Kaiyuan Securities has reiterated its "Buy" rating on NetEase-S (09999), citing robust Q3 performance with both revenue and net profit posting year-on-year growth, including a 31.8% surge in net profit. The growth was primarily driven by the long-term operational strength of core games like "Fantasy Westward Journey," strong performance of new titles, and overseas expansion, alongside significant AI-driven enhancements in music and education businesses. Key highlights from Kaiyuan Securities' report are as follows:

**Financial Performance** NetEase reported Q3 2025 revenue of RMB 28.4 billion (+8.2% YoY, +1.7% QoQ) and net profit attributable to shareholders of RMB 8.6 billion (+31.8% YoY, +0.2% QoQ). Gross margin improved to 64.1% (+1.2 ppts YoY), while net margin rose to 31.0% (+5.4 ppts YoY), supported by gains from fair value changes in equity investments and lower net forex losses. The gradual release of deferred revenue is expected to sustain high growth. Based on Q3 results, Kaiyuan forecasts 2025–2027 net profits of RMB 35.7/38.3/42.9 billion, with the current P/E ratio at 16.6x/15.5x/13.8x. The firm remains optimistic about growth catalysts from new game launches, overseas expansion, and AI integration, maintaining its "Buy" rating.

**Gaming Momentum: Long-Term Strength and Expansion** Q3 gaming and value-added services revenue reached RMB 23.3 billion (+11.8% YoY, +2.3% QoQ), driven by "Fantasy Westward Journey PC," "Eggy Party," and new title "Where Winds Meet." Gross margin for the segment stood at 69.3% (+0.5 ppts YoY). "Fantasy Westward Journey PC" set four consecutive records for peak concurrent users, hitting 3.58 million on November 2, underscoring NetEase’s operational expertise. Legacy games like "Revelation" are undergoing upgrades to revive monetization. Overseas, "Destiny: Star Cluster" topped iOS download charts in Europe and the U.S., while "Where Winds Meet" attracted over 2 million players within 24 hours of its global launch. Upcoming titles like "Infinite Lagrange" (7 million views for its September demo on Bilibili) and "Forgotten Waters" (slated for multi-platform release in 2026) are expected to further fuel growth.

**AI-Driven Growth in Music and Education** NetEase Cloud Music optimized its revenue structure, posting Q3 sales of RMB 1.96 billion with gross margin up 2.6 ppts to 35.4%. Its "AI Mastering" feature offers personalized audio experiences. Youdao, leveraging AI innovation, reported RMB 1.63 billion in revenue, led by online marketing services. Youdao Lingxi saw a 40%+ YoY revenue increase, with user retention exceeding 75% (vs. ~70% in Q4 2024). AI-powered subscription services hit a record RMB 100 million (+40% YoY). Kaiyuan expects AI to continue driving growth in music and education.

**Risks** Potential delays in new game launches or weaker-than-expected monetization, alongside declining revenue from older titles.