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NetEase (NTES US) - Blizzcon 2019 – By three they come

作者: Matt MA,Leo LIU,Calvin NG
时间: 2019年11月08日
重要性: 一般报告
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摘要: Report title:NetEase (NTES US) - Blizzcon 2019 – By three they come
Analyst:Matt MA,Leo LIU,Calvin NG
Report type:Company
Date:20191108
[Summary]

■ Blizzcon 2019 revealed 3 key titles, Diablo 4 (D4) stole the show
■ D4 not likely to get approval in China, but Diablo Immortal does
■ Maintain BUY, and TP of US$295 is under review
What happened? On Nov 1, Activision Blizzard (ATVI US; NR) revealed on BlizzCon 2019 about three major upcoming titles from its global hit franchises, Diablo 4, Overwatch 2 and World of Warcraft: Shadowlands. D4 stole the spotlights after showing off its cinematic and gameplay trailer, which depicted a darker, grimier, and more horrifying game universe as a tribute to D2. The franchise began its legacy in 1996. With its hack and slash playing style and dopamine inducing loots, Diablo became an all time fan favourite ARPG franchise. IGN even named D3, which sold 30mn+ copies (as of 2015) as one of Top10 best selling games of all time. Its sequal (D4) not only returned to the franchise’s dark tonality, but also added a few key features including open world, shared group quests, skill ranks and talent trees. Currently, there is no clear time for D4’s release. But looking back at Blizzard’s customary delays, D4 should be released at least after 2021.
Our view: We believe it should be difficult for D4 to bring meaningful impact on NTES’s game rev in the foreseeable future, given: 1) D4’s distant release date; and 2) high chance of not getting the approval from SAPPRFT due to its violent contents filled with blood and gore. On the other hand, the NTES Blizzard co-developed Diablo Immortal (DI) should bring material impact to NTES sooner given: 1) As franchise’s first mobile title, it could become a blockbuster leveraging on NTES’s deep understanding of China’s mobile RPG gamers; 2) high quality gameplay which shares many similar new features with D4; 3) higher chance of getting the approval based on NTES’s understanding of government regulations. According to a recent open letter from Blizzard, DI is still under development, and doesn’t have a finalized monetization method at current stage. Therefore we believe DI is not likely to be released in 2020. Based on our estimation, in 2016/17/18E/19E, Blizzard has contributed RMB4.2bn/3.5bn/3.4bn/3.2bn of revenue respectively to NTES, accounting for 15.0%/9.6%/8.5%/7.1% of Company’s online game revenues. The decreasing Blizzard contribution was mainly due to its natural user churn from lack of new titles since 2016, which should recover significantly once DI is released.
Wait for future catalyst; Maintain BUY; TP of US$295 is under review
In the ST, we think most of NTES’s recent positive catalysts (Kaola deconsolidation, Cloud Music fund raising, Youdao’s IPO) have been priced in. As FWJ 3D received the game license on Nov 4, more details on Company’s pipeline should be clarified during Nov 21 earnings call. In the LT, we still prefer NetEase for its top notch game developing capability in China, as well as its overseas revenue growth, especially from Japanese market. We maintain BUY, our TP of US$295 is under review. Our TP implies 21x FY19E P/E. Co. is currently trading at 21x FY19E P/E.

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