With Few Catalysts, NetEase Shares May Languish Near Term

Jefferies on Tuesday downgraded shares of NetEase Inc (ADR) NTES, as it sees near-term earnings risk while waiting for the next big thing.

As such, Jefferies downgraded shares of NetEase from Buy to Hold and lowered its price target from $330 to $290.

At the time of writing, NetEase shares were adding 2.45 percent to $273.12.

Analysts Karen Chan and Ani Tu said lackluster existing game performance coupled with a lack of offsetting new hits is hurting the company. Based on channel checks, the analysts noted that average monthly grossing for "FWJ," "WJ" and "Ghost" remained largely stable, while that for "Onmyoji" fell.

The analysts believe that the company's third-quarter mobile game revenue would come under pressure due to a lack of offsetting hits, with the metric expected to dip 20 percent sequentially.

That said, the analysts said the launch of the "Onmyogi"' anniversary version on Sept. 28 helped the company regain the fourth spot in terms of current gross revenue ranking.

Jefferies does not expect meaningful revenue contribution from mobile "Minecraft" until at least next year, given that the iOS version was launched on Sept. 14 and that the Android version is due to be launched Oct. 12.

"The MOBA version of Onmyoji, currently in closed beta testing, is targeted to launch by YE17, which may potentially see a longer lifecycle than its original card game version, in our view," the firm said.

Accordingly, the firm lowered its fiscal year third quarter and 2017 revenue estimates by 6 percent and 2 percent, respectively. The firm also trimmed its earnings per share estimates for the said period by 10 percent and 3 percent, reflecting a sequential decline in mobile game and margin suppression from continued sales and marketing spending and revenue mix change.

The firm said it now estimates third-quarter revenues of 12.2 billion yuan, 4 percent below consensus estimates, and non-GAAP earnings of 2.7 billion yuan, 10 percent below consensus. The firm's 2017 and 2018 earnings and revenues estimates are also below consensus estimates.