. Titles Taptap score 1 The Lord of the Rings: Rise to War 8.9 2 Pokemon Quest 9.0 3 Revelation Mobile 9.2 4 Harry Potter: Magic Awakened 8.7

5 Immortal 6.1

6 Unknown Future 7.8 Report

7 Akasha Book n.a. 8 Nightmare Breaker n.a.

9 Infinite Lagrange n.a. Company 10 Ghost World Chronicle 9.0 Source: the Company, Taptap, Guotai Junan International See the last page for disclaimer Page 4 of 10 [Table_PageHeader] NetEase (NTES US)

Figure-7: NetEase's Annual Online Games Revenue and Figure-8: NetEase's Quarterly Online Games Revenue and YoY

YoY Growth Growth ] 1 r a M t h g i R _ e l b a T [

RMB (Million) Online games services yoy RMB (Million) Online games services yoy

80,000 20% 16,000 30% 18.4% 72,372 70,000 14,000 13,518 13,828 13,862 13,751 15.5% 15.9% 11,535 11,604 60,000 63,704 13.6% 12,000 11,433 54,960 20% 20.9% 20.2% 50,000 10,000 20 November2020 10.8% 46,423 18.5% 40,190 13.6% 40,000 10% 8,000 11.5% 14.1% 30,000 6,000 10%

20,000 4,000

10,000 2,000 5.3%

0 0% 0 0% 2018A 2019A 2020F 2021F 2022F 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20F

Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.

Revenue contribution from non-game segments is expected to gain further growth ] momentum2 r a M t inh g ouri R forecasted_ e l b a T [

period. Revenue contribution by Youdao is expected to further grow in 2021 to 2022. The revenue of Youdao increased 159.0% yoy to RMB896.0 million, mainly due to increased net revenue from online courses. Gross billing of Youdao’s K-12 online courses accelerated by 369% yoy, with K-12 paid enrollments expanding to around 499,000. In addition, net revenue of Youdao’s learning devices grew significantly by 289% yoy to RMB163 million, attributable to the market popularity of the Company's Dictionary Pen Second series. Looking forward, on the user acquisition side, the Company believes it is the right time to be acquiring students and to take advantage of the sector’s rapid growth. On the services side, the Company is expected to improve its conversion and retention rate for certain courses via strengthening top quality instructors and content offerings upgrades such as improvement in teaching materials. With the expected enhancement of learning experience and further user acquisition, we have further adjusted up 2020-2022 Youdao revenue by 13.3%, 21.5% and 26.6%, respectively. In

addition, we have revised up 2020-2022 innovative business and others by 4.9%, 3.5% and 1.8%, respectively, due to expected revenue growth momentum of cloud music. Innovative business and others net revenues amounted to RMB3.9 billion in 3Q20, increasing 41.6% yoy mainly due to increased monetization from cloud music services. The Company saw notable increases in

the number of paying users and the improvement of paying ratio in 3Q20. In terms of music content, the Company continues to (NTES US) partner with worldwide music labels and top artists to offer users access to the fullest music content possible. In addition, the

Company’s cloud music now has more than 200,000 independent musicians. We believe that online music will still be the main 网易 revenue driver of innovative business because the Company is expected to continue to explore and diversify monetization

channels. NetEase

Figure-9: NetEase's Annual Youdao Revenue and YoY Figure-10: NetEase's Annual Innovative Business and Growth Others Revenue and YoY Growth

RMB (Million) Youdao yoy RMB (Million) Innovative businesses and others yoy

5,000 120% 25,000 40% 112.2% 110% 4,500 4,327 100% 19,430 4,000 20,000 28.6% 3,550 90% 30% 17,204 3,500 78.4% 80% 14,810 3,000 70% 15,000 2,769 11,514 2,500 60% 20% 10,257 2,000 50% 10,000 40% 16.2% 1,500 1,305 28.2% 12.9% 21.9% 30% 12.3% 10% 1,000 5,000 732 20%

500 Report 10%

0 0% 0 0% 2018A 2019A 2020F 2021F 2022F 2018A 2019A 2020F 2021F 2022F

Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International. Company

See the last page for disclaimer Page 5 of 10 [Table_PageHeader] NetEase (NTES US)

