NetEase beats expectations in 1Q26 despite a high base, and Nomura maintains a Buy rating
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NetEase beats expectations in 1Q26 despite a high base, and Nomura maintains a Buy rating
The report says NetEase's 1Q26 revenue and profit both beat expectations, driven mainly by the resilience of its classic PC games, a sharp improvement in gaming gross margin, and the potential for a growth reacceleration in the second half of the year from Sea of Remnants.
- 1Q26 total net revenues rose 6% YoY to RMB30.6 billion, beating Bloomberg consensus by 4%.
- Consolidated gross margin increased 5.3 percentage points YoY to 69.4%, while gaming gross margin reached 74.8%, above Nomura's 70% forecast.
- Non-GAAP operating profit increased 17% YoY to RMB13.3 billion, above Nomura's 12% forecast; non-GAAP operating margin rose to 43.4%.
- Management said the new game Sea of Remnants is scheduled for release in 3Q26, and Nomura expects that if it launches around July, it could benefit from the summer peak season.
Report interpretation
Overview
This is Nomura's 1Q26 earnings review on NetEase. The report says that, despite a high base from the same period last year, NetEase still delivered a double beat on revenue and profit in 1Q26, mainly benefiting from resilient performance in evergreen PC titles such as Fantasy Westward Journey PC, Where Winds Meet, and Justice PC, as well as margin expansion driven by a revenue mix that tilted toward the higher-margin PC segment.
Core views
The core view is that: first, NetEase's gaming business remained resilient despite a high base, with Online Game and Value-Added Services revenue up 7% YoY; second, margin improvement was even more pronounced than revenue growth, with gaming gross margin hitting a recent historical high; third, if the new title Sea of Remnants launches as scheduled in 3Q26, especially early in the summer release window, it could become a catalyst for a reacceleration in gaming growth in the second half of the year; fourth, the timeline for converting the company's Hong Kong listing from a secondary listing to a primary listing has not been updated, but under HKEX rules the company has a one-year window starting from February 2026 to complete the conversion.
Analysis framework
The report combines earnings decomposition, margin comparison, observation of game bookings and user performance, product-pipeline tracking, and SOTP valuation. On the revenue side, it focuses on total net revenues and Online Game and Value-Added Services revenue; on the profit side, it compares consolidated gross margin, gaming gross margin, non-GAAP operating profit, and non-GAAP net profit against Bloomberg consensus and Nomura forecasts.
Methodology notes
sum-of-the-parts valuation
Nomura values NetEase using an SOTP approach, with the online gaming business valued at 17x FY26F P/E and the music business valued at its latest market capitalization, resulting in a target price of USD155 for NTES.
results beat analysis
The report compares actual revenue, gross margin, operating profit, and net profit with Bloomberg consensus and Nomura forecasts to determine the sources of the beat.
gross margin expansion decomposition
The report attributes the gross margin improvement mainly to revenue mix optimization, specifically a higher share of high-margin PC game revenue and lower app store revenue-sharing fees.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- NTES.OQ / NTES USprimary coverage name, US ADR
- Strengths
- 1Q26 revenue and profit beat expectations, gaming gross margin was strong, and the Buy rating with a USD155 target price provides upside.
- Weaknesses
- Non-GAAP net profit was flat YoY, and revenue growth remains constrained by the high base.
- Comparison
- At the current price of USD118.17 shown in the chart, the USD155 target implies about 31.2% upside; the current FY26F P/E is about 13x, while the target price corresponds to about 17x.
- Risks
- A larger-than-expected margin contraction from the incubation business, or lower-than-expected bookings for classic mobile titles such as FWJ.
- 09999.HKthe same company's Hong Kong-listed security
- Strengths
- Shares the same fundamentals as the ADR, and the report's Hong Kong valuation result implies a target price of HKD249.
- Weaknesses
- The company has not yet updated the timeline for converting from a secondary listing to a primary listing.
- Comparison
- The chart shows the Hong Kong share price at HKD180.40, with the HKD249 target implying substantial upside.
- Risks
- Hong Kong market sentiment, the pace of the listing-status conversion, and FX factors may affect performance.
- NetEase online gaming businesscore earnings driver
- Strengths
- Strong resilience in evergreen PC titles, Fantasy Westward Journey PC set a new peak in PCU, and gaming gross margin reached 74.8%.
- Weaknesses
- Some classic mobile game bookings may come in below expectations.
- Comparison
- Nomura values the online gaming business at 17x FY26F P/E, underscoring that it remains the core valuation driver.
- Risks
- Product aging, declining user retention, weaker-than-expected new title launches, or changes in channel costs.
Key data
- 1Q26 total net revenuesRMB30.6 billion, up 6% YoY4% above Bloomberg consensus.
- Online Game and Value-Added Services revenueup 7% YoYAbove Nomura's 3% forecast, mainly driven by Fantasy Westward Journey PC, Where Winds Meet, and Justice PC.
- Fantasy Westward Journey PC peak concurrent users3.9 millionManagement said it set a new all-time high in 1Q26.
- Estimated cash revenue growthabout 3.7% YoYNomura views this as solid given the high base, and in line with its forecast.
- Consolidated gross margin69.4%Up 5.3 percentage points YoY, 4.7 percentage points above consensus.
- Gaming gross margin74.8%Up 6.0 percentage points YoY, well above Nomura's 70% forecast.
- Non-GAAP operating profitRMB13.3 billion, up 17% YoYAbove Nomura's 12% forecast.
- Non-GAAP operating margin43.4%Up 3.9 percentage points YoY, above Nomura's 39.8% forecast.
- Non-GAAP net profitRMB11.3 billion, flat YoYStill 13% above consensus.
- Target priceUSD155Based on SOTP valuation, corresponding to about 17x FY26F P/E.
Impact & implications
The report is mildly positive for NetEase's share price: the 1Q26 results show that the core gaming assets remain resilient, margin expansion confirms the value of the PC segment and lower channel-sharing structure, and Sea of Remnants provides a growth catalyst for the second half of the year. If the new title performs in line with expectations, the market may revise upward its view on the sustainability of gaming growth; however, if legacy game bookings weaken or the incubation business drags on margins, the target price may be harder to achieve.
Risks
- A larger-than-expected margin squeeze from the incubation business.
- Lower-than-expected bookings for classic mobile games such as FWJ.
- Delayed launch or weaker-than-expected monetization for Sea of Remnants.
- Changes in the macro market and valuation multiples could affect target price realization.
- The pace of conversion from a secondary listing to a primary listing in Hong Kong has not yet been updated.
What to watch
- Whether Sea of Remnants launches early in 3Q26, especially around July.
- The user activity and booking sustainability of Fantasy Westward Journey PC, Where Winds Meet, and Justice PC.
- Whether gaming gross margin can remain elevated, especially as the PC revenue mix and app store revenue-sharing fees evolve.
- Whether non-GAAP operating margin can continue to stay above market expectations.
- The timetable and regulatory progress for the Hong Kong listing-status conversion.