CICC has maintained its 2027 Non-GAAP net profit forecast for NetEase-S (09999), considering the company's product pipeline. The current Hong Kong stock price corresponds to a 2026/2027 Non-GAAP P/E of 14x/12x, while the U.S. stock price corresponds to 13x/12x. The firm reiterates an Outperform industry rating. Due to adjustments in earnings forecasts, a target price of HK$265/US$171 is set, implying 36%/38% upside potential for the Hong Kong and U.S. shares, respectively, based on 19x/17x 2026/2027 Non-GAAP P/E. Key points from CICC are as follows:

Quarterly deferred revenue showed strong growth, with attention on subsequent recognition. New game "Forgotten Sea" is expected to launch in the third quarter of 2026. Fourth-quarter 2025 revenue from games and related value-added services increased 3% year-over-year, primarily driven by stable operations of long-standing IPs such as "Fantasy Westward Journey" and contributions from "Where Winds Meet" and "Marvel Rivals." Deferred revenue saw a net increase of RMB 1.04 billion quarter-over-quarter in the fourth quarter of 2025, surpassing market expectations. The bank anticipates this will gradually be recognized as revenue.

Youdao revenue grew 17% year-over-year, reflecting effective advancement of its AI-driven strategy. NetEase Cloud Music revenue steadily increased 5% year-over-year. Although innovation business revenue declined year-over-year, it showed significant improvement quarter-over-quarter.

Key focus areas for 2026 include: 1) The globalization of "Where Winds Meet." As of the fourth-quarter 2025 earnings release date, total players exceeded 80 million. 2) The new game "Forgotten Sea" began its second domestic test in February, receiving positive market feedback on gameplay and art style. The company indicated during the earnings call a potential launch in the third quarter of 2026. 3) "Rivals" underwent a closed test in January, with feedback meeting company expectations; a full-platform launch is planned.

Gross margin remained robust, and expenses were largely in line with expectations. The fourth-quarter 2025 gross margin improved to 64.2%, which the bank views as reflecting strong cost control. Absolute figures for the three major expense categories met expectations, with the sales expense ratio rising to 14%, judged to align with the business promotion cycle.

The dividend policy remains generous, actively rewarding shareholders. The fourth-quarter 2025 dividend was US$1.16 per ADS, with a payout ratio of 83%. The full-year dividend ratio is maintained at around 40%, continuing a stable shareholder return policy. The company has also extended its share repurchase program (up to US$5 billion) until January 2029, with approximately US$2 billion repurchased by the end of 2025.