We have revised down operating profit margin for 2020 to 2022 by 3.0 ppts, 1.7 ppts and 1.1 ppts, respectively, due to

expected increasing promotional expense on the Company's learning products. Overall] 1 grossr a M margint h ing 3i Q20R _ dee creasedl b a T [

by 0.8 ppts qoq to 53.0%, mainly dragged by relative low gross profit margin of innovative business. We have revised up gross profit margin for 2021 to 2022 by 0.3 ppts and 0.9 ppts mainly due to 1) expected economic scale of Youdao and cloud music business; and 2) relative stable margin of online games services business. For promotional expense, during 3Q20, Youdao increased promotion of its course products as the Company believes that it is profitable for each valid user acquisition. Even so, we believe that overall sales and marketing spend will be under a controllable level as the Company is focusing on its ROI. We

expect the percentage of selling and marketing expenses to net revenues from 2020 to 2022 to be 15.1%, 15.7% and 15.8%, 20 November2020 respectively.

Figure-11: Gross Profit Margin of Each Segment Figure-12: Operating Margin and Gross Profit Margin

GPM of Online Game Services GPM of Youdao GPM of Innovative Businesses and Others OPM GPM

70% 60% 63.6% 63.4% 63.8% 63.9% 64.0% 54.0% 53.4% 53.3% 53.6% 53.7%

60% 50%

47.4% 50% 47.0% 45.4% 40%

40%

] 2 r a M t h g i R _ e l b a T [ 30% 23.3% 29.6% 28.4% 30% 19.8% 19.5% 19.2% 19.5% 20%

20%

17.1% 17.3% 18.1% 10% 15.2% 15.1% 10%

0% 0% 2018A 2019A 2020F 2021F 2022F 2018A 2019A 2020F 2021F 2022F

Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.

Profit Revision

With expected strong top-line growth but relatively heavy margins, we have revised down 2020-2022 earnings per ADS by 8.3%, 11.6% and 11.1%, respectively. We believe that the Company's top-line growth is expected to accelerate due to 1)

expected strong online games pipeline and steady cash flow of main existing games, 2) expanding of Youdao business, and 3) (NTES US) expected increasing monetization capability of cloud music. However, with the expected increase in marketing spend, we have revised down Non-GAAP EPADS by 7.7%, 9.6% and 9.4% in 2020-2022, respectively. 网易

Table-3 Financial Estimations Revisions : NetEase

OLD NEW CHANGE RMB (Billion) 2020F 2021F 2022F 2020F 2021F 2022F 2020F 2021F 2022F Total revenue 71.3 82.8 94.3 72.5 84.5 96.1 1.8% 2.0% 1.9% - Online games 54.7 63.3 71.8 55.0 63.7 72.4 0.5% 0.6% 0.8% services - Youdao 2.4 2.9 3.4 2.8 3.6 4.3 13.3% 21.5% 26.6% - Innovative businesses and 14.1 16.6 19.1 14.8 17.2 19.4 4.9% 3.5% 1.8% others Net profit 14.9 17.1 19.6 13.8 15.1 17.3 (7.7%) (11.4%) (11.8%)

Non GAAP EPADS 27.8 30.9 34.7 25.7 27.9 31.5 (7.7%) (9.6%) (9.4%)

EPADS (RMB) 23.4 26.8 30.6 21.5 23.7 27.2 (8.3%) (11.6%) (11.1%)

Source: Guotai Junan International.

Report

Company

See the last page for disclaimer Page 6 of 10 [Table_PageHeader] NetEase (NTES US)

Valuation

] 1 r a M t h g i R _ e l b a T [

With expected accelerated growth of online games services and growth momentum of cloud music and online education services but expect increasing sales and marketing spend, we set the investment rating as "Buy" and revise down the TP to US$106.00. The new TP represents 27.4x 2020 Non GAAP EPADS, 25.3x 2021 Non GAAP EPADS and 22.5x 2022 Non GAAP PER.

