BDA-網(wǎng)易深度研究與價值評估跟蹤Tracking-20160130

BDA4Q15NetEaseTrackingJan30,2015ForTigerGlobalInternalUseOnly?BDA2016TableofContentsExecutiveSummaryGamingBusinessE-commerceBusinessAdsandOtherBusinessFinancialForecastUpdateNetEase’sFWJandWJOMobilemaintainedstrongperformancewhilenewgameswerelackluster;KaolaGMVgrewrapidlyandwilllosemorein2016duetomoremarketingGaming:newlylaunchedgamesandpipelinegamesarelesspromisingIn3Qreport,weforecastedthatmobilegamesmarketwouldgrowfasterinthenextfewyears.Recentmarketstatisticssuggestedthemobilegamesmarketin2015wasevenlargerthanweexpected.Webelievethegrowthmomentumwillcontinueforyearsthuswefurtherupwardlyadjustedthemobilegamesmarketsizingforthenextfewyears.FWJandWJOmobilekeptgeneratingstrongbillingsin4Q.However,NetEase’snewlylaunchedgameswerenotperformingverywell.KungFuPanda,whichwasaseriesgamewithhighexpectations,recordedhighestmonthlygrossbillingsofonlyUSD6MNin4Q.AcarefulexaminationofNetEase’spipelinegamesin2016findsthatonlyonegamemaygotoiOSgrossbillingrankingtop10,andthegrossbillingsshouldbearoundUSD20-30MNinpeakmonth.PCgameswereslidingfasterthanweexpected.E-commerceMajorplatforms’cross-bordere-commerceGMVreachedRMB11BNin4Q15,andKaolatookaround9%ofmarketshare(vs.~10%in3Q);TmallandAmazondidbetterin4Qthanksto11/11andBlackFriday.Cross-bordere-commercesizewillcontinuegrowingin2016withmorebondedwarehouseinmoretrialcities.Thecomingtaxadjustment’simpactshouldbelimited.Kaolamaintaineditspricinglevelin4Q15,andfurtherdiversifieditsproductmix.In2016,KaolaplanstoinvestmoreinmarketingtoacquiretrafficoutsideofNetEase,andwethusprojectaUSD~170MNlossfromKaolain2016.OtherBusinessWeraisedNetEase’sadsrevenueforecasttoreflecttheirintroductionofCPCadvertisingandprogrammaticadssupplyplatform.Thoughwidelyspeculated,theofficialrestartofonlinelotterysellingin2016isunlikelyduetotheconflictsofinterestsbetweenwelfarelotterydepartmentandsportslotterydepartment.FinancialForecastUpdateInourlatestmodel,NetEaseenjoyshighermobilegamesrevenueinthenextfewyears.Butweslightlyreviseddownthee-commercerevenue.Theenlargedlossfrome-commercebusinesswillmakeNetEase’sneartermreturnlessattractive.3TableofContentsExecutiveSummaryGamingBusinessE-commerceBusinessAdsandOtherBusinessFinancialForecastUpdateWeadjustedourforecastofmobilegamingmarketsizeupwardwhereasloweredtheexpectationofPCclient-basedgamingmarket520152016F2023F5.87.07.29.218.321.4+16%+28%+23%PreviousForecastNewForecastYoY16/15CAGR(15-23)3Q15Forecast24%16%4Q15Forecast30%15%20152016F2023F8.78.48.78.36.56.1-6%-5%-4%PreviousForecastNewForecastYoY16/15CAGR(15-23)3Q15Forecast0%-4%4Q15Forecast-1%-4%MarketSizeofMobileGameinChinaMarketSizeofClient-basedGameinChinaUnit:USDBNUnit:USDBNSource:GPC,IDC,CNG,BDAforecastