Open Source Securities: Maintains a "buy" rating for NTES-S (09999), focusing on the effects of innovation in PC games and the progress of new games.

Open Source Securities published a research report stating that NTES-S (09999) 2026Q1 "Fantasy Westward Journey" PC game revenue and simultaneous online player numbers reached a new record high, with mobile game daily active users reaching a new high since 2017. Maintaining the forecast for 2026-2028 net profit attributable to shareholders at 37.2/41.9/45.1 billion yuan, the current stock price corresponds to PEs of 13.7/12.2/11.3 times respectively. Optimistic about the long-term operation of old games, the launch of new games, and the deepening growth driven by AI empowerment, maintaining a "buy" rating. Key points from Open Source Securities are as follows: Significant increase in gross profit margin, continued optimism about the growth driven by the rejuvenation of old games and the release of new games In 2026Q1, the company achieved revenue of 30.6 billion yuan (up 6% year-on-year, up 11% quarter-on-quarter), net profit attributable to shareholders of 10.7 billion yuan (up 4% year-on-year, up 71% quarter-on-quarter), and non-GAAP net profit attributable to shareholders of 11.3 billion yuan (flat year-on-year, up 59% quarter-on-quarter). The quarter-on-quarter growth was mainly driven by the increase in self-developed game revenue. The game business drove a year-on-year increase in gross profit margin of 5.3 percentage points to 69.4% in Q1, with a net profit margin of 35.5%. By the end of Q1, contract liabilities increased by 6% to 20.5 billion yuan (the highest level since 2022). Classic game operating indicators repeatedly reach new highs, focusing on the launch progress of "Lost Ark" in Q3 In 2026Q1, gaming and related value-added services achieved revenue of 25.7 billion yuan (up 7% year-on-year); gross profit margin was 74.8%, up 6.0 percentage points year-on-year, possibly driven by the increase in self-developed PC game revenue. In 2026Q1, "Fantasy Westward Journey" PC game revenue and simultaneous online player numbers reached a new record high, while mobile game daily active users reached a new high since 2017; "Tian Xia" PC game revenue and user payment rate reached new highs; the company announced the "Gold Snatching" gameplay for "Fantasy Westward Journey" at the May 20th game conference, and the overall renovation of "Reverse Cold: Shanghai New World", the bank sees a bright future for classic games to break boundaries and reinvigorate based on player preferences. The core data of Q1's "Yanyun Sixteen Songs" in terms of active users, revenue, social media popularity, etc., all broke records, the overseas version launched the first expansion pack driving Steam's global bestselling list to second place, validating the quality of the game and its potential for overseas expansion. The company plans to push for more platform launches and market localization, potentially contributing to incremental growth. Among the new game reserves, the feedback from the test of "Lost Ark" has been positive, with approximately 24.5 million total reservations as of May 25, 2026, a TapTap rating of 8.9, and is expected to launch in 2026Q3; the "Party + Life Simulation" game "Star Painting Friends Qingtian" PC version started on April 28; the development progress of the life simulation game "Shanhai Qilv" has reached 90%-100%; two auto chess games are under development; "Infinite Universe" continues to polish the quality of content, and the product will be launched globally/all platforms simultaneously. AI-driven subscription revenue growth, steady growth in cloud music highlights solid user base Youdao launched new products such as Youdao Lobster and Youdao Treasure, achieving revenue of 1.35 billion yuan in Q1 (up 4% year-on-year), with AI-driven subscription revenue exceeding 1 billion yuan (up more than 70% year-on-year), and advertising revenue driven by AI applications and short drama marketing increasing by more than 50% year-on-year. The bank is optimistic about the continuous growth driven by AI education/application and marketing demand. Cloud music achieved revenue of 19.8 billion yuan in Q1 (up 7% year-on-year), with a gross profit margin of 37.1% (up 0.3 percentage points year-on-year), reflecting a stable user base. Risk warning: The launch time or performance of new games may be lower than expected, and the decline in revenue from old games, among other risks.