股 票 研 [Table_Title] Jason Zhou 周桓葳 Company Report: NetEase (NTES US) 究 (852) 2509 5347 Equity Research 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 Company Report 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$106.00. With expected strong top-line growth but relative increase in 0.0 研 报 margin pressure, we have revised down Non-GAAP EPADS by 7.7%, 9.6% (20.0) 究 究 and 9.4% in 2020-2022, respectively. The new TP represents 27.4x, 25.3x (40.0) 报 and 22.5x 2020-2022 Non GAAP PER. 研 Nov-19 Feb-20 May-20 Aug-20 Nov-20 告 2020 年第三季度网易非 GAAP 应占持续经营股东净利好于市场预期 70.3%但低于我们预 CCMP Index NETEASE INC-ADR 券 期 ，主要是由于高于预期的有道与在线游戏服务相关销售及市场费用。 17.9% Equity Research Report 证 [Tab 我们分别上调 2020 至 2022 年在线游戏服务收入 0.5%、0.6%和 0.8%，因预计 i）主要存 Change[Table_PriceChange] in ADS Price 1 M 3 M 1 Y le_I 量游戏稳定的现金流，ii) 公司较好的游戏运营能力以及 iii) 丰富的游戏储备。我们认为在 硬核玩家稳定的时间支出下，存量主打游戏仍然可以在随后几个季度保持稳定的流水。 股价变动 1 个月 3 个月 1 年 nfo1 Abs. % 2.1 (6.2) 56.3 绝对变动 我们认为非游戏板块将在我们预测期内获得进一步增长动力。随着学习体验的预期提升以 % ] Rel. % to NASDAQ Index 及用户的进一步扩展，我们进一步上调有道业务 2020-2022 年收入 13.5%、21.5%和 (1.2) (11.9) 16.7 互 相对纳指变动 % 26.6%。在线音乐预计将成为创新业务的主要收入驱动力。此外，由于公司教育产品的促 Avg. ADS price(US$) 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 Internet 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 November 2020 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 Tencent, 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) 网易 Figure-3: Amount of Licensed Games Approved by NPPA 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 November 2020 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.