Guotai Junan maintains a "buy" rating on NTES-S (09999) with a target price of HKD 216.77.

Guotai Junan has released a research report maintaining a "buy" rating for NTES-S(09999), with an expected adjusted net profit of 29.9/30.4/33.1 billion yuan from 2023 to 2025, and a target price of HKD 216.77. The company's third-quarter performance exceeded expectations, with the mobile game sector witnessing strong growth and value-added services recovering. The gross profit margin has improved, and operational efficiency has been continuously optimized. The company's revenue and profits have exceeded expectations, and the growth of both new and old products in the mobile game sector is promising. Guotai Junan's main points are as follows: Revenue acceleration and record-high gross profit margin, with adjusted net profit exceeding expectations. The company achieved revenue of 27.27 billion yuan in 3Q23, a year-on-year increase of 11.6%. The recovery of the gaming and value-added services sector drove the acceleration of revenue growth. The gross profit margin was 62.2%, a year-on-year increase of 5.9 percentage points and a quarter-on-quarter increase of 2.3 percentage points. The continuous optimization of profitability in the three main businesses contributed to the group's record-high gross profit margin. Adjusted net profit reached 8.645 billion yuan, a year-on-year increase of 15.7%. The adjusted net profit margin was 31.7%, a year-on-year increase of 1.1 percentage points and a quarter-on-quarter increase of 7.35 percentage points. Adjusted net profit exceeded market expectations, demonstrating the steady growth of the company's profit through revenue recovery, gross profit margin optimization, and expense control. Strong performance in mobile games and narrowing decline in PC games, flagship products performing well. In 3Q23, the company achieved gaming and value-added services revenue of 21.78 billion yuan, a year-on-year increase of 16.5%. The gross profit margin was 69%, a year-on-year increase of 4.0 percentage points. The self-developed games continued to drive the increase in gross profit margin. Gaming revenue and value-added services revenue were 20.424 billion yuan and 1.373 billion yuan, respectively, with year-on-year increases of 17.6% and 3.4%. Among them, mobile games and PC games achieved revenue of 15.849 billion yuan and 4.575 billion yuan, respectively. The proportion of mobile games in gaming revenue increased to 77.6%. The number of players for "JX3" increased to over 40 million after the conversion to free-to-play. The flagship mobile games "Nishuihan" and "Danzaipaidui" performed well, and the new game "Star Streetball Party" once dominated the charts. CLOUD MUSIC focuses on strengthening profitability through membership, and both revenue and gross profit margin of Youdao have reached record highs. In 3Q23, CLOUD MUSIC achieved revenue of 1.973 billion yuan, with a gross profit margin of 27.2%, a year-on-year increase of 13.0 percentage points. The focus on monetizing membership services with music content as the core contributed to the improvement of the gross profit margin. Youdao achieved revenue of 1.539 billion yuan, a year-on-year increase of 9.7%, with a gross profit margin of 55.9%, a year-on-year increase of 1.7 percentage points. Both revenue and gross profit margin of multiple businesses grew rapidly and reached record highs. The Sub.la model has supported the development of six major native applications. Innovation and other businesses achieved revenue of 1.978 billion yuan, a year-on-year increase of 0.6%, with a gross profit margin of 27.3%, a year-on-year increase of 1.8 percentage points. The Just Selection business focused on brandization, and its sales on Singles' Day exceeded 100 million.