NetEase earns a Buy rating from Goldman Sachs, supported by long-term IP operations, China-based R&D for global publishing, and cost execution

Overview

This report summarizes the key takeaways from Goldman Sachs' August 21 investor meeting with NetEase management, focusing on game development and the new-product pipeline, overseas growth, margins and expenses, AI applications, and 2Q26 investment losses. The report believes NetEase has the capabilities to operate IP over the long term, serve global markets through its China-based R&D teams, and execute cost optimization, and it maintains a Buy rating.

Core views

NetEase's game-development philosophy centers on operating IP over the long term. Management also acknowledges that creating new IP is becoming more difficult across the industry: players continue to demand new experiences, while the scope for innovation that can achieve meaningful differentiation is narrowing. Nevertheless, the company continues to view developing new IP and exploring different forms of innovation as a long-term strategy, emphasizing that a clear strategic direction and long-term vision are more important than pursuing product volume in the short term. The new-game pipeline features differentiated positioning. Initial user feedback following the launch of Sea of Remnants has been mixed. Its highly innovative design may not suit every player, but it has gained recognition among certain user groups. The company plans to continue investing in content for its core audience while improving the overall experience and onboarding for new players. There is no resource allocation conflict between Ananta and Under the Misty Sea: Ananta has a larger budget, more ambitious goals, and a higher degree of innovation, and it is explicitly aimed at the global market. Management plans to disclose updates at Gamescom 2026 next week. Under the Misty Sea is a relatively moderate innovation initiative, and the recent initial test results were encouraging, although there is no definite launch date yet. The overseas growth model is shifting from expanding an overseas R&D network to "China-based R&D, global publishing." Management believes global players are placing increasing importance on new gameplay, while China-based R&D teams are becoming increasingly capable of delivering innovative experiences. The overseas performance of Marvel Rivals and Where Winds Meet has strengthened the company's confidence in this model. NetEase has therefore substantially downsized or closed its overseas studios, and future overseas growth is expected to be driven mainly by large games developed by China-based teams and published globally. As more new IPs with global ambitions are launched, management expects overseas revenue to gradually increase as a proportion of total revenue. The significant 2Q26 margin expansion was primarily attributable to an improved product mix and lower channel costs, with the latter particularly benefiting from reduced iOS platform fees and optimization of Android channels. The financial table shows that the 2Q26 gross margin was 70.5%, up from 69.4% in 1Q26 and 64.7% in 2Q25. However, management believes the main optimization measures have already been in place for some time, leaving relatively limited room for further gross-margin expansion. The table's 3Q26E and 4Q26E gross-margin forecasts of 69.7% and 69.2%, respectively, also reflect this view. R&D investment is expected to remain broadly stable, and the company does not intend to streamline studios on a large scale, although it hopes to continue improving efficiency through AI development tools. General and administrative expenses normalized in 2Q26 after being unusually low in 1Q26 due to one-off personnel changes, and are expected to remain below the prior-year level in 2H26. Selling and marketing expenses are expected to remain broadly stable, with an expense ratio of approximately 13% of revenue, and the company will not forgo growth opportunities solely to reduce marketing spending. The near-term value of AI lies first in existing production processes rather than in immediately contributing large AI-native products. Current applications include optimizing internal workflows, improving developer productivity, and helping teams understand user behavior. Management also believes AI can extend the lifecycle of existing game IP by continuously improving content and experiences. NetEase has experimented with several smaller AI-native game projects, but they will require time to mature. The long-term vision is to dynamically adjust content based on player preferences—for example, providing more PvP content within the same game to players who prefer PvP—thereby delivering a more personalized experience. The 2Q26 investment loss was mainly related to holdings in PDD and Alibaba, as well as impairment charges on primary-market investments in game studios and gaming companies made during the pandemic. The PDD data uses actual figures from NetEase's 13F filing. Management emphasized that NetEase is not an investment company, will not adopt a more aggressive investment strategy, and has no plans to increase its PDD holdings further. This indicates that the company does not regard equity investment as a new growth pillar, although the relevant holdings and impairment charges on historical investments may continue to cause fluctuations in non-operating profit. Goldman Sachs forecasts that NetEase's revenue will increase from RMB112,626 million in 2025 to RMB118,849 million in 2026E, RMB126,062 million in 2027E, and RMB135,384 million in 2028E, representing growth of 6%, 6%, and 7%, respectively. Online game revenue is forecast at RMB95,767 million in 2026E, up 7% year over year, including RMB62,520 million from mobile games, up 5%, and RMB33,247 million from PC games, up 10%. Goldman Sachs uses a sum-of-the-parts valuation to derive 12-month target prices of US$168 for NTES and HK$263 for 9999.HK, representing upside of 31.1% and 30.2%, respectively, relative to the reference prices of $128.17 and HK$202.00. The downside risks explicitly identified in the report include weaker performance from legacy games, slower-than-expected commercialization ramp-up of new games, intensifying competition in gaming, e-commerce, education, and other businesses, and rising music-content costs and online-education advertising expenditures.

Analysis framework

The report first uses the August 21 management meeting to outline the company's views on IP development and key new products, and then analyzes why NetEase is shifting the focus of overseas growth toward China-based R&D and global publishing. It subsequently explains the changes in 2Q26 margins and their sustainability through product mix, channel costs, and various operating expenses, and assesses the role of AI in existing R&D processes and future personalized gaming. Finally, the report traces the sources of the 2Q26 investment loss, incorporates financial forecasts for 2026–2028, and uses a sum-of-the-parts valuation to derive 12-month target prices.

