T.H. Capital - NetEase, Inc.： Steady Growth In Games and Ads Combining with Better Kaola Drives Better 1Q16 Results; Maintain Buy and Price Target
NTES will report 1Q16 results on Wednesday, May11th after the close of themarket followed by an 9pm EST conference call. NTES is highlylikely to deliver 1Q16 results better thanconsensus expectation ofnet revenue at $1,225.98M (117.1%Y/Y growth) drivenmainly by ecommerce while game and advertising are growing nicely. We believethat NTES can continue its strong growth in mobile games due to its strongcontent development capability. Wemaintain our Buy rating and raise our price target at $168.00.
· Steady growth in mobile games – According to our proprietary data, NTES’s mobilegames continue to be the growth driver. In 1Q16, the total number of gameservers reached 2,279, up 4.3% Q/Q from 2,184 in 4Q15 (Figure 1); among that, mobile game servers grew 8.7% Q/Q, while PCgames were flat. Out of all mobile games, mobile FWWJ grew 13.2% Q/Q; WWJ at 39.0%Q/Q and LDXY2 grew 3.5% Q/Q. Also, the cumulative downloads of NTES's majormobile games was 348M, up from 273M in 4Q15 with a net addition of 76M from4Q15 (Figure 2). The growth is drivenby new downloads from FWWJ at 14M, WWJ at 22M and LDXY2 at 31M (Figure 3). We estimate that NTES's totalgame revenue can be $869.6M in 1Q16.