NetEase’s fourth quarter report missed expectations, but did it actually perform better?

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Although NetEase's fourth quarter performance was weak and below market expectations, JPMorgan believes the company's actual operating performance is much better than what the headline figures suggest.

NetEase announced its 2025 fourth quarter financial report, with revenue up only 3% year-on-year and net profit down 27% year-on-year, both falling short of Bloomberg’s consensus by approximately 4% and 23%, respectively. This directly weighed on Hong Kong stock prices before the market opened, with shares falling 4% at the opening.

However, JPMorgan pointed out in its research report that strong cash flow from new games such as "Sixteen Voices of Yan Yun" is already reflected in contract liabilities, while non-recurring losses obscure the outstanding performance of core operating profit.

In addition, with the launch of major new games like "Sea of Oblivion" and "Infinity," game revenue is expected to achieve a 13% annual compound growth rate in 2026–2027. JPMorgan maintains its "Overweight" rating for NetEase, with a target price of HK$295 (US$190), pointing out that the 2026 forecast PE of 13 times is attractive.

Actual Cash Flow Far Exceeds Reported Revenue

The research report points out that the market’s disappointment with NetEase's revenue mainly stems from Q4 online game revenue growing only 4% year-on-year, and falling 7% sequentially. This is easily interpreted as a lack of growth.

For example, rankings and revenue for "Egg Party" and "Identity V" both declined, partly due to the dissipating effect of summer vacation seasonality.

Furthermore, JPMorgan emphasizes that the money has already been received, but has not yet been recognized as revenue. The key metric "contract liabilities"—similar to deferred revenue (game payments by players not yet recognized as income)—showed unexpectedly strong performance.

In the fourth quarter of 2025, contract liabilities surged 34% year-on-year, far above the 25% in the third quarter, and even grew 5% quarter-over-quarter during a typically weak season. This stands in sharp contrast to the 6% and 2% declines in Q4 2023 and 2024, respectively.

The driving force is the strong cash flow performance of "Sixteen Voices of Yan Yun" in both domestic and overseas markets. JPMorgan estimates that NetEase's actual Q4 cash flow grew 10% year-on-year.

Considering the high base effect of Activision Blizzard’s China revenue in the same period of 2024, this double-digit growth is truly remarkable.

"Plunging" Profit Is an Illusion—Investment Losses to Blame

Net profit fell 27% year-on-year, 23% below Bloomberg’s consensus—an alarming figure. But this is not due to issues with NetEase's business, but rather investment-related book losses.

JPMorgan notes that NetEase reported up to RMB 2.2 billion in equity investment and FX losses in Q4 (of which RMB 1.7 billion was equity investment losses), while the same period last year saw a profit of RMB 1 billion. This swing directly dragged down net profit performance.

Stripping out these non-recurring items, NetEase’s core earning power remains solid:

Operating profit actually grew 5% year-on-year.Operating margin increased by 0.6 percentage points year-on-year, and surged by 1.8 percentage points quarter-on-quarter.Sales and marketing expense ratio dropped 1.6 percentage points quarter-on-quarter, proving the company is rational and efficient in acquiring new users.

Simply put, the company's main business not only hasn’t deteriorated but has become more profitable due to more reasonable cost controls.

13x PE Is Extremely Cheap—Two Major Games Launch in 2026

JPMorgan believes market worries about NetEase are overdone. Currently, its 2026 PE ratio is only 13x, lower than major A-share listed game companies, offering a very high margin of safety.

Meanwhile, analysts are increasingly optimistic about NetEase’s 2026 game pipeline.

Analysts predict "Infinity" will launch in Q3 2026 and is expected to become NetEase's highest revenue game, with expected first-year revenue reaching RMB 12 billion, about half that of "Genshin Impact" during the same period.

Another highly anticipated title, "Sea of Oblivion" (an ocean adventure RPG), is expected to launch in the first half of 2026, with annual revenue expected to be RMB 5 billion.

In addition, NetEase has fully integrated AI into its game development cycle. From art design to programming, animation, and quality assurance, this enhances high output and scalable production capability, and enables dynamic AI-native game features to be rolled out across multiple flagship games.

Most importantly, NetEase may be included in Stock Connect in 2026. JPMorgan believes NetEase may qualify for inclusion in Stock Connect in 2026, bringing southbound capital liquidity support and potentially triggering further valuation upgrades.

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