HSBC maintains its Buy rating and USD150 target price on NetEase, with near-term focus on Gamescom and progress in the game pipeline

Overview

Following NetEase's below-expectation 2Q26 net profit and subsequent share-price decline, the report reassesses its growth pressures in 2H26, the performance of existing games, and its new-game pipeline. HSBC acknowledges that near-term revenue growth may slow but believes Ananta's medium-term potential, cost and product-operation initiatives, an approximately 4% shareholder return, and strong free cash flow still support its Buy rating and USD150 target price.

Core views

First, HSBC distinguishes the shortfall in NetEase's 2Q26 accounting profit from the performance of its core operations. After the results announcement on August 20, NetEase's US-listed shares fell 5% in early trading, compared with a 2% decline in KWEB over the same period. Net profit was 24% below expectations, mainly due to a RMB3.0bn investment loss involving fair-value changes and impairments in the investment portfolio, including investments in PDD, Alibaba, and other unlisted companies. By contrast, non-GAAP operating profit was 13% above consensus and increased 27% YoY, reflecting continued strong revenue contributions from Where Winds Meet and Justice. The report also notes that even excluding the investment loss, the effective tax rate would still rise YoY to 19.5%, partly because tax incentives for the music business expired; HSBC expects the full-year 2026 effective tax rate to increase YoY. Near-term fundamentals remain under clear pressure. Deferred revenue growth slowed from 23% YoY in 1Q26 to 14%, while there are no confirmed new-game launches scheduled for 2H26. The PC version of Where Winds Meet and Justice in China established high gross-billings bases last year, while Sea of Remnants has performed relatively weakly. HSBC therefore expects YoY gaming revenue growth over the next few quarters to be lower than in 1H26. However, the impact of the high base could be partially offset by strong performance from Eggy Party, incremental overseas contributions from Where Winds Meet, and recoveries in Naraka: Bladepoint and Marvel Rivals. Regarding the new-game pipeline, the most important near-term event is Ananta's Gamescom update in Cologne, Germany, on August 25, 2026. HSBC continues to expect the game to launch in summer 2027; if a new testing date is announced, the report believes it could serve as a positive catalyst. Under the Mistsea was tested from August 17 to 23 and received a TapTap score of 9.4, primarily targeting China's mobile market; HSBC considers a score of 9 to be a solid initial level. Hidden Edge completed a four-day test on August 10 and received a TapTap score of 9.3, targeting China's PC and mobile markets. Neither of the latter two games has been incorporated into HSBC's model, so their potential contributions are not included in current forecasts. Sea of Remnants is the principal weakness in the pipeline. Management acknowledged that the game has a steep learning curve and received substantial criticism. Frequent content updates, experience enhancements, and responses to player feedback have begun to improve player sentiment, but HSBC's tracking indicates that gross billings have yet to recover. NetEase will continue refining the game, prioritizing the Chinese market over overseas markets in the near term. Performance among existing games is mixed. Character monetization for the PC version of Where Winds Meet remains higher YoY, although growth is slowing; in July 2026, the mobile version recorded YoY growth in daily active users, iOS gross billings, and total time spent, while average time spent per user was flat YoY. Justice's China mobile version saw YoY declines in daily active users, iOS gross billings, and time spent in July, while the PC version's popularity in Chinese internet cafés declined MoM. Its global Steam revenue rebounded following an update but remained below launch-period levels, and its user base continued to normalize gradually, although overseas mobile gross billings and daily active users began to stabilize. Other long-running titles provide a partial buffer. Identity V's daily active users declined YoY in July, but iOS gross billings, total time spent, and average time spent per user returned to YoY growth. Key metrics for Justice Mobile declined YoY. Eggy Party's daily active users and total time spent declined YoY in July, but iOS gross billings and average time spent per user increased YoY. Marvel Rivals showed a clear recovery, with its Steam user base during Season 9 exceeding the comparable levels in Seasons 3 through 8, while its global Steam revenue ranking also improved from Season 8. The PC version of Naraka: Bladepoint saw a MoM recovery in Chinese internet-café popularity in July, and its China Steam revenue ranking in 3Q to date rebounded from 2Q26. By contrast, Hearthstone's mobile daily active users and iOS gross billings declined YoY, while its PC internet-café popularity was stable MoM; the Chinese internet-café popularity of both World of Warcraft and Overwatch weakened MoM in July. Earnings forecasts show modest revisions. HSBC's 2026, 2027, and 2028 EPS forecasts are RMB61.51, RMB70.85, and RMB80.26, respectively, representing reductions of 1.2%, 0.3%, and 2.0% from its previous forecasts; the main text also states that the valuation and forecast assumptions used in this report are maintained. Corresponding annual revenue forecasts are RMB120.191bn, RMB127.442bn, and RMB139.577bn, while HSBC-adjusted net profit forecasts are RMB39.575bn, RMB45.358bn, and RMB51.124bn, respectively. Free cash flow to equity is forecast at RMB32.448bn, RMB43.995bn, and RMB48.321bn, respectively. Regarding valuation and rating, HSBC maintains its USD150 target price, derived using a sum-of-the-parts valuation. Based on the report's share price of USD121.02, the upside is 23.9%. NetEase trades at a forecast 2027 P/E of 11.5x, described in the report's discussion as approximately 12x, while HSBC expects 2027 EPS to increase by approximately 15% YoY. The report also notes that NetEase's P/E is substantially below global peers and one standard deviation below its own five-year historical average. HSBC believes Ananta's revenue potential could drive a valuation rerating in mid-2027; cost controls and strategies to revitalize legacy games could partially offset earnings risks, while an approximately 4% shareholder return in 2026-2027 could provide a buffer. NetEase's business has relatively limited exposure to macroeconomic risks and can generate strong free cash flow without substantial artificial intelligence investment, forming the core rationale for maintaining the Buy rating.

