NetEase on track for solid third-quarter earnings growth

NetEase, China’s second-largest online and mobile video game services provider, is poised to report solid year-on-year earnings growth for the quarter to September 30 on the back of strong performance of its desktop games, analysts said.

The Nasdaq-listed company, which will report its third-quarter financial results on Wednesday in the United States after the close of trading, is expected to post a 37 per cent increase in net profit to 2.58 billion yuan (HK$2.96 billion), up from 1.88 billion yuan in the same period last year, according to a report by Nomura.

That was in line with market analysts’ consensus estimate of 2.57 billion yuan.

Nomura also projected total third-quarter revenue for NetEase to rise 39 per cent to 9.30 billion yuan from 6.67 billion yuan a year earlier.

Its revenue forecast was below the market consensus estimate of 9.66 billion yuan.

“Personal computer gaming revenue likely rose 19 per cent year on year and 15 per cent quarter on quarter, driven by Overwatch and the launch of World of Warcraft’s expansion pack in August,” research analyst Shi Jialong, lead author of the Nomura report, said.

NetEase chief executive William Ding Lei said in August that multiple-player first-person shooter game Overwatch, which the company licensed from US developer Blizzard Entertainment, sold nearly 3 million copies by the end of June.

“It surpassed the sales record established last year by Blizzard Entertainment’s Diablo III: Reaper of Souls in the category of buy-to-play PC-client games in China,” Ding said.

In September, Blizzard and NetEase jointly announced the extension of their collaboration in mainland China to January 2020.

The two companies started working together in 2008, with a license agreement to bring Blizzard’s StarCraft II and Battle.net platform to the mainland. Their renewed agreement includes Blizzard’s World of Warcraft, StarCraft II, Diablo III, Hearthstone, Heroes of the Storm and Overwatch, as well as new content for these games during the agreement period.

On mobile games, Nomura’s Shi predicted mobile gaming revenue for NetEase to have advanced 39 per cent year on year, but decreased 3 per cent quarter on quarter.

“The quarter on quarter decline in mobile gaming revenue was likely caused by a shift of focus from monetisation to user growth for the [company’s] two legacy titles, Fantasy Westward Journey and Westward Journey II,” Shi said.

That would mean keeping the prices of those mobile games competitive in the market, as the company further develops successful new mobile titles like the anime-style Onmyoji and New Ghost.

Market research firm Newzoo has forecast China’s total games market this year to reach US$24.4 billion, 56 per cent of which are revenue from online desktop titles, 41 per cent from mobile, and 3 per cent from boxed personal computer and console games.

Nomura rates NetEase shares a “buy”, with a target price of US$315. NetEase’s share price was unchanged at US$243.43 at the close of trading in the US on Friday.