Nomura maintains Buy rating on NetEase with USD155 TP; expects 1Q26F to slightly beat low expectations

Overview

This is Nomura's 1Q26F earnings preview for NetEase. The core view is: given low market expectations, NetEase is likely to slightly beat in 1Q26F; in the short term, while new game releases are limited, existing titles remain stable, and gross margin improves driven by a higher revenue mix from high-margin self-developed games; in the medium term, the SoR launch and base normalization are expected to drive re-acceleration in game growth in 2H26F.

Core views

The report maintains a Buy rating on NetEase with a target price of USD155. Nomura forecasts 1Q26F revenue of CNY29.92bn, up 4% YoY and 1% above consensus; non-GAAP net profit of CNY10.434bn, down 7% YoY and 3% above consensus; and non-GAAP EPADS of CNY16.27, 6% above consensus. The report notes that 1Q26 is a relatively quiet quarter for the game business, but legacy titles like FWJ remain resilient. If SoR launches in summer, coupled with base normalization, game revenue growth could accelerate to approx. 10% in 2H26F. Additionally, following NetEase's conversion from secondary to primary listing in Hong Kong, potential future inclusion in Stock Connect could serve as a share price catalyst.

Analysis framework

The report combines earnings preview, segment operating forecasts, consensus comparison, and SOTP valuation: first forecasting 1Q26F revenue, gross margin, non-GAAP operating margin, and EPADS; then breaking down performance by segments including Games & Related VAS, Youdao, Cloud Music, and Innovative Businesses; finally deriving the target price using FY26F P/E multiples for online games and market capitalizations for Cloud Music and Youdao.

Methodology notes

• Valuation MethodSOTP

  Sum-of-the-Parts Valuation

  Online games business valued at USD74bn based on 17x FY26F P/E; Cloud Music and Youdao included based on latest market cap and shareholding ratios; aggregated to derive target price of USD155.

• Valuation MethodP/E Multiple Valuation

  FY26F P/E

  Online games business applies 17x FY26F P/E; report notes this multiple represents a 10% discount to global peer average.

• Earnings ForecastConsensus Comparison

  Company Forecast vs. Bloomberg Consensus

  Report compares 1Q26F revenue, gross profit, non-GAAP net profit, and EPADS against consensus to assess likelihood of a slight earnings beat.

Asset mapping & comparison

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

• NTES US

  Primary Covered Asset

  Strengths

  Buy rating, TP USD155; expects slight 1Q26F beat, potential acceleration in 2H26F game growth, balance sheet remains net cash.

  Weaknesses

  1Q26F non-GAAP net profit and EPADS still expected to decline YoY; limited new game releases in short term; performance of legacy titles remains key variable.

  Comparison

  Current FY26F P/E approx. 13x; TP implies FY26F P/E approx. 17x.

  Risks

  Greater-than-expected margin contraction from incubation businesses; lower-than-expected revenue from legacy titles like FWJ.

• 9999 HK

  HK-listed Security of Same Company

  Strengths

  Maintains Buy; conversion to HK primary listing may pave way for Stock Connect inclusion.

  Weaknesses

  HK valuation and liquidity may be affected by local market sentiment, FX rates, and Connect expectations.

  Comparison

  Disclosed price HKD181.90; separate HK-denominated TP of HKD249.

  Risks

  Uncertainty regarding timing of Stock Connect inclusion and actual capital inflows.

• Cloud Music

  NetEase Stake & SOTP Component

  Strengths

  Included in valuation based on latest market cap; 1Q26F revenue expected to grow 7.0% YoY.

  Weaknesses

  Gross margin only slightly improved YoY; valuation subject to its independent market price.

  Comparison

  Attributable valuation of approx. USD1.9bn in SOTP based on 59% stake.

  Risks

  Market valuation volatility affects SOTP outcome.

• NetEase Youdao

  NetEase Stake & SOTP Component

  Strengths

  1Q26F revenue expected to grow 9.2% YoY.

  Weaknesses

  1Q26F gross margin expected to decline 2.3ppt YoY.

  Comparison

  Attributable valuation of approx. USD0.7bn in SOTP based on 57% stake.

  Risks

  Recovery in education and related business growth and margins falls short of expectations.

Key data

• 1Q26F Revenue ForecastCNY29,920mnUp 4% YoY, 1% above Bloomberg consensus of CNY29,589mn.
• 1Q26F Non-GAAP EPADS ForecastCNY16.27Down 7% YoY, but 6% above consensus of CNY15.37.
• 1Q26F Gross Margin Forecast65.0%Up 0.9ppt YoY, mainly driven by improved revenue mix from high-margin self-developed games.
• 1Q26F Non-GAAP Operating Margin Forecast39.8%Up 0.2ppt YoY, up 6.5ppt QoQ.
• Games & Related VAS Revenue ForecastCNY24,890mn1Q26F expected to grow 3.5% YoY and 13.3% QoQ.
• 2H26F Game Revenue Growth ExpectationApprox. 10% YoYReport believes SoR launch and base normalization will drive growth recovery from approx. 3% in 1H26F.
• Target PriceUSD155Unchanged, corresponding to approx. 17x FY26F P/E, implying approx. 31.4% upside from current price.
• Current PriceUSD117.98NTES US closing price as of 2026-05-01.
• HK Share PriceHKD181.909999 HK price as of 2026-05-04.

Impact & implications

If 1Q26F actual results slightly exceed low expectations, it could alleviate near-term market concerns regarding high base and new title gap in the game business; if SoR launches on schedule in summer and contributes revenue, NetEase's 2H26F game revenue growth may re-accelerate. Conversion to primary listing in HK and potential Stock Connect inclusion could also broaden the investor base and provide additional catalysts.

Risks

• Greater-than-expected margin contraction in incubation businesses.
• Lower-than-expected revenue from legacy titles such as FWJ.
• SoR launch timing, revenue performance, or user retention misses expectations.
• Uncertainty regarding timing and actual capital catalyst from potential Stock Connect inclusion.
• Macro market, FX, and overall internet sector valuation volatility may affect TP realization.

What to watch

• Whether 1Q26F actual revenue, gross margin, non-GAAP net profit, and EPADS deliver a slight beat.
• Revenue stability of legacy titles like FWJ and ability to offset high base.
• Whether SoR launches on schedule in summer, and post-launch revenue, ranking, and retention performance.
• Whether Games & Related VAS revenue growth can accelerate from approx. 3% in 1H26F to approx. 10% in 2H26F.
• Progress on Stock Connect inclusion following NetEase HK primary listing conversion.
• Impact of Cloud Music and Youdao market cap changes on SOTP valuation.