Morgan Stanley issued a report on NetEase (NTES.US) , downgrading the rating of its US-listed shares (ADRs) from Overweight to Equalweight and trimming the target price from US$120 to US$100. The broker lowered its EPS forecast for the stock from 2024 to 2026 by 6-12%, while forecasting game revenue and net profit to rise by 6-7% YoY this year and next year.
The broker removed NetEase from its top picks list in April because of a number of risks. Among them were the weakening of China's macro-economy, which could lead to a shift in consumption towards higher price-performance ratio items such as casual games and minigames, as well as potential regulatory tightenings that may limit player spending and some monetisation initiatives.
NetEase has an estimated market share of about 50% for massively multiplayer online role-playing games (MMORPGs), which have the highest average revenue per user. However, the market share of minigames is increasing in China, and the potential for future NetEase game revenues may be discounted.
Morgan Stanley also pointed out that NetEase may face a decline in the return on its invested capital in the future, including the low-priced cosmetics at "Justice Mobile" and "Condor Heroes", the RMB10 billion subsidy for "Justice Mobile" and "Eggy Party", and the adjustment of the monetisation model of "Fantasy Westward Journey" on PC.
Furthermore, in response to Tencent's "Dream Star", NetEase's sales and marketing costs soared in 4Q23, a situation that could be repeated when competition rekindles between "Naraka Bladepoint Mobile" by NetEase and "Honor of Kings: Breaking Dawn" by Tencent in the coming Summer. The separate launches of mobile and PC versions of " Where Winds Meet" also affected the market's expectations for the game's grossing stream.
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