According to the results of the second quarter of 2023, the Chinese online game developer NetEase reported revenue of 24 billion RMB. The revenue growth rate was only 4% YoY, while analysts expected an average growth of 7% YoY to 24.9 billion RMB. At the same time, in quarterly terms, the company's revenues decreased by 4%, due to seasonal factors.
In the key segment of video games, revenue showed an increase of 4% YoY and amounted to 18.8 billion RMB. In June, NetEase released several new releases for mobile devices – Justice, Racing Master, Badlanders, all of them took the first places in the iOS downloads chart in China. Also in June, the release of the acclaimed Harry Potter: Magic Awakened game was released on international markets. The current popular franchises Fantasy Westward Journey, Eggy Party, Identity V and Justice continued to show good results. NetEase continues to focus on its expansion outside of mainland China, developing an international segment. In August, the company opened another video game development studio this year, T-Minus Zero Entertainment, under the leadership of Rich Vogel.
In the Cloud Music segment, revenue decreased by 11% YoY to 1.9 billion RMB. The positive contribution was made by music services, but it was outweighed by the decline in the indicators of social services. It is also worth noting the growth in the number of monthly active paid subscribers (MAU) of music services by 14% YoY to 207 million people in the first half of the year.
The Youdao segment showed strong revenue growth of 26% YoY to 1.2 billion RMB. Both training services and online marketing services contributed to the increase in revenue. In August, the company introduced its new product Youdao Dictionary Pen X6 Pro – a dictionary pen, it is an indispensable tool that helps in learning foreign languages. Unlike previous versions of the tool, the new model is based on a large language model "Ziyue".
The new initiatives generated 2.1 billion RMB in revenue, which is 10% more than a year earlier. Most of the revenue comes from the Yanxuan e-commerce platform.
Returning to the cumulative results, NetEase's quarterly gross profit increased by 11% YoY and amounted to 14.4 billion RMB. Gross profit growth was shown by each of the operating segments. Gross profit margin has also increased in all areas.
The net profit from continuing operations attributable to shareholders amounted to 9 billion RMB, an increase of 67% YoY. The average diluted earnings per ADS was $1.91, and earnings per share was 2.78 RMB. We must pay tribute to NetEase, since the profit figures significantly exceeded the consensus, as analysts predicted profit growth of no more than 5% YoY.
In June, we raised the target price for NetEase shares in Hong Kong to HKD 176 and for ADS in the US to $112.40, assigning the securities a "Buy" rating. We consider the reporting for the second quarter to be neutral for the company's investment case, and therefore we keep the rating and target prices at the same level. The upside from the current level is about 12%. Since the beginning of this year, NetEase shares have significantly outperformed the Hong Kong market in terms of profitability, +44% on shares VS -8% on the Hang Seng index.