Figure-13: NetEase’s PE Graph Figure-14: NetEase’s PER Range 20 November2020 Forward P/E Avg (x) max min avg 30.0 (x) +1 S.D. -1 S.D. 30.00 27.73 26.91 +2 S.D. -2 S.D. 26.27

25.0 23.80 25.00 21.51 20.0 20.14 21.72 22.44 20.50 19.03 20.00 17.62 15.0 16.63 18.51 15.66 15.00 16.62 15.65 10.0 13.93 12.78 10.00 12.46 5.0

5.00 0.0

0.00

] 2 r a M t h g i R _ e l b a T [

15 16 17 19 20 18

2015 2016 2017 2018 2019 2020 YTD

Jan- Jan- Jan- Jan- Jan- Jan-

Jul-15 Jul-16 Jul-17 Jul-19 Jul-20 Jul-18

Source: Bloomberg. Source: Bloomberg.

(NTES US)

网易 NetEase

Report

Company

See the last page for disclaimer Page 7 of 10 [Table_PageHeader] NetEase (NTES US)

Table-4: Peers Comparison PER (x) PBR (x) P/S PEG Market Cap

] 1 r a M t h g i R _ e l b a T [ Local currency Company Ticker Currency Price 20F 21F 22F 20F 21F 22F 20F 20F-22F (million)

US Online Game Companies Glu Mobile Inc GLUU US USD 9.060 20.8 16.7 13.0 3.8 3.2 2.6 2.8 0.8 1,558 Sciplay Corp-Class A SCPL US USD 13.850 11.9 11.8 13.4 6.5 3.0 1.9 3.0 (2.2) 1,751 Take-Two Interactive Softwre TTWO US USD 165.580 46.3 29.9 29.0 7.4 6.0 5.1 4.3 1.5 19,045 Inc EA US USD 120.140 11.6 22.2 20.1 4.6 4.3 4.0 5.3 2.2 34,850 Inc ATVI US USD 75.930 22.6 21.7 19.0 3.9 3.4 3.0 7.3 2.5 58,683 Netease NTES US USD 89.220 24.1 20.0 17.6 4.5 3.9 3.5 5.6 1.4 61,653

Simple Average 22.9 20.4 18.7 5.1 4.0 3.3 4.7 1.0 20 November2020 Weighted Average 23.4 22.0 19.7 4.7 4.0 3.5 5.9 1.9

HK Online Game Companies Kingsoft Corp Ltd 3888 HK HKD 41.000 11.1 36.0 28.0 2.3 0.0 0.0 8.3 (0.3) 56,282 Forgame Holdings Ltd 484 HK HKD 2.220 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 354 Linekong Interactive Group C 8267 HK HKD 0.490 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 181 Idreamsky Technology Holding 1119 HK HKD 3.890 8.4 7.3 6.6 1.0 1.0 n.a. 1.3 0.7 4,939 Tencent 700 HK HKD 573.000 37.5 30.4 25.1 8.2 6.6 5.3 9.7 1.7 5,492,049 Boyaa Interactive Int. 434 HK HKD 0.530 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 379 Fingertango Inc 6860 HK HKD 0.600 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1,159 Leyou Technologies Holdings 1089 HK HKD 3.290 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 10,151 Fire Rock Holdings Ltd 1909 HK HKD 5.500 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 5,280 Digital Hollywood Interactiv 2022 HK HKD 0.089 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 178

