UBS maintains a Buy rating on NetEase but lowers the target price to US$170

Overview

This is UBS's Q1 2026 earnings preview and valuation update on NetEase. The report believes short-term quarterly performance will be soft, mainly because of last year's high base, the normalization of selling and marketing expenses, and a relatively light game pipeline in the first half. However, with multiple new titles progressing from H2 2026 to 2027, along with evergreen game bookings recovery, dividend returns and buybacks, NetEase's current valuation still looks attractive.

Core views

The core view is that near-term earnings are under pressure, but the medium-term re-rating logic remains intact. UBS expects Q1 2026 revenue to rise 2.6% YoY to RMB 29.582 billion, while adjusted net profit is forecast to fall 11.6% YoY to RMB 9.939 billion. Online game revenue is expected to grow 2.0% YoY, while non-game businesses should grow about 5% YoY. Among existing evergreen titles, FWJ PC, driven by the Changwan server, may contribute monthly bookings of RMB 400 million to RMB 500 million, with 2026 annualized bookings potentially approaching RMB 7 billion to RMB 8 billion. Infinite Borders and Identity V are also showing operational recovery. On the new-game side, Sea of Remnants, Ananta, and other simulation, single-player and IP spin-off titles are the next catalysts.

Analysis framework

The report combines quarterly earnings previews, revenue and profit forecasts by business line, product pipeline assessment, valuation multiple comparison, and DCF valuation updates. In the near term, the focus is on Q1 revenue, gross margin, operating expenses and adjusted profit; in the medium term, the focus is on new-game launches in H2 2026 to 2027, bookings assumptions, the share of PC revenue, lower iOS commission rates, and efficiency gains from AI in R&D and publishing workflows.

Methodology notes

• Valuation methodsDCF

  discounted cash flow valuation

  UBS derives its target price using the DCF method and lowers the NTES.US target price from US$180 to US$170 after updating future new-game booking assumptions.

• ratingForecast Stock Return

  12-month expected stock return

  In UBS's disclosure, FSR is defined as the expected share price appreciation over the next 12 months plus total dividend yield, and the stock rating and target price correspond to a 12-month investment horizon.

• fundamental_analysisearnings_preview

  quarterly earnings preview

  The report forecasts Q1 2026 performance and compares it with prior estimates and consensus using revenue, segment revenue, gross profit, operating expenses, operating profit and adjusted net profit.

Asset mapping & comparison

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

• NTES.US

  Core covered name, NetEase ADR

  Strengths

  The evergreen game portfolio is resilient, cash flow is strong, a 2026E dividend yield of about 3% and buybacks of about 4% provide shareholder returns, and the new-game cycle should drive a re-rating.

  Weaknesses

  Q1 2026 profit declined YoY, the H1 pipeline is light, and some older games were softer.

  Comparison

  Target price US$170; UBS says the current roughly 13x 2026E P/E looks attractive, and the target implies 19x 2026E P/E.

  Risks

  New game performance may disappoint, regulatory risk, rising costs driven by competition, and maturity of the core MMORPG franchise.

• 9999.HK

  NetEase's Hong Kong-listed counterpart

  Strengths

  Shares the same fundamental catalysts as the ADR, and the report notes that potential inclusion in Stock Connect in 2027 could improve funding flows.

  Weaknesses

  Subject to the same game-pipeline, competition and margin risks.

  Comparison

  UBS correspondingly lowers the Hong Kong target price to HK$265.20.

  Risks

  Hong Kong market liquidity and sentiment, uncertainty around Stock Connect inclusion, and uncertainty over product launch timing.

Key data

• Q1 2026 revenue forecastRMB 29.582 billionUp 2.6% YoY, up 7.4% QoQ, and 0.7% below consensus.
• Q1 2026 online game services revenue forecastRMB 23.912 billionUp 2.0% YoY and 0.9% below consensus.
• Q1 2026 adjusted net profit forecastRMB 9.939 billionDown 11.6% YoY, with an adjusted net margin of 33.6%, 2.1% below consensus.
• Q1 2026 non-GAAP operating profit forecastRMB 10.645 billionDown 6.4% YoY, with an operating margin of 36.0%.
• 2026E revenue forecastRMB 119.865 billionUp 0.6% versus the prior forecast and up 6.4% YoY.
• 2027E revenue forecastRMB 133.217 billionDown 4.1% versus the prior forecast and up 11.1% YoY.
• 2026E diluted EPSRMB 62.34UBS forecast, slightly below consensus at RMB 62.52.
• 2026E valuation13.1x UBS diluted P/E; about 13x 2026E P/EThe report says the current valuation, plus about 3% dividend yield and about 4% buybacks in 2026E, looks attractive.
• Target priceNTES.US US$170; 9999.HK HK$265.20DCF target price lowered, implying 19x 2026E P/E.

Impact & implications

For investment implications, the report believes the year-to-date share price weakness mainly reflects the soft H1 2026 pipeline and lower investor interest in non-AI names. If new games launch and monetize in H2 2026 to 2027, combined with evergreen game stability, margin improvement, dividends and buybacks, as well as potential inclusion in Stock Connect in 2027, NetEase could see a valuation re-rating. Near-term downside risk from earnings missing consensus remains, but UBS believes the current valuation already offers some margin of safety.

Risks

• Regulatory and product risk, especially the hit rate of new games, remains uncertain.
• Intensifying competition may raise R&D, publishing and marketing costs.
• The core game portfolio is maturing, MMORPGs contribute a relatively high share of game revenue, and diversification remains limited.
• Cross-border e-commerce business may pressure margins.
• If new-game booking assumptions for H2 2026 to 2027 come in below expectations, earnings and DCF valuation will be affected.
• Investor interest in non-AI internet names may continue to weigh on valuation.

What to watch

• Whether actual Q1 2026 revenue, adjusted net profit and expense ratios meet the preview.
• Whether FWJ PC Changwan server bookings contribution stays near RMB 400 million to RMB 500 million per month.
• Whether Sea of Remnants launches in Q3 as expected and whether first-month bookings can meet the market expectation of above RMB 500 million.
• Ananta's test feedback, overseas appeal and 2027 launch schedule.
• The actual profit contribution from higher PC revenue mix, lower iOS commission rates and AI tool adoption.
• Whether NetEase is included in Stock Connect in 2027 and the impact on liquidity and valuation.