Jefferies Initiates Netease with A Hold Rating Amid Company Transition

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With the worst margin contraction likely behind NetEase Inc (ADR) NTES, driven by improving e-commerce profitability, Jefferies’ Karen Chan believes the stock is fairly valued at present.

Chan initiated coverage of the company with a Hold rating and price target of $245.

“As the company transitions into a more stable growth stage, we see more attractive risk/reward opportunities in other China Internet segments,” the analyst mentioned.

Mobile Game Leader

Chan expects NetEase to continue to be one of the mobile game leaders in China, with robust performances by its recently released titles, A Chinese Ghost Story and Onmyoji.

However, the failure to replicate the success of Fantasy Westward Journey (FWJ), given the more competitive mobile RPG environment, the analyst expects mobile game growth to slow to 28 percent in FY17 from 115 percent in FY16.

Robust China Growth

At the same time, Chan expects “solid growth in China’s mobile game market driven by increasing game time, paying user ratio and ARPU.”

The analyst believes that following the increased marketing and R&D costs in 2015 and H1:16, and NetEase and Tencent taking 57 percent market share, IP and eSports would be key to prolonging the lifetime value of a game.

In fact, Chan stated that the “remarkable success of FWJ and Westward Journey Online (WJ) testifies to Netease’s strong IP conversion capability.”

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Posted In: Analyst ColorInitiationAnalyst RatingsJefferiesKaren Chan
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