CICC has released a research report stating that, considering improved operating profit margins, it has raised NetEase-S's (09999) Non-GAAP net profit forecasts for 2026 and 2027 by 3% each to RMB 42.2 billion and RMB 46.7 billion, respectively. The current share price corresponds to 11x/10x 2026/2027 Non-GAAP P/E for the Hong Kong-listed shares and 12x/11x for the US-listed shares. The firm maintains its Outperform industry rating and target price of HK$265 (US$171). Considering a downward shift in the industry valuation benchmark, this target implies 17.5x/15.5x 2026/2027 Non-GAAP P/E for the Hong Kong shares and 17.5x/15.6x for the US shares, representing potential upside of 54% for the Hong Kong shares and 46% for the US shares. CICC's key views are as follows:
The company's Q1 2026 performance exceeded both CICC's and market expectations. Revenue grew 6% year-over-year to RMB 30.6 billion, while Non-GAAP net profit attributable to shareholders was RMB 11.3 billion, flat year-over-year. The overall performance was better than expected, which CICC attributes primarily to: 1) gaming and value-added service revenue surpassing expectations; 2) a significant improvement in gross margin; and 3) lower-than-expected sales and administrative expenses.
The growth rate of gaming revenue has recovered, with core business performance exceeding expectations. Q1 2026 revenue increased 6% year-over-year, a notable acceleration from the 3.0% growth in the previous quarter. Gaming and value-added service revenue grew 7% year-over-year. CICC believes this was mainly driven by steady contributions from flagship evergreen games (including "Fantasy Westward Journey PC" and the "Tianxia" series, both achieving record-high gross transaction volumes), as well as the continued momentum from global products like "Where Winds Meet" (which also set a new revenue record) and "Marvel Rivals." Youdao and Cloud Music also achieved positive year-over-year growth. Overall, the resilience of the core gaming business exceeded market expectations, and deferred revenue increased by nearly RMB 1.3 billion sequentially, providing support for revenue recognition in subsequent quarters.
Gross margin improved significantly, expense control was effective, and core business profitability was strong. The Q1 2026 gross margin increased by 5 percentage points year-over-year to 69% (gaming and value-added service gross margin reached 75%), hitting a multi-year high. CICC attributes this primarily to an increased proportion of revenue from high-margin self-developed games and a decrease in platform sharing costs. On the expense side, both sales and administrative expenses were lower than market expectations, contributing to incremental profit. Research and development expenses remained stable, ensuring the core operational competitiveness of the main business.
Shareholder returns continued, with new product launches and potential inclusion in Stock Connect providing potential catalysts. The company declared a Q1 2026 dividend per share of US$0.144 (US$0.72 per ADS) and repurchased approximately US$127 million worth of shares. Looking ahead: 1) "The Forgotten Sea" is scheduled to begin a paid closed beta test on May 28, with CICC expecting a launch this summer (as of May 21, pre-registrations across all platforms exceeded 22 million); 2) The pipeline includes diverse new titles such as "Infinity," "Shanhai Qilv," and "Return to Tang." CICC believes the better-than-expected gross margin improvement and steady shareholder returns provide a margin of safety. The upcoming new product cycle and global expansion progress will be key variables to monitor. Furthermore, if the transition from a secondary listing to a primary listing in Hong Kong is completed smoothly, it could pave the way for inclusion in the Southbound Stock Connect, with potential improvements in liquidity and value discovery.
Risks include economic downturn, tightening regulation, underperformance of games, intensifying competition, and foreign exchange/investment losses.