2H25软非订阅业务收入未达预期；全年26财年盈利增长展望保持不变

non-subscription business; intactFY26 earnings growth outlook 2H25 revenue miss on softnon-subscriptionbusiness; intact FY26 earnings growth outlook Target PriceHK$245.00(Previous TPHK$330.00)Up/Downside48.1%Current PriceHK$165.40 NetEase Cloud Musicannounced FY25financial results:total revenuedeclinedby2% YoY to RMB7.76bn,slightlybelowBloombergconsensus estimate ofRMB7.91bn.Adjustednet profit was up by 68% YoY to RMB2.86bn, in line withconsensus estimate.Excluding the impact of deferred income tax credit,adjusted operating profit grew by 32% YoY to RMB1.73bn.Share price declinedby over 9%post resultson 12 Febowingto thetwoconcerns of investors: 1)online music revenue growthdeceleratedto +8% YoY in 2H25 (1H25: +16%YoY); 2) overall GPM declined by 1.4pptsin 2H25 vs 1H25.Nonetheless, wenote that the deceleration and GPM contraction in 2H25 was mainly due to theYoY decline in revenue from higher-margin non-subscription business, whilemusic subscription business remained solid in 2H25. We slightly lower FY26 China Internet Saiyi HE, CFA(852) 3916 1739hesaiyi@cmbi.com.hkWentao LU, CFA luwentao@cmbi.com.hk Ye TAO, CFA(852) 3850 5226franktao@cmbi.com.hk Non-subscription businessesdraggedonlinemusic revenue growth. Online musicservicesrevenuegrew by 8% YoY to RMB3.0bn in 2H25(1H25:+16% YoY). Revenue from membership subscription was up by 12%YoY to RMB2.6bn in 2H25 (1H25: +15% YoY), primarily driven by growth insubscriberbase, but partially offset bythe decline inmonthly ARPPU. Non-subscription music revenue declined by 7% YoY in 2H25, mainly due tothedecline in revenue from digital album sales.Socialentertainmentand others Shareholding Structure NetEaseSource: Company data Margin expansionon operating leverage and expense control.OverallGPMincreased by 2.7pptsYoY but declined by 1.4pptsHoH to 35.0% in2H25. The HoH margin decline was mainly dueto the drop in revenue fromhigher-margin non-subscription business. Overall adjusted operating margin Operating income to sustain solid growth in FY26E.Looking into FY26E,we forecast total revenue to increase by 8% YoY to RMB8.4bn, mainlydriven by the solid growth of online music business.We expect musicsubscriptionrevenue to rise by13% YoY to RMB5.7bn in FY26E, supportedbytheincrease in both subscriber base and ARPPU. Underpinned by solid Source: FactSet Valuation We valueNetEase Cloud MusicatHK$245.0per share based on23x 2026EP/E.Ourtarget PE multiple ison par withtheglobal peers. Disclosures& Disclaimers Analyst Certification The researchanalyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respectto the securities or issuerthat the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neitherthe analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to thedate of issueof this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3)serve as an officer of any of the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stock with potential return of +15% to-10% over next 12 monthsSELL: Stock withpotential loss of over 10% over next 12 monthsNOT RATED: Stock is not rated byCMBIGM OUTPERFORM:Industry expected to outperform the relevant broad market benchmark over next 12 monthsMARKET-PERFORM:Industry expectedto perform in-line with the relevant broad market benchmark over next 12 monthsUNDERPERFORM:Industry expected to underperform the relevant broad market benchmark over next 12 months Address:45/F, Champion Tower, 3 Garden Road, Hong Kong, Tel: (852) 3900 0888 Fax: (852) 3900 0800CMB InternationalGlobal MarketsLimited (“CMBIGM”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly ownedsubsidiary of China Merchants Bank) Important Disclosures There are risks involved in transacting in any securities. The information contained in this report may not be suitable forthe purposes of all investors.CMBIGMdoes not provide individually tailored investment advice. This report has been prepared without regard to the individual investment objectives, financial positionor special requirements. Past performance has no indication of future performance, and actual events may differ materially from that which is contained in thereport.The value of, and retu