Methodology notes

• Valuation MethodSOTP Valuation

  12-month target price based on sum-of-the-parts valuation

  Goldman Sachs separately assesses the value of NetEase's different businesses and aggregates them into the company's overall value, deriving 12-month target prices of US$168 for NTES and HK$263 for 9999.HK.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Analysis of gross-margin drivers and sustainability

  The report attributes the improvement in 2Q26 gross margin to product-mix optimization and lower channel costs. Together with the view that the main cost-reduction measures have already been implemented and that room for further improvement is limited, it distinguishes realized margin gains from the scope for sustainable future improvement.

• Competitive and Strategic FrameworkProduct life cycle

  Long-term IP operations and game lifecycle management

  NetEase uses the long-term operation of game IP as a development principle and extends the lifecycle of existing IP through continuous content investment, user-experience improvements, and AI tools while also developing new IP for the future.

• Company Fundamentals and Financial Framework

  Attribution of investment losses based on 13F filings and investment impairments

  The report uses actual PDD holding data from NetEase's 13F filing and combines it with Alibaba holdings and impairment charges on primary-market gaming investments made during the pandemic to explain the main sources of the 2Q26 investment loss.

Asset mapping & comparison

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

• NetEase Inc. ADR (NTES)

  NetEase's ADR traded in the U.S. market; the report assigns it a Buy rating and a 12-month target price of US$168.

  Strengths

  Long-term game IP operating capabilities, the ability of China-based R&D teams to develop products for global markets, and strong execution in channel costs and margins.

  Weaknesses

  Growing difficulty in developing new IP, mixed initial feedback on Sea of Remnants, and limited room for further gross-margin expansion.

  Comparison

  Represents the same company as 9999.HK; the report applies the same Buy view to both securities but sets separate target prices in U.S. dollars and Hong Kong dollars.

  Risks

  Weakening legacy games, underperformance in new-game commercialization, intensifying competition, and rising content and advertising costs.

• NetEase Inc. H-share (9999.HK)

  NetEase's H-share traded in the Hong Kong, China market; the report assigns it a Buy rating and a 12-month target price of HK$263.

  Strengths

  Long-term game IP operating capabilities, the ability of China-based R&D teams to develop products for global markets, and strong execution in channel costs and margins.

  Weaknesses

  Growing difficulty in developing new IP, mixed initial feedback on Sea of Remnants, and limited room for further gross-margin expansion.

  Comparison

  Represents the same company as the NTES ADR; the report applies the same Buy view to both securities but sets separate target prices in Hong Kong dollars and U.S. dollars.

  Risks

  Weakening legacy games, underperformance in new-game commercialization, intensifying competition, and rising content and advertising costs.

Key data

• Management investor meetingAugust 21Discussion of the game pipeline, overseas growth, margins and expenses, AI applications, and 2Q26 investment losses
• NTES 12-month target priceUS$168Reference price of $128.17, implying 31.1% upside
• 9999.HK 12-month target priceHK$263Reference price of HK$202.00, implying 30.2% upside
• 2Q26 gross margin70.5%69.4% in 1Q26 and 64.7% in 2Q25; 3Q26E and 4Q26E are forecast at 69.7% and 69.2%, respectively
• Selling and marketing expense ratio outlookApproximately 13%Management expects expenses to remain broadly stable and will not sacrifice growth opportunities to reduce marketing expenses
• 2026E revenueRMB118,849 millionUp 6% year over year; RMB112,626 million in 2025
• 2027E revenueRMB126,062 millionUp 6% year over year
• 2028E revenueRMB135,384 millionUp 7% year over year
• 2026E online game revenueRMB95,767 millionUp 7% year over year
• 2026E mobile game revenueRMB62,520 millionUp 5% year over year
• 2026E PC game revenueRMB33,247 millionUp 10% year over year
• 2026E GAAP gross profitRMB82,821 millionRMB72,402 million in 2025

Impact & implications

The report believes the key to NetEase's future growth lies not in expanding the number of overseas studios, but in leveraging its China-based R&D teams to produce large games with global appeal and extending IP lifecycles through continuous content operations. Channel optimization significantly improved margins in 2Q26, but there is limited room for further gross-margin expansion, making the commercialization of new products, a higher overseas revenue contribution, and AI-driven R&D efficiency more important. The investment losses primarily reflect fluctuations in equity holdings and impairment charges on historical investments, and management does not intend to make a more aggressive investment strategy a direction for the company's development.

Risks

• The performance of legacy games may be weaker than expected.
• The commercialization ramp-up of new games may be slower than expected.
• Competition in gaming, e-commerce, education, and other business areas may intensify further.
• Music-content costs and advertising expenses related to the online-education business may rise.

What to watch

• Monitor the updates on Ananta to be announced at Gamescom 2026 next week and its progress in global development.
• Monitor whether content investment for core Sea of Remnants players and improved onboarding for new players can reverse the mixed initial feedback.
• Monitor subsequent test results for Under the Misty Sea and its as-yet-undetermined launch date.
• Monitor whether large games developed by China-based teams and published globally can gradually increase the overseas share of revenue.
• Monitor the gross-margin trend after the completion of the main channel optimizations, as well as the forecasts of 69.7% and 69.2% for 3Q26E and 4Q26E, respectively.
• Monitor whether general and administrative expenses can remain below the prior-year level in 2H26 and whether the selling and marketing expense ratio can remain at approximately 13%.
• Monitor improvements in R&D efficiency and existing IP lifecycles from AI tools, as well as the progress of small-scale AI-native game experiments.
• Monitor the impact of PDD and Alibaba holdings and impairment charges on historical gaming investments on future investment gains and losses.