Citi Upgrades NetEase, But What's Changed?

In a report published Tuesday, Citi analysts upgraded the rating on

from Neutral to Buy. The price target was raised from $131 to $170. The company has taken a significant step towards going mobile with the successful launch of the mobile version of "Fantasy Westward Journey." The analysts expressed their optimism regarding the company's mobile games strategy following the launch of the mobile version of the game, which also proves NetEase's commitment to quality in mobile. "We consider NetEase differentiates from other pure online games companies on (i) solid online games revenue growth in both client based and mobile and (ii) a portfolio of licensed games titles from Blizzard to be operated in China," the analysts said. The analysts expect the company to continue to drive revenue growth by developing quality games via its robust R&D capabilities. This should help offset the transition from PCs to mobile. According to the Citi report, "NetEase made meaningful progress in mobile in the past 12 months with the launch of self-developed games and licensed game

from Blizzard." The mobile version of "Fantasy Westward Journey" is expected to generation monthly gross billing of RMB 200 million for the company in April, which the analysts believe would prove to be an inflection point, with 30 percent of NetEase's total gaming revenue being contributed by mobile in 2Q15, as compared to 14 percent in 4Q14 and 20 percent in 1Q15. The company is also set to launch two well-known client-based game franchises in 2Q15. With the contribution from new titles as well as the strong performance of existing ones, the analysts expect client-based games to witness 15 percent year-on-year growth in 2015.