Earning Alert: 2Q22 earnings increased by 28%, above market expectations; new blockbuster games to boost growth in 2H22
- 2Q22 revenue grew by 12.8% y-o-y to Rmb23.2bn, in line
- Non-GAAP net profit rose 28%, better than consensus, due to higher game growth and better cost control
- New blockbuster games like Diablo Immortal and launch of Harry Potter in overseas markets should drive growth in 2H22
- Maintain BUY with higher TP of HK$225/ US$144 as we roll our valuation base to FY23
2Q22 results highlights
– Revenue grew by 12.8% to Rmb23.2bn, in line with market expectations.
– By segment, Games and related value-added services revenue grew by 15% to Rmb18.1bn, slightly higher than market expectations. In term game format, mobile games increased by c.16% in 2Q22 while PC games grew by 41% in 2Q22.
– As for non-game business, Youdao’s revenue declined by 26% to Rmb956m, missing consensus, due to suspension of its after-school tutoring services. Cloud Music increased by c.30% to Rmb2.2bn, while innovative businesses and others grew by 6% to Rmb1.9bn.
– Gross profit increased by 15.7%, with the margin expanding by 1ppt y-o-y to 55.4%, due to favourable game revenue mix and continued margin improvement of Cloud Music.
– Non-GAAP net profit rose 28% to Rmb5.4bn, better than market expectations of a c.12% increase.
– The earnings outperformance was mainly driven by higher game growth and better cost control of Cloud Music.
– The robust growth of games was driven by strong performance of popular PC title Naraka: Bladepoint and longevity of flagship mobile game titles.
– We believe NetEase can continue to outpace the industry’s growth in 2H22. Its new blockbuster games Diablo Immortal is one of the few key blockbuster games this year. Diablo Immortal and Harry Potter’s overseas launch should drive game revenue growth in coming quarters.
– Looking forward, the company will continue to extend the longevity of leading franchise titles via launching upgraded versions and focusing on high-quality games. Besides, overseas expansion remains a key focus to enlarge the total addressable market. The company is confident in launching more big games in overseas markets, like Diablo Immortal and Onmyoji. It has built several overseas game studios led by industry veterans to accelerate its expansion pace.
– Factoring in better-than-expected margin improvement of Cloud Music, we revised up 2022F non-GAAP net profit forecast by 1%. Our 2023F/2024F non-GAAP net profit estimates are largely unchanged.
– We have rolled our valuation base to FY23. Maintain BUY with TPs of HK$225 / US$144 based on the SOTP methodology: (1) Online games: 25x PE on FY23F Non-GAAP net profit (HK$215); (2) Cloud Music: based on market value (HK$3), (3) Youdao: based on market value (HK$1), and (4) Innovative businesses: 1x P/S on FY23F revenue (HK$5).