Kaiyuan Securities released a research report stating that for the first quarter of 2026, NetEase-S (09999) achieved record-high revenue and concurrent online users for its PC game "Fantasy Westward Journey," while the mobile game version's daily active users in March reached the highest level since 2017. The firm maintains its forecast for net profit attributable to the parent company for 2026-2028 at RMB 37.2 billion, RMB 41.9 billion, and RMB 45.1 billion, respectively. The current stock price corresponds to price-to-earnings ratios of 13.7x, 12.2x, and 11.3x for those years. The report is optimistic about growth drivers including the long-term operation of existing games, the launch of new titles, and the deepening of AI empowerment, thus maintaining a "Buy" rating. The main points from Kaiyuan Securities are as follows:
Gross margin improved significantly; continued optimism for growth driven by revitalizing existing games and launching new ones. In Q1 2026, the company reported revenue of RMB 30.6 billion (up 6% year-over-year, up 11% quarter-over-quarter) and net profit attributable to the parent of RMB 10.7 billion (up 4% YoY, up 71% QoQ). Non-GAAP net profit attributable to the parent was RMB 11.3 billion (flat YoY, up 59% QoQ). The sequential growth was primarily driven by increased revenue from self-developed games. The gaming business drove the Q1 gross margin up by 5.3 percentage points year-over-year to 69.4%, with a net profit margin of 35.5%. As of the end of Q1, contract liabilities increased by 6% sequentially to RMB 20.5 billion, the highest level since 2022.
Classic game operating metrics repeatedly hit new highs; focus on the Q3 launch progress of "Forgotten Sea." In Q1 2026, revenue from games and related value-added services reached RMB 25.7 billion (up 7% YoY). The gross margin for this segment was 74.8%, an increase of 6.0 percentage points year-over-year, likely driven by a higher proportion of revenue from self-developed PC games. During Q1, both revenue and concurrent online users for the PC version of "Fantasy Westward Journey" set new records, while the mobile version's daily active users in March were the highest since 2017. The PC game "Tian Xia" also achieved record-high user spending and payment rates. The company's 520 Game Conference announced new gameplay for "Fantasy Westward Journey" and comprehensive innovations for "Justice: A New World." The firm is positive about classic games revitalizing their appeal by integrating player preferences and breaking boundaries. In Q1, "Where Winds Meet" set records in user activity, revenue, and social media buzz. The overseas version's first major update propelled it to second place on Steam's global bestseller list, validating the game's quality and overseas potential. The company plans to expand to more platforms and enhance market localization, which may contribute incremental growth. Among the new game pipeline, "Forgotten Sea" has received positive feedback during testing, with approximately 24.5 million pre-registrations across platforms as of May 25, 2026, and a TapTap rating of 8.9. It is expected to launch in Q3 2026. The PC version of the "party + life simulation" game "Starry Friend Sunny Day" had a soft launch on April 28. The development progress for the life simulation game "Mountain and Sea Journey" has reached 90%-100%. Two auto-chess games are in development. "Infinity" continues to refine its content quality and is planned for a global, multi-platform simultaneous release.
Youdao's AI-driven subscription revenue shows high growth; Cloud Music's steady growth highlights a solid user base. Youdao launched new Agent products, Youdao Lobster and Youdao Treasure Vault. Q1 revenue for Youdao was RMB 1.35 billion (up 4% YoY), of which AI-driven subscription revenue exceeded RMB 100 million (up over 70% YoY). Advertising revenue, driven by demand for AI applications and short-drama marketing, increased by over 50% year-over-year. The firm is optimistic that demand in AI education and application marketing will continue to drive growth. Cloud Music's Q1 revenue was RMB 1.98 billion (up 7% YoY), with a gross margin of 37.1% (up 0.3 percentage points YoY), reflecting a stable fundamental performance.
Risk warnings include potential delays in new game launches or lower-than-expected performance, as well as risks related to declining revenue from existing games.
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