NTES-网易：Inline 3Q24 results; eyes on new game launch in December

Investment Rating - The report maintains a "BUY" rating for NetEase with a target price of US $125.5, down from the previous target of US$ 130.0, indicating a potential upside of 64.5% from the current price of US $76.28 [1][3]. Core Insights - NetEase reported a total revenue decline of 4% year-over-year (YoY) to RMB26.2 billion in 3Q24, which aligns with Bloomberg consensus estimates. The operating profit also decreased by 5% YoY to RMB7.15 billion, consistent with expectations [1]. - The decline in revenue is attributed to a high-base effect and underperformance of certain new game titles. The upcoming launches of "Marvel Rivals" and "Where Winds Meet" in December are anticipated to be key catalysts for revenue growth in FY25E [1]. - The report has adjusted the FY24-26E total revenue forecast down by 5-6% due to the softer-than-expected performance of new titles [1]. Revenue Breakdown - Games and related value-added services (VAS) revenue fell by 4% YoY to RMB20.9 billion in 3Q24, with mobile games revenue down by 10% YoY to RMB14.3 billion, primarily due to the high-base effect from the previous year's launch of "Justice Mobile" [1]. - PC games revenue, however, grew by 29% YoY to RMB5.9 billion, driven by the relaunch of "World of Warcraft" and "Hearthstone" in China, with daily active users (DAUs) increasing significantly [1]. - Non-gaming businesses showed steady development, with NetEase Cloud Music revenue up by 1% YoY to RMB2.0 billion and Youdao revenue increasing by 2% YoY to RMB1.6 billion, although innovative businesses revenue declined by 10% YoY [1]. Financial Metrics - The operating profit margin (OPM) slightly decreased by 0.4 percentage points YoY to 27.3% in 3Q24, mainly due to increased investments in sales and marketing (S&M) and research and development (R&D) [1]. - The report highlights that NetEase's current valuation of 10x FY25E price-to-earnings (PE) is at a 31% discount to its 2-year historical average PE, suggesting an attractive risk-reward profile [1]. Valuation Methodology - The report employs a sum-of-the-parts (SOTP) valuation methodology, attributing US$ 118.4 to the online game business, US $0.7 to Youdao, US$ 3.2 to NetEase Cloud Music, and US $1.5 to innovative businesses and others, with net cash valued at US$ 1.7 [8][9].