NetEase Reports Solid Earnings; Breakup With Blizzard Has Negligible Impact; Shares Very Undervalued

We retain our fair value estimate of USD 139 (HKD 216) for narrow-moat NetEase after it reported third-quarter earnings. While regulatory approvals remain a constraint to near-term growth, we continue to see long-term revenue opportunities outside China. As for the reported breakup with Blizzard Entertainment, we believe the two will eventually reach a deal to keep Blizzard's games live in China, but a re-engagement might only happen after Microsoft's takeover of Activision Blizzard. Blizzard's games only contribute about 2% of NetEase's earnings, so we think the market could have overreacted to the headlines. We view NetEase's shares as undervalued, trading at 50% discount to our fair value. We would treat volatility in the stock as an opportunistic entry point.