NetEase Shares Win Upgrade Following 16% Pullback

Jefferies’ Karen Chan believes a more favorable risk/reward profile is emerging for NetEase Inc (ADR) NTES, following the pullback in the stock of 16 percent from its recent peak.

Chan upgraded the rating on the company from Hold to Buy, with a price target of $261.

The analyst explained that the share price decline was driven by the Q3 2016 miss with respect to mobile game and ecommerce revenue.

The stock is currently trading at a 7 percent discount to its global online game peers.

However, Chan pointed out that the “defensive nature of game business, the recently announced USD1bn share repurchase program and stable dividend payout ratio of 25 percent should provide share price support.”

2017 Pipeline

In addition, the analyst believes that overseas expansion and the game pipeline for 2017 would prove to be near-term catalysts for NetEase.

“As old mobile hits (FWJ and WJ) reach maturity, Onmyoji surpassed FWJ and Pokemon GO as No.1 iOS game by grossing in both China and worldwide in October,” Chan stated.

With robust initial traction of Onmyoji in the international markets, NetEase is likely to also launch the game in Japan, as early as Q1:17. In fact, the company is expected to announce a full mobile game pipeline for 2017 during its annual games award event in late December.

Chan also expects robust sequential recovery in mobile game in Q4 2016.