DFZQ has issued a research report maintaining a "Buy" rating for NETEASE MUSIC (09899). The company continues to enhance its music library by adding content from well-known Korean labels while also strengthening the promotion of original music. The report suggests that the Online Music Monthly Active Users (MAU) may benefit from these initiatives. DFZQ forecasts net profit attributable to parent company shareholders for 2025-2027 to be 2.75 billion yuan, 2.01 billion yuan, and 2.40 billion yuan, respectively. Based on a comparable companies' average adjusted 2026 P/E ratio of 21x, a target price of 214.37 HKD (189.35 CNY, HKD/CNY=0.88) is assigned. Key points from DFZQ's report are as follows:

NETEASE MUSIC recently released its 2025 performance announcement. Second-half 2025 revenue reached 3.93 billion yuan (year-on-year increase of 1%), with net profit attributable to parent company shareholders for H2 2025 at 860 million yuan (year-on-year increase of 15%).

Paid subscriber numbers and Average Revenue Per User (ARPU) are expected to see growth. Online music revenue for H2 2025 was 3.0 billion yuan (year-on-year increase of 8%). The company has recently introduced K-pop labels such as Shofar and supplemented its catalog with works from popular Chinese musicians like Chusheng Chen, Jackson Yee, Yuxin Liu, and Miriam Yeung. Furthermore, the company launched the AI musician platform "Tianyin," which is expected to drive further growth in exclusive content. By 2025, over 1 million musicians had uploaded more than 5.6 million tracks to the cloud music platform. DFZQ anticipates online music revenue for H1 2026 could reach 3.2 billion yuan (year-on-year increase of 8%), primarily due to expectations that MAU and payment conversion rates will continue to improve as the music library is further enhanced. Regarding ARPU, the report suggests that with reduced channel discounts, ARPU is expected to increase in 2026.

The company is focusing on its core music business, with the adjustment and contraction of the social entertainment segment now complete. Social entertainment revenue for H2 2025 was 910 million yuan (year-on-year decrease of 17%), which was 10% higher than expected. This was mainly due to the adoption of a more cautious operational strategy for social entertainment services, including a prior proactive reduction in the platform's exposure for social entertainment, which gradually impacted paid user metrics. DFZQ believes the social entertainment business adjustments are complete and expects it to stabilize thereafter, projecting H1 2026 social entertainment revenue of approximately 880 million yuan (year-on-year increase of 2%).

The gross margin for digital album sales in H2 2025 was slightly higher than expected, and membership gross margin is anticipated to continue rising in 2026. The company's overall gross margin for H2 2025 was 35%, 1 percentage point higher than expected. The leverage for gross margin improvement from membership revenue growth remains, and DFZQ expects this trend to persist into 2026.

Risk factors include increased competition from services like Qishui Music; potential underperformance of original music revenue; rising copyright costs; and tightening industry regulatory policies.