Despite NetEase's weak fourth-quarter results, which fell below market expectations, J.P. Morgan believes the company's actual operational performance is significantly better than what the reported figures suggest.
NetEase reported its financial results for the fourth quarter of 2025, with revenue increasing by only 3% year-on-year and net profit declining by 27% year-on-year. Both figures missed Bloomberg consensus estimates by approximately 4% and 23%, respectively. This directly led to pressure on the Hong Kong-listed stock price in pre-market trading, with shares opening down 4%.
However, J.P. Morgan published a research report stating that the strong cash flow from new games like "Where Winds Meet" is already reflected in contract liabilities, and that non-recurring losses masked the excellent performance of core operating profit. Furthermore, with the upcoming launches of major new titles such as "Forgotten Sea" and "Once Human," the firm anticipates these will drive a compound annual growth rate of 13% for game revenue from 2026 to 2027. J.P. Morgan maintains its "Overweight" rating on NetEase with a target price of HK$295 (US$190), citing an attractive valuation based on a projected 2026 price-to-earnings ratio of 13 times.
**Actual Cash Flow Significantly Exceeds Reported Revenue**
The report notes that market disappointment with NetEase's revenue primarily stems from online game revenue growing only 4% year-on-year in Q4 and declining 7% quarter-on-quarter. This can easily be interpreted as weak growth. For instance, the rankings and revenue flow for titles like "Eggy Party" and "Identity V" have declined, but this is partly attributable to the fading of seasonal summer holiday factors. Additionally, J.P. Morgan emphasizes that the money has effectively already been received but has not yet been recognized as revenue. The key metric "contract liabilities," similar to deferred revenue (prepayments from players not yet recognized as game revenue), showed surprisingly robust strength. Contract liabilities surged 34% year-on-year in Q4 2025, significantly higher than the 25% growth in Q3, and even achieved a 5% sequential increase in what is typically a slower season. This contrasts sharply with the declines of 6% and 2% witnessed in the fourth quarters of 2023 and 2024, respectively. The driving force behind this is the strong cash flow performance of "Where Winds Meet" in both domestic and international markets. J.P. Morgan estimates that NetEase's actual cash flow grew 10% year-on-year in Q4. Considering the high base effect from Activision Blizzard China revenue in the same period of 2024, this double-digit growth is particularly noteworthy.
**Illusion of a Profit "Plunge," Blame Investment Losses**
A 27% year-on-year decline in net profit, missing the Bloomberg consensus by 23%, is indeed a startling figure. However, this was not due to problems in NetEase's core business but rather resulted from paper losses on investments. J.P. Morgan pointed out that in Q4, NetEase recognized substantial losses of RMB 2.2 billion in equity investments and exchange rate movements (of which equity investment losses accounted for RMB 1.7 billion). This contrasts with a gain of RMB 1.0 billion recognized in the same period last year. This swing directly depressed the net profit figure. Stripping out these non-recurring items, NetEase's core profitability remains robust: * Operating profit actually increased by 5% year-on-year. * The operating profit margin improved by 0.6 percentage points year-on-year and increased significantly by 1.8 percentage points quarter-on-quarter. * The sales and marketing expense ratio decreased by 1.6 percentage points quarter-on-quarter, demonstrating rational and efficient user acquisition spending.
In simple terms, the core business has not deteriorated; instead, it has become more profitable due to more rational cost control.
**13x P/E Considered Extremely Cheap; Two Major New Games Scheduled for 2026**
J.P. Morgan believes market concerns about NetEase are excessive. The current valuation, at only 13 times estimated 2026 earnings, is below that of major A-share listed game companies and offers a high margin of safety. Simultaneously, analysts are growing increasingly optimistic about NetEase's game pipeline for 2026. Analysts expect "Once Human" to launch in the third quarter of 2026, with the potential to become NetEase's highest-revenue game. Revenue for the first 12 months is projected to reach RMB 12 billion, approximately half of "Genshin Impact's" revenue during a comparable period. Another highly anticipated title, "Forgotten Sea" (an oceanic adventure RPG), is expected to launch in the first half of 2026, with projected annual revenue of RMB 5 billion. Furthermore, NetEase has fully integrated artificial intelligence into its game development cycle. From art design to programming, animation, and quality assurance, this enhances high-yield and scalable production capabilities and enables the smooth rollout of dynamic, AI-native gaming features across multiple flagship titles. Most importantly, NetEase may become eligible for inclusion in the Hong Kong Stock Connect program in 2026. J.P. Morgan believes this eligibility could bring liquidity support from southbound capital, potentially triggering a further re-rating of the stock's valuation.