NetEase Earnings: Leveling Up in Shareholder Returns Eclipse Slight Revenue Miss

Even though fourth-quarter earnings were slightly below our estimates, NetEase's enhanced commitment to capital returns reflects improving corporate governance. Our confidence in NetEase remains unshaken, as management again demonstrated unwavering dedication and patience in crafting next-generation games. This commitment should translate to continued outperformance, cementing it as our top selection in the interactive media space. We fine-tune our near-term estimates, roll forward our model, and lift NetEase’s fair value estimate by 5% to $158 per ADR (HKD 246 per H-share). Reflecting on the words from NetEase's management about the regulatory climate in China, it seems prudent to dial back NetEase’s Morningstar Uncertainty Rating to High from Very High, aligning with its status before the unsettling regulatory draft in December 2023. The firm's shares remain undervalued, trading at a 30% discount to our valuation, and we would treat any weakness in the stock as an opportunistic entry point.