Analysis framework

HSBC first analyzes the sources of the 2Q26 earnings miss, separating the RMB3.0bn investment loss and tax-rate changes from core operating-profit performance. It then assesses the 2H26 growth trajectory using deferred revenue, new-game launch schedules, and high comparable bases. The report subsequently examines the operating trends of individual new and existing games through daily active users, iOS gross billings, time spent, internet-café popularity, and Steam user and revenue rankings. Finally, it incorporates the game pipeline, earnings forecasts, free cash flow, shareholder returns, and relative valuation into a sum-of-the-parts framework to determine its rating and target price.

Methodology notes

• Valuation MethodologySOTP Valuation

  Sum-of-the-parts Valuation

  The report separately assesses the value of NetEase's different businesses and assets and aggregates them into an overall corporate valuation, forming the basis for the USD150 target price.

• Valuation MethodologyP/E and PEG Valuation

  Relative P/E Valuation

  The report compares forecast P/E multiples with global peers and NetEase's own five-year historical range, while incorporating 2027 EPS growth to assess whether the current valuation fully reflects its growth potential.

• Industry Analysis FrameworkVolume and Price Decomposition

  Tracking Game Users, Engagement, and Gross-Billings Metrics

  The report separately examines user-volume and engagement metrics such as daily active users, time spent, and internet-café popularity, as well as monetization metrics such as iOS gross billings and Steam revenue rankings, to identify the specific drivers of growth or decline for each game.

• Corporate Fundamentals and Financial FrameworkFree cash flow analysis

  Free Cash Flow and Shareholder Return Analysis

  HSBC views strong free cash flow, limited capital-expenditure requirements, and an approximately 4% shareholder return in 2026-2027 as buffers against earnings volatility and downward valuation pressure.

• Event Trading and Behavioral FinanceEvent-driven analysis

  Gamescom Update and Testing-Date Catalyst

  The report identifies Ananta's Gamescom update on August 25, 2026, as a key near-term event and believes that a potential new testing date could provide a positive catalyst.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• NetEase (NTES.US)

  The core stock covered by the report, facing slower gaming revenue growth in the near term but potentially benefiting over the medium term from Ananta's launch, improvements in existing games, and shareholder returns.

  Strengths

  Strong non-GAAP operating-profit growth, cost-control and game-revitalization capabilities, relatively limited exposure to macroeconomic risks, and the ability to generate strong free cash flow without heavy artificial intelligence investment.

  Weaknesses

  No confirmed new-game launch schedule for 2H26, slowing deferred revenue growth, high comparable bases for key existing games, and weak monetization performance from Sea of Remnants.

  Comparison

  The report states that NetEase's P/E is substantially below global peers and one standard deviation below its own five-year historical average; following the earnings release, its US-listed shares fell 5% in early trading, compared with a 2% decline in KWEB over the same period.

