NetEase is the second largest online game player in China with many successful IPs and high-quality game pipeline. The company has reported a solid 2Q22 result last week. Revenue grew by 12.8%, while net profit rose by 28%!
Within online games, PC game was up 41% yoy, mainly due to new contribution from Naraka: Bladepoint and Fantasy Westward Journey PC version. Mobile game revenue was up 6% yoy due to strong performance of Infinite Lagrange. Revenue of Harry Potter: Magic Awakened was deferred. Netease Cloud Music did well too, with revenue increasing 30% yoy. Unfortunately, Youdao’s revenue slide down 26% yoy due to the suspension of after-school tutoring services under China’s latest policy.
While global gaming market demand in 2022 will be challenging due to weak macro and post COVID gaming behaviour normalization, I expect Netease to continue to outperform from the latest debut of Diablo Immortal in the global markets, as well as the launch of Harry Potter Mobile in Japan in 2H22. Additional online game license approval in China well be an upside for the company.
Looking forward, Netease is expected to extend the longevity of leading franchise titles via launching upgraded versions. Netease will also likely focus on accelerating its overseas expansion pace through launching more big games, such as Diablo Immortal and Onmyoji, in the overseas market and collaborating with global studios, which will help to enlarge Netease’s total addressable market. Netease Cloud Music is showing promising growth as well as paying users for music content continues to grow.
Netease is now trading at forward PE multiple of 20 times. Given Netease’ growth potential, I think this is a fair valuation as the forward PEG is approximately 1x as well. While Netease is a wonderful and promising company, I would prefer to wait for a better entry price to secure a higher margin of safety, considering the Hong Kong market volatility and bearish sentiments in China right now.
Above is solely my personal opinion and does not constitute as any trading advice.
Comments