NetEase's quarterly report falls short of expectations, but the actual performance is better?

Despite NetEase's weak performance in the fourth quarter, which fell short of market expectations, JP Morgan believes that the company's actual operating performance is far better than what the reported figures suggest.

NetEase announced its fourth quarter financial report for 2025, with revenue growth of only 3% year-on-year and a net profit decline of 27% year-on-year, both below Bloomberg's consensus expectations of approximately 4% and 23%, which directly led to pressure on the stock price before the market opened, dropping 4% at the opening.

However, JP Morgan's research report pointed out that the strong cash flow from new games such as "Yan Yun Shi Liu Sheng" has already been reflected in contract liabilities, while non-recurring losses have masked the excellent performance of core operating profits.

In addition, with the launch of major new games such as "Forgotten Sea" and "Infinite", it is expected to drive a compound annual growth rate of 13% in game revenue from 2026 to 2027. JP Morgan maintains an "overweight" rating on NetEase, with a target price of HKD 295 (USD 190), based on an attractive valuation of 13 times the projected price-to-earnings ratio for 2026.

Real Cash Flow Far Exceeds Reported Revenue

The research report pointed out that the market's disappointment with NetEase's revenue mainly stems from the fact that Q4 online game revenue grew only 4% year-on-year and declined 7% quarter-on-quarter. This can easily be interpreted as weak growth.

For example, the rankings and cash flow of "Egg Party" and "Identity V" have both declined, but this is partly attributed to the seasonal factors of the summer vacation fading.

In addition, JP Morgan emphasized that the money has actually been received, but has not yet been recognized as revenue. The key indicator "contract liabilities" is similar to deferred revenue (game revenue that players have prepaid but has not yet been recognized), showing unexpectedly strong performance.

In Q4 2025, it surged 34% year-on-year, far exceeding the 25% in Q3, and even achieved a 5% quarter-on-quarter growth during the typically off-peak Q4. This stands in stark contrast to the declines of 6% and 2% in Q4 of 2023 and 2024, respectively.

The driving force behind this is the strong cash flow performance of "Yan Yun Shi Liu Sheng" in both domestic and international markets. JP Morgan estimates that NetEase's actual cash flow in Q4 grew by 10% year-on-year.

Considering the high base effect brought by Activision Blizzard's revenue in China during the same period in 2024, this double-digit growth is indeed remarkable.

The Illusion of "Plummeting" Profits, Investment Losses to Blame

The net profit declined by 27% year-on-year, which is 23% lower than Bloomberg's consensus expectations, and this figure is indeed alarming. However, this is not due to problems with NetEase's business, but rather because of investment losses on paper.

JP Morgan pointed out that in Q4, NetEase recognized equity investment and exchange losses of up to RMB 2.2 billion (including equity investment losses of RMB 1.7 billion), while the same period last year saw a gain of RMB 1 billion. This inflow and outflow directly pulled down the net profit performance.

Excluding these non-recurring items, NetEase's core earning ability remains robust:

• Operating profit actually grew by 5% year-on-year
• Operating profit margin increased by 0.6 percentage points year-on-year and significantly increased by 1.8 percentage points quarter-on-quarter.
• Sales and marketing expense ratio decreased by 1.6 percentage points quarter-on-quarter, proving that the company is very rational and efficient in customer acquisition through buying traffic.

In simple terms, the company's main business has not only not worsened but has become more profitable due to more reasonable cost control.

13 times PE is extremely cheap, two major new games scheduled for 2026

JP Morgan believes that the market's concerns about Nio are overstated, with the current 2026 price-to-earnings ratio at only 13 times, lower than major gaming listed companies in the A-share market, providing a very high margin of safety.

At the same time, analysts are increasingly optimistic about Nio's game reserves for 2026.

Analysts expect "Infinity" to launch in the third quarter of 2026, likely becoming Nio's highest-grossing game, with expected revenue of 12 billion RMB in the first 12 months, about half of "Genshin Impact" during the same period.

Another highly anticipated game, "Sea of the Forgotten" (ocean adventure RPG), is expected to launch in the first half of 2026, with annual revenue expected to reach 5 billion RMB.

In addition, Nio has fully integrated artificial intelligence into the game development cycle. From art design to programming, animation, and quality assurance, it has strengthened high output and scalable production capabilities, and can smoothly launch dynamic AI-native game features across multiple flagship games.

Most importantly, Nio may be included in the Hong Kong Stock Connect in 2026. JP Morgan believes that Nio may qualify for inclusion in the Hong Kong Stock Connect in 2026, which will bring liquidity support from southbound funds and trigger further valuation adjustments.