] 2 r a M t h g i R _ e l b a T [ Ourgame International Holdin 6899 HK HKD 0.500 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 539 Baioo Family Interactive Ltd 2100 HK HKD 0.970 6.6 5.3 3.9 1.3 1.1 1.0 1.7 0.2 2,642 Feiyu Technology Internation 1022 HK HKD 0.159 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 246 Friendtimes Inc 6820 HK HKD 2.080 7.3 5.6 4.9 1.9 1.5 1.2 1.6 0.3 4,538 IGG 799 HK HKD 7.460 5.7 6.7 6.5 2.3 1.8 1.5 1.7 (1.0) 9,186 Zengame Technology Holding 2660 HK HKD 1.200 3.8 3.5 3.3 1.3 1.0 0.8 1.0 0.6 1,222 Homeland Interactive Technol 3798 HK HKD 5.020 16.0 13.6 10.2 n.a. n.a. n.a. 7.9 0.6 6,305 Cmge Technology Group Ltd 302 HK HKD 3.350 8.4 6.6 5.7 1.6 1.4 1.3 1.5 0.4 7,806 Xd Inc 2400 HK HKD 33.750 27.7 20.8 16.7 4.6 3.8 3.0 4.0 1.0 15,326 Netdragon 777 HK HKD 16.660 10.6 8.2 7.4 1.3 1.2 1.0 1.3 0.5 9,347 Archosaur Games Inc 9990HK HKD 18.660 20.3 11.1 8.9 3.8 2.9 2.3 7.0 0.4 Simple Average 13.6 12.9 10.6 2.7 2.0 1.7 4.6 0.4 Weighted Average 36.9 30.2 24.9 8.1 6.5 5.2 9.6 1.7

Advertising Companies

China Literature Ltd 772 HK HKD 61.000 n.a. 39.5 29.7 3.1 2.9 2.6 6.6 n.a. 61,963 Inc-Spon Adr MOMO US USD 15.240 8.6 6.7 5.7 1.8 1.4 1.2 1.4 0.4 3,181 Inc-Sponsored Adr BILI US USD 58.460 n.a. n.a. 730.8 19.6 25.1 24.2 11.8 n.a. 20,311

Sohu.Com Inc US USD 19.740 n.a. 21.3 18.1 3.8 3.3 2.7 0.5 n.a. 775 (NTES US) Weibo WB US USD 45.410 22.3 18.1 16.1 3.4 2.9 2.2 6.2 1.3 10,284

Bitauto BITA US USD 15.940 n.a. 14.3 9.4 0.7 0.7 0.6 0.6 n.a. 1,132 网易 Cheetah Mobile CMCM US USD 1.940 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 270 Soufun SFUN US USD 10.470 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 94 Phoenix New Media FENG US USD 2.330 n.a. 33.8 11.7 n.a. n.a. n.a. 0.9 n.a. 170

Twitter Inc TWTR US USD 43.620 n.a. 54.4 38.6 4.3 4.0 3.8 9.6 n.a. 34,693 NetEase Sina SINA US USD 43.330 20.2 18.8 23.6 1.5 1.1 1.0 1.2 (2.7) 2,588 Facebook FB US USD 272.940 28.3 24.6 20.5 6.2 5.0 4.0 9.3 1.6 777,413 Simple Average 19.9 25.7 90.4 4.9 5.1 4.7 4.8 0.1 Weighted Average 28.1 25.8 38.0 6.4 5.4 4.5 9.2 1.6

E-commerce Companies Inc-Adr PDD US USD 137.660 (341.6) 346.8 85.3 46.0 38.1 25.3 21.7 n.a. 168,816 Alibaba* BABA US USD 259.890 37.3 26.9 21.9 6.5 5.0 4.2 7.1 1.1 703,168 VIPSHOP VIPS US USD 23.320 18.1 14.8 12.8 3.6 3.0 2.4 1.0 1.0 15,795 EBay EBAY US USD 49.780 14.7 13.7 12.2 13.6 7.2 5.0 3.4 1.5 34,315 JD.com JD US USD 86.040 51.9 36.9 26.6 7.4 6.4 5.3 1.2 1.3 134,644 MZN US USD 3117.020 65.9 53.5 40.3 16.6 12.4 9.4 4.1 2.4 1,563,968 Simple Average (25.6) 82.1 33.2 15.6 12.0 8.6 6.4 1.5 Weighted Average 30.3 63.6 37.0 15.2 11.6 8.7 5.9 1.9

Search Engine Companies

Sogou Inc-Adr SOGO US USD 8.880 74.0 28.6 27.8 3.1 2.8 2.5 3.0 1.2 3,442 Alphabet Inc-ClA GOOGL US USD 1758.570 31.5 25.6 21.5 5.4 4.7 4.0 8.0 1.5 1,191,431