  Risks

  Fair-value changes and impairments in the investment portfolio, a higher effective tax rate, uncertainty regarding new-game timelines, and slowing gross billings from existing games could affect earnings.

Key data

• Rating and Target PriceBuy; USD150.00Both the rating and target price are maintained
• Share Price and Upside to Target PriceUSD121.02; +23.9%Share price as of 12:00 NYT on August 20, 2026
• 2Q26 Net Profit Shortfall-24%Relative to expectations, primarily due to a RMB3.0bn investment loss
• 2Q26 Non-GAAP Operating Profit13% above consensus; up 27% YoYPrimarily reflecting revenue contributions from Where Winds Meet and Justice
• Effective Tax Rate Excluding Investment Loss19.5%Would still increase YoY, partly due to the expiration of tax incentives for the music business
• Deferred Revenue GrowthUp 14% YoYSlower than the 23% YoY growth in 1Q26
• New-Game Test ScoresUnder the Mistsea 9.4; Hidden Edge 9.3Both are TapTap scores and neither has been incorporated into HSBC's earnings model
• HSBC EPS Forecasts2026e RMB61.51; 2027e RMB70.85; 2028e RMB80.26Revised by -1.2%, -0.3%, and -2.0%, respectively, from previous forecasts
• HSBC Revenue Forecasts2026e RMB120.191bn; 2027e RMB127.442bn; 2028e RMB139.577bnRevenue continues to grow in 2027 and 2028
• HSBC-Adjusted Net Profit Forecasts2026e RMB39.575bn; 2027e RMB45.358bn; 2028e RMB51.124bn2027 earnings growth is supported by expectations for the game pipeline and operational improvements
• Free Cash Flow to Equity Forecasts2026e RMB32.448bn; 2027e RMB43.995bn; 2028e RMB48.321bnThe report views strong free cash flow as supporting valuation and shareholder returns
• Forecast P/E2026e 13.2x; 2027e 11.5x; 2028e 10.1xThe report states that NetEase's P/E is below global peers and one standard deviation below its five-year historical average
• Forecast Dividend Yield2026e 2.9%; 2027e 3.5%; 2028e 3.9%The report separately forecasts an approximately 4% shareholder return in 2026-2027
• 2027 EPS GrowthApproximately 15% YoY growthHSBC believes this growth, combined with an approximately 12x 2027 P/E, provides valuation support

Impact & implications

The report believes NetEase's near-term earnings and gaming revenue growth will be constrained by investment losses, a higher tax rate, high comparable bases, and a gap in new-game launches. However, core operating profit remains resilient, and operational improvements across several long-running games could buffer some of the pressure. If Ananta progresses as expected and launches in summer 2027, its revenue potential could drive a valuation rerating in mid-2027; meanwhile, cost controls, game revitalization, free cash flow, and shareholder returns could reduce the valuation impact of near-term earnings volatility.

Risks

• The absence of a confirmed new-game launch schedule for 2H26 could exacerbate the slowdown in gaming revenue growth.
• The PC version of Where Winds Meet and Justice in China face high comparable gross-billings bases in 2H26.
• Deferred revenue growth slowed from 23% YoY in 1Q26 to 14%, indicating weakening future revenue momentum.
• Fair-value changes and impairments in the investment portfolio caused a RMB3.0bn investment loss, leaving 2Q26 net profit 24% below expectations.
• The expiration of tax incentives for the music business is driving the effective tax rate higher, and HSBC expects the 2026 effective tax rate to increase YoY.
• Sea of Remnants has a steep learning curve and has received substantial player criticism; although sentiment has improved, gross billings have yet to recover.
• Uncertainty remains regarding Ananta's testing and launch schedule, with HSBC currently expecting a summer 2027 release.

What to watch

• Monitor Ananta's update at Gamescom in Cologne on August 25, 2026, and whether a new testing date is announced.
• Monitor player feedback following the Under the Mistsea test, subsequent testing arrangements, and whether the game is incorporated into HSBC's earnings model.
• Monitor feedback from the Hidden Edge test, subsequent development progress, and its potential commercialization timeline.
• Monitor whether continued content updates and experience enhancements for Sea of Remnants can translate into a recovery in gross billings in the Chinese market.