上调至确信推荐评级并纳入确信推荐名单；上调目标价60%至345美元。

评级调整主要原因：1）手游市场表现大幅超出预期：尽管第三方机构2016年初预期的手游市场增速为同比+30~40%（易观智库：+18%；艾瑞咨询：+60%），根据2016上半年腾讯及网易已发布的财报数据显示，其手游收入分别同比大增100%/306%，合并收入总计达260亿元，已经超过了2015上半年全行业总收入的210亿元；2）网易推出的新手游《阴阳师》在发布两周后即进入iOS收入排行榜前五，更于一个月后夺得榜首，且在海外发行取得优异成绩。该游戏作为首款非端游IP下的爆款，充分证明了网易优异研发能力、发行能力，仍将持续支撑其手游业务的蓬勃发展。

我们与市场最大的差异：1）我们预计手游市场的实际规模或将超出市场预期，并且手游市场的集中度将进一步提升，超越端游市场。我们预计2018年手游市场收入规模将达到1670亿元，2020年达到2420亿元（vs. 今年为910亿元），其中腾讯和网易将占据最大的市场份额；2）考虑到网易对单款游戏的依赖风险在过去6个月里大幅下降，且随着阴阳师的成功、其研发及发行能力得以证明，有望实现市盈率重估。此外，我们预计继《阴阳师》的火爆之后，多款自研新游（战意、镇魔曲、大唐等）、守望先锋、Minecraft等将带来更多惊喜，从而带动市场预期提升。我们现在预计2017年每股盈利预测17.2美元，高于彭博一致预期的14.7美元。

其他潜在催化剂包括：1）海外扩张，如《阴阳师》《率土之滨》；2）非核心业务的价值释放，如新闻、电商和有道等工具类产品的潜在融资或独立上市，或将提高公司整体估值；3）充足现金令网易在运营上具备充分灵活性，包括但不限于：回购股份、提升派息率等，均将对股价形成利好。另外，公司创始人及CEO丁磊持有网易44%股份，过去几年间从未售出，与股东利益高度一致。

上调目标价至345美元（对应上行空间36%），新目标价对应20倍2017年市盈率（剔除现金价值后为17倍）。比较目前国际主流游戏研发公司，艺电的2017年市盈率为20倍（13%净利润增长），暴雪2017市盈率20倍（14%的净利润增长）。而网易2017年收入和净利润预计分别增长28%和22%。目前市场一致预期较低，预计未来有望逐渐提升、且在未来12个月内实现价值重估。

一元夺宝将面临潜在的政策监管风险。

Market constantly beats estimates and to continue doing so

At end-2013, iResearch estimated the size of the mobile games market would reach Rmb20.92bn in 2014; the actual number was much higher at Rmb27.6bn.

In 2014, iResearch forecast that 2015 revenue would be Rmb41bn, but it again outpaced estimates, actually rising 103.7% YoY to Rmb56bn. According to GPC IDC and CNG data, total actual sales in the Chinese mobile market rose 87.2% YoY to Rmb51.4bn. The market has surprised several times, and we expect its rapid growth to last for some time.

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We expect the mobile game industry’s revenue to reach Rmb167bn in 2018e, assuming:

• China’s population grows 0.5% p.a. over 2016~18, to reach 1.395bn in 2018e.

• The number of mobile internet users increases to 780mn in 2018, 55.9% of the total population and 97.5% of internet users (vs. 45.1% and 90.1% in 2015).

• The number of mobile game players rises to 515.1mn in 2018, 66% of mobile internet users (vs. 62.1% in 2015).

• Monthly mobile-game ARPU grows to Rmb27 in 2018, reaching 75% that of client-based games (vs. 30% in 2015).

   

  
  

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We expect the mobile-game industry’s concentration ratio to be higher than that of PC. 

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Globalization: next growth engine for Chinese CPs

To generate 2x~3x revenue from overseas mobile game market

As the local market has been carved up by big players, local CPs are seeking growth opportunities in overseas markets, where they will have less competition. On October 3, NetEase announced it would roll out the Chinese version of Onmyoji in foreign countries’ app stores, including the US, Canada, the UK and Australia. 

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NetEase: to benefit from industry trends and solid governance

EPS undervalued: current Bloomberg Consensus estimates non-GAAP EPS to be US$14.7 in 2017 vs. our estimate of US$17.2.  

Rerating to be expected 

Compared to EA and Blizzard, NetEase has much higher revenue and profit growth, better position in mobile, and pays out more dividends (EA does not pay dividends; ATVI pays out 20%, vs. NTES 25%). However, NTES is trading at a discount in terms of forward P/E, we believe the gap will gradually disappear as NTES has repeatedly proved its R&D capability in the game industry, as well as its publishing ability in global markets.

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Valuation and recommendation

TP of $345 under SOTP-based valuation

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P/E ratio and valuation of global peers

We now forecast NetEase’s revenue will grow 68%/28%/24% in 2016/17/18, with non-GAAP net income growing 68%/22%/20%. Our TP represents 20x 2017 PER (17x ex-cash). 

Bloomberg consensus has EA’s net profit growing 13% in 2017, while it is trading at 21x 2017 PER; and the same source has ATVI net profit growing 10% in 2017 while it is trading at 20x 2017 PER. Thus, we believe NetEase deserves to be rerated to at least the level of EA and ATVI, given its repeated success in hit games and stronger layout in mobile. 

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