Shenwan Hongyuan Group: Maintains "Buy" rating for NTES-S(09999) with a target price of HK$177

Shenwan Hongyuan Group released a research report stating that they maintain a "buy" rating for NTES-S (09999), considering the low valuation, solid fundamentals, and potential acceleration in shareholder returns, with a target price of 177 Hong Kong dollars. The company's Q2 mobile gaming growth outperformed the industry, displaying a stable performance. The bank predicts that the rich array of client-based game products in the second half of the year will become a significant driver of growth in the gaming business. Key points from Shenwan Hongyuan Group: Q2 mobile gaming growth outperformed the industry, showing stable performance. According to the financial report, NetEase's Q2 revenue was 25.5 billion, YoY +6%; operating profit was 7 billion, yoy +15%. Q2 gaming and value-added business revenue yoy +6.7% to 20.1 billion, gross profit margin yoy +2.6pct to 70%, reaching a higher position. Specifically, mobile gaming revenue was 14.7 billion yoy +16%, while client-based games were 4.55 billion, remaining flat compared to last year. The double-digit growth of mobile gaming continued to outperform the industry, and according to data, Q2's "Dream Mobile Game" and "Fifth Person Identity" showed strong growth compared to last year, with "Nishu Hand Tour" contributing incremental revenue. The bank achieved a 5% year-on-year growth in Q2 revenue based on deferred subscription testing data, which was impressive for a quarter with few new products. Fundamentals are expected to hit bottom, and client-based games in the second half of the year are expected to drive growth. Looking ahead, in the mobile gaming sector, the game "Eternal No Bounds" was launched in July, breaking new record for daily new users. In terms of client-based games, concerns in the market about the impact of core old products like "Dream" and "The Tale" have been manageable, with the game "Seven-Day World" receiving good reviews upon its launch on Steam in July; the superhero PVP shooting game "Marvel Contest of Champions" is scheduled to be released on December 6; the martial arts open world game "Yan Yun Sixteen Sounds" is expected to be launched by the end of the year. In addition, Blizzard's products are gradually being relaunched, with "World of Warcraft" returning on August 1 and "Hearthstone" scheduled for September 25. The bank predicts that the rich array of client-based game products in the second half of the year will become a significant driver of growth in the gaming business. Q2 share repurchases accelerated. According to the financial report, the company's Q2 cash dividend was 0.435 USD/ADR, totaling nearly 2 billion RMB in dividends, with a dividend rate of about 26% (Q127%). In 23, the company distributed dividends of 1.65 billion and repurchased 690 million, totaling about 2.3 billion US dollars, resulting in a shareholder return of 4.7%. NetEase repurchased 290 million US dollars in Q2 (compared to 417 million in Q1, 306 million in Q4, and 305 million in Q3), showing an accelerated pace of repurchases. By the end of 1H24, the company has repurchased about 1.1 billion of the planned 5 billion US dollars in repurchases for 23-25, leaving a balance of 3.9 billion, and if future repurchases continue to increase, the shareholder return rate is expected to significantly increase.