CICC has released a research report maintaining its Non-IFRS net profit forecasts for NETEASE MUSIC (09899) for 2026 and 2027. The current share price implies 16x and 15x 2026/2027 Non-IFRS P/E ratios, respectively. An Outperform rating is reiterated, with a target price of HK$224, corresponding to 20x and 18x 2026/2027 Non-IFRS P/E, suggesting a 22% upside from the current price. The main points from CICC are as follows.

The company's 2025 Non-IFRS net profit was in line with expectations. NETEASE MUSIC reported 2025 revenue of RMB 7.759 billion, largely matching the projected RMB 7.807 billion. The Non-IFRS net profit reached RMB 2.860 billion, broadly aligning with both the forecast of RMB 2.849 billion and the consensus estimate of RMB 2.836 billion.

The music business is expected to see volume and price increases in 2026, while social entertainment may stabilize sequentially. Online music revenue for 2025 was RMB 5.994 billion, up 12% year-on-year, driven by a 13.3% increase in subscription revenue and a 5.2% rise in non-subscription revenue. Management attributed subscription growth primarily to an expanding paying user base, alongside improvements in member retention and activity. The strategic focus for 2026 is on further expanding the paying user scale, with ARPPU expected to grow as discounts are narrowed. Online music revenue is projected to increase by 10.8% year-on-year in 2026, with subscription revenue growing 12.1%.

Social entertainment and other revenue for 2025 was RMB 1.765 billion, down 32% year-on-year, mainly due to a prudent operational strategy, although it saw a slight sequential improvement in the second half of 2025.

Gross margin improved year-on-year, and operating expenses were relatively controlled. The 2025 gross margin was 35.7%, up 2 percentage points year-on-year. Sales, management, and R&D expenses all decreased in absolute terms compared to the previous year. Management indicated that investment might increase in 2026, suggesting close attention to the pacing of content cost and user acquisition spending. Driven by healthy growth in the music business, operating profit for 2026 is forecast to rise 20% year-on-year to RMB 1.95 billion.

The timing of industry stabilization, user experience, and continuous innovation are key focuses. Investor concerns persist regarding industry stability. According to QuestMobile, a competitor maintained high year-on-year growth in MAU and DAU as of January 2026, while NETEASE MUSIC's user base remained relatively stable. The impact of competition is believed to be limited currently, but monitoring changes in competitors' strategies regarding copyright and user acquisition is crucial. The company has launched its self-developed AI generative recommendation model, Climber, along with a series of AI features, demonstrating a proactive approach to innovation. The company is recognized for its focus on user experience and differentiated positioning within the industry, with attention on when user share might stabilize.

Risks include tightening regulation, intensifying competition, costs exceeding expectations, and pressure on the music and social entertainment segments.