网易Q1：利润超预期，产品线仍是问题

Robin Zhu+852 2123 2659robin.zhu@bernsteinsg.com NetEase Inc Charles Gou+852 2123 2618charles.gou@bernsteinsg.com RatingOutperform Min-Joo Kang+852 2123 2644minjoo.kang@bernsteinsg.com Price Target Hyrum Caesar+81 3 6777 6979hyrum.caesar@bernsteinsg.com NetEase Q1: Profits beat, pipeline remains the question Q1 beat driven by lower platform fees.NetEase’s Q1 results were solid, in contrastwith fairly negative expectations into the quarter. RMB30.6bn of revenue grew 6.1% yearon year, and was 3.7% higher than the street. Cash billings at the group level (calculatedby triangulating revenues with deferred revenue balances) grew only 2.0%, but even thiswas no worse than fears we’d heard of a decline - compared against high year-ago comps.Core Online Games revenue (RMB25.1bn) grew 6.9% year on year. Meanwhile, RMB13.3bnof non-GAAP operating profit this quarter was more than 20% ahead of our modelling(RMB10.5bn) and Street consensus (RMB10.9bn). Close Date20 May 2026NTES Close Price (USD)116.82Price Target (USD)150.00Upside/(Downside)28%52-Week Range159.55/108.67SPX7,432.97FYEDecDiv Yield4.0%Market Cap (USD) (M)74,546EV (CNY) (M)356,038 On the go-forward pipeline.Speaking around the quarter, company managementattributed the Q1 top-line strength to Fantasy Westward Journey and Where Winds Meet.The 69.4% gross margin this quarter was a new high, and was attributed to a higher shareof revenue from Fantasy Westward Journey and Where Winds Meet domestically, and lowerAndroid platform fees. Lower iOS platform fees in China should help here in Q2 and onward.Lower G&A costs in the quarter were partly one-off, but also reflected some headcountreductions. On the go-forward game launch pipeline, NetEase management spoke positivelyabout beta feedback for Sea of Remnant, due in Q3, but didn’t give incremental colour onwhen Ananta might join the line-up (our base case remains 2027). Why was the stock down so much?All in, the quarter felt… okay? Feedback we heardfocused on the lack of Ananta updates, 2.0% billings growth reflecting the ongoing waitfor new game launches, and the company's ongoing investments in PDD(!) in contrast with$100mn or so of buybacks this quarter (even though the latter marked the first quarter in awhile where NetEase had reported buybacks). The PDD investment irks us, but NetEase’sshares now trade on c. 12x FY+1 PE on very modest expectations for Sea of Remnants,with primary listing conversion (and subsequent southbound inclusion) and eventual Anantalaunch news representing possible catalysts later in the year. Investment Implications DETAILS A SOLID Q1 BEAT, OUTLOOK STILL HINGES ON ANANTA NetEase’s Q1 results were solid compared with low expectations entering the quarter. In contrast with the last couple ofquarters, when slower than expected deferred revenue recognition weighed on earnings, 6.1% revenue growth and 2.0%billings growth were both ahead of where we’d heard investors focus on ex-ante. RMB30.6bn of Q1 revenue was 6.1% higher year on year, while RMB25.7bn of Gaming and VAS revenue was 6.9% higher.Gaming and VAS gross margin hit 74.8% this quarter, around 500bps higher compared with the 69.2% and 69.5% that we andconsensus had estimated. According to the company this was driven by a high share of domestic PC games this quarter, led byFantasy Westward Journey PC, and high Where Winds Meet engagement following the global success. RMB13.3bn of Groupnon-GAAP operating profit was more than 20% above our prior modelling (RMB10.5bn) as well as consensus (RMB10.9bn).Excluding the contributions from Cloud Music and Youdao though core non-GAAP operating profit of RMB13.9bn was about28.7% ahead of what we’d assumed. The real beat was likely a little smaller excluding one-offs that depressed admin expenses,but the underlying quarter was still strong. NetEase’s total non-GAAP operating expenses grew 12.1% from Q1 2025 to RMB7.9bn in Q1 2026. Marketing spend thisquarter was 28.6% higher year on year, compared with a very low comp from last year. One interesting tidbit from managementcommentary related to the shift in marketing seasonality related to a greater overseas presence with games like Where WindsMeet. Admin expenses decreased 25.8% year on year, in part reflecting the aforementioned one-offs, while R&D expense was7.8% higher year on year. The decline in admin expenses was said to be partly one-off, but also reflected headcount reductionswhere the impact on costs should be ongoing. Updating our estimates for NetEase Exhibit 3 shows a summary of our estimate changes. Our updated NetEase price target is based on an unchanged 16x FY+1PE, on marginally lower EPS estimates, which partly reflect stronger CNY exchange rates. Q1 2026 REPORTING IN CHARTS EXHIBIT 5:Online games revenue increased 6.9% toRMB25.1bn Source: Corporate reports and Bernstein analysis. EXHIBIT 7:Gaming non-GAAP gross profit wasRMB21.5bn in Q1 2026 with a gross margin of 70.2% Source: Corporate reports and Bernst