NetEase: In-House Games Drove Sales, Morgan Stanley Raised TP To $77
By Shuli Ren
NetEase (NTES) reported worse-than-expected third-quarter earnings. Revenue came in at $385.1 million, below the $392.9 million polled by Factset. Earnings per share was $1.31, below the consensus $1.35.
But these numbers were good enough for Morgan Stanley, saying they were in line with their estimates. In addition, the broker raised their Buy target price from $73 to $77.
What did the analysts like? In the third quarter, NetEase’s 21% year-on-year revenue growth was driven by in-house developed games. Here are analysts Timothy Chan, Philip Wan, and Gillian Chung:
The annual sales growth was mainly helped by price hike of Fantasy Westward Journey (FWJ) and Westward Journey Online III (WJ3), and continued growth of its games. We note the strength of in-house titles helped offset the decline in World of Warcraft (WoW). We estimate FWJ contributed ~30% of total sales.
Morgan Stanley also liked the pipeline of new games:
We expect new titles, such as Heroes of Three Kingdoms, Dragon Sword, Legend of Tibet, Crisis 2015 and Revelation to be new drivers for 2014 and beyond
And the cash pile:
NetEase’s net cash of US$2.8bn (+16% YoY) accounts for 30-35% of its market value.
So what are NetEases’s key business risks? The declining sale from World of Warcraft may be an overhang:
We believe the gamer base for World of Warcraft has continued to decline, as no major expansion pack was launched this year. That said, we estimate that its total revenue contribution may drop below 10%.
And its two most popular games are entering an old age:
NetEase’s major revenue contributors Fantasy Westward Journey II and Westward Journey Online II are advancing into the eighth and tenth years of operation, respectively.
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