EB SECURITIES: Maintains a "buy" rating on NTES-S (09999), new games expected to drive performance growth and valuation reshaping.

EB SECURITIES released a research report stating that they are optimistic about NTES-S (09999) new product line, which is expected to bring incremental revenue from 2026, and significant profit growth from 2027. The bank estimates that the company's revenue for 2026-2028 will be 124.9/143.6/151.6 billion yuan, and profit under non-international accounting standards will be 41.2/48.6/51.6 billion yuan, respectively. Compared to the bank's previous forecasts, the bank maintains the prediction of non-GAAP net profit for 2026, raises the non-GAAP net profit for 2027 by 9.2%, and adds net profit for 2028. The current stock price corresponds to P/E (Non-GAAP) of 13/11/10 times, maintaining a "buy" rating. EB SECURITIES' main points are as follows: Events The bank believes that there are three key factors worth paying attention to at the current time: 1) new games may drive performance beyond expectations; 2) major products may bring valuation increase; 3) cost reduction and efficiency improvement may lead to a new phase of quality development. Specifically, key new games include "Sea of Forgetfulness," "Infinite," and "Return to Tang." The recent catalyst is the new round of internal testing of "Sea of Forgetfulness" starting on May 28. Game Review Recent developments show that "Sea of Forgetfulness" started a new round of internal testing on May 28: "Sea of Forgetfulness" is an open world RPG developed by Joker Studio under Netease Games (the developer of "Identity V"). Developed over a period of 5 years, cross-platform, using puppet aesthetics as a visual label, combining maritime exploration, dual-mode combat, and meat pigeon cycling gameplay. The game has now started two rounds of testing, with the "drift bottle number test" starting on June 27, 2025, and the "wandering number test" starting on February 5, 2026. Players will play as a captain who has lost his memory and embark on a nautical journey with a mysterious girl until reaching the final sea. In April 2026, "Sea of Forgetfulness" obtained a number. On May 28, 2026, the game started a new round of internal testing. According to the general testing rules of games, this round of testing may be the final round before the launch. According to the company's official website, the game currently has a total of 25 million reservations online. For comparison, before the launch, "Onmyoji" and "Evertale" both had reservations of over 30 million. There is still some time before the game goes online, so the bank judges that the total online reservations for "Sea of Forgetfulness" are also expected to exceed 30 million, ranking in the top tier of attention. The bank refers to games with similar styles or gameplay such as "Identity V," "Onmyoji," and "Evertale," and believes that the first-year revenue from "Sea of Forgetfulness" may reach 5 billion yuan, considering the simultaneous release on three platforms, with a high profit margin on the PC side (especially direct connection), it is expected to increase the overall profit margin. Assuming a profit margin of 35%-45%, it may contribute an incremental profit of 1.75-2.25 billion yuan, accounting for 4.7%-6% of the company's non-GAAP profit in 2025. In the medium to long term, "Infinite" is more heavyweight, and "Return to Tang" has a high level of attention: the company has reserves of new games such as "Infinite" and "Return to Tang." "Infinite" is an urban open-world role-playing game being developed by the company. It was first revealed in August 2023 and began technical offline testing on January 3, 2025. Currently, there is little information released about the game. From the promotional videos and some player trial videos, it can be seen that the urban background is close to Japanese style, with multiple protagonists and skills, mainly third-person action and exploration, incorporating some QTE gameplay. The game has exceeded 17 million global reservations. "Return to Tang" is an action-adventure game created by the company's Rayfire Business Studio 24 using Unreal Engine 5. Executive Vice President Hu Zhipeng serves as the producer. The project was initiated in 2018 and development began in 2021. The game is inspired by the historical event of "Ship Returns to Tang Dynasty," and will be launched on PC and console platforms, targeting global distribution. "Return to Tang" can be considered the company's first AAA game. Initial effects of quality improvement Founder Ding Lei "returned to the front line" at the end of 2024, taking direct control of the highest decision-making power in the gaming business, and implemented a series of reform measures within the company aimed at reducing costs and improving efficiency. The bank sees that the company has effectively controlled its three expenses, with initial results. Specifically, the company's R&D expense ratio has remained around 16%, decreasing to 14.7% in the first quarter of 2026. Under such a development intensity, efficiency has significantly improved; the sales expense ratio has remained stable; and the management expense ratio has decreased from 4.93% in the second quarter of 2021 to 2.08%. In 2027, the company is expected to be included in the "Hong Kong Stock Connect" According to the company's announcement, as the trading volume of the company's shares on the Hong Kong Stock Exchange accounted for over 55% of the global total trading volume in the 2025 financial year, it triggered the Hong Kong Stock Exchange's "trading center of gravity shift" clause. The company must fully comply with the relevant Hong Kong listing rules applicable to dual primary issuer. If this trading status continues for a year, the company's trading center of gravity will be deemed to permanently shift to the Hong Kong Stock Exchange, formally becoming a dual primary issuer, and will also qualify for inclusion in the Hong Kong Stock Connect. Risk warning: The progress or quality of new game releases may not meet expectations, and a slowdown in macroeconomic growth may damage consumer spending, among others.