Baidu Inc - Spon Adr BIDU US USD 136.480 15.9 14.8 11.9 1.7 1.5 1.3 2.9 1.0 46,550 Report Simple Average 40.5 23.0 20.4 3.4 3.0 2.6 4.6 1.2 Weighted Average 31.1 25.2 21.2 5.3 4.6 3.9 7.8 1.5

Overall Average 14.2 32.8 34.7 6.4 5.2 4.2 4.6 0.9 Company Overall Weighted Average 29.9 33.3 28.2 7.9 6.4 5.2 7.7 1.7 Source: Bloomberg. Note: * represents figures of FY19/FY20/FY21 See the last page for disclaimer Page 8 of 10 [Table_PageHeader] NetEase (NTES US)

Financial Statements and Ratios

[Table_IncomeStatement] [Table_BalanceSheet] ] 1 r a M t h g i R _ e l b a T [ Income Statement Balance Sheet

Year end 31 Dec (RMB m) 2018A 2019A 2020F 2021F 2022F Year end 31 Dec (RMB m) 2018A 2019A 2020F 2021F 2022F

Total revenue 51,179 59,241 72,538 84,458 96,130 Property and equipment, net 4,672 4,622 4,715 4,645 4,518

Online games 40,190 46,423 54,960 63,704 72,372 Land use right, net 3,272 3,707 3,893 4,087 4,292

Youdao 732 1,305 2,769 3,550 4,327 Deferred tax assets 1,064 904 940 978 1,017

Innovative businesses and others 10,257 11,514 14,810 17,204 19,430 Time deposit 100 2,360 3,894 3,933 3,972

Cost of revenue (23,832) (27,686) (33,671) (39,093) (44,239) Other long-term assets 9,144 15,427 16,967 18,663 19,596

Gross profit 27,346 31,555 38,867 45,365 51,891 Total non-current assets 18,252 27,019 30,408 32,306 33,395 20 November2020

Sales and marketing (6,912) (6,221) (10,972) (13,261) (15,210)

Product development (3,079) (3,130) (3,483) (4,286) (4,807) Short-term investments 11,675 15,313 19,906 23,888 26,276 General and administrative (7,378) (8,413) (10,478) (11,381) (12,851) Time deposits 32,900 53,487 56,161 58,970 61,918 Operating profit 9,977 13,791 13,935 16,437 19,024 Restricted cash 4,692 3,150 2,122 1,763 2,487

Accounts receivable, net 4,002 4,169 5,190 5,367 6,285

Investment income (22) 1,306 2,142 1,188 1,577 Inventories, net 1,066 651 586 556 545

Interest income 587 822 1,392 1,542 1,403 Prepayment and others 9,403 5,089 6,070 6,677 7,345

Exchange gains/(losses) (52) 25 (1,438) (324) (601) Cash & cash equivalents 4,977 3,246 3,183 4,115 5,802

Other, net 587 439 713 522 635 Total current assets 68,716 85,105 93,218 101,335 110,658

Profit before tax 11,077 16,383 16,743 19,365 22,038

Income tax (2,461) (2,915) (2,879) (3,669) (4,092) Total assets 86,968 112,124 123,626 133,641 144,053

] 2 r a M t h g i R _ e l b a T [ Profit after tax 8,616 13,469 13,865 15,696 17,946

Non-controlling interest (325) (194) (76) (552) (629) Accounts payable 1,201 1,212 1,378 1,606 1,745

Shareholders' profit / loss 8,291 13,275 13,789 15,144 17,317 Salary and welfare payables 2,799 2,957 2,514 2,589 2,667

Basic EPADS (RMB) 12.813 20.610 21.466 23.680 27.219 Short-term loans 13,659 16,828 20,194 22,213 24,435

Non-GAAP shareholders' Profit 10,761 15,663 16,485 17,865 20,016 Deferred revenue 7,718 8,602 10,156 11,200 12,142

Non-GAAP EPADS (RMB) 16.631 24.317 25.663 27.934 31.460 Others 9,732 8,643 10,335 10,852 11,395

Total current liabilities 35,109 38,243 44,577 48,461 52,383

[Table_CashFlowStatement] Cash Flow Statement Other long term payables 54 458 561 653 743

Year end 31 Dec (RMB m) 2018A 2019A 2020F 2021F 2022F Deferred tax liabilities 394 382 649 714 786

Profit after tax 6,477 21,431 13,865 15,696 17,946 Total non-current liabilities 447 840 1,210 1,367 1,529

Share-based compensation 2,472 2,404 2,696 2,721 2,699 Total liabilities 35,556 39,083 45,787 49,828 53,912

D&A 2,060 2,614 2,823 2,964 3,112

Others 735 (8,874) (3,011) (2,682) (3,119) Total shareholders' equity 45,232 61,454 75,754 80,596 88,599

Change in working capital 1,672 (358) 3,082 2,130 1,257 Minority interest 6,180 11,588 2,085 3,217 1,542 Total equity Cash from operating activities 13,416 17,216 19,454 20,828 21,895 51,412 73,041 77,839 83,813 90,141 (NTES US)

[Table_FinancialRatio] 网易 Investing activities Financial Ratios

CAPEX (6,831) (3,268) (1,402) (1,382) (1,140) 2018A 2019A 2020F 2021F 2022F

Change in short term investments (1,494) (3,168) (5,053) (4,778) (2,389) Gross margin 53.4% 53.3% 53.6% 53.7% 54.0% NetEase Change in time deposits (1,629) (22,702) (3,637) (4,212) (3,597) Operating margin 19.5% 23.3% 19.2% 19.5% 19.8% Change in long term investments (3,023) (1,155) (1,697) (2,036) (1,026) Net margin 12.7% 36.2% 19.1% 18.6% 18.7%

Others (2,023) 8,989 (36) (38) (39)

Cash from investing activities (15,000) (21,304) (11,825) (12,445) (8,191)

Financing activities

Proceeds from short term bank loans 15 433 3,366 2,019 2,221

Dividends paid to shareholders (1,440) (8,841) (3,228) (3,545) (4,054)

Repurchase of shares (7,517) 11 (2,561) 0 0

Redeemable noncontrolling interests 4,771 5,063 (9,439) 1,146 (1,781)

Others 5,758 4,416 3,107 (7,478) (7,717)

Cash from financing activities 1,587 1,083 (8,755) (7,857) (11,330)

Net changes in cash 4 (3,006) (1,126) 526 2,374

Cash at beg of year 8,691 10,207 6,398 5,304 5,878

FX change 82 29 33 48 36

Cash at end of year 4,977 3,246 3,183 4,115 5,802 Report

Restricted cash 4,692 3,150 2,122 1,763 2,487

Cash and restricted cash end of the year 9,669 6,397 5,304 5,878 8,289

Company

Source: the Company, Guotai Junan International.

See[Table_CompanyRatingDefinition] the last page for disclaimer Page 9 of 10 [Table_PageHeader] NetEase (NTES US)

Company Rating Definition

The Benchmark: NASDAQ Composite Index ] 1 r a M t h g i R _ e l b a T [

Time Horizon: 6 to 18 months

Rating Definition Buy 买入 Relative Performance>15%; or the fundamental outlook of the company or sector is favorable. Accumulate 收集 Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. 20 November2020 Reduce 减持 Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable.

Sell 卖出 Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable.

Sector[Table_ RatingIndustry DefinitionRatingDefinition] The Benchmark: NASDAQ Composite Index Time Horizon: 6 to 18 months Rating Definition Outperform 跑赢大市 Relative Performance>5%;

] 2 r a M t h g i R _ e l b a T [

or the fundamental outlook of the sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform 跑输大市 Relative Performance<-5%; Or the fundamental outlook of the sector is unfavorable.

[DISCLOSURETable_DISCLOSUREOFINTERESTS OF INTERESTS ] (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for GUOTAI JUNAN I (01788 HK),JXR (01951 HK),JINSHANG BANK (02558 HK),HAITIAN ANTENNA (08227 HK),Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. (5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research Report.

(6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research (NTES US)

Report. There is no officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies.

网易

DISCLAIMER NetEase This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily).

Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan.

Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision.

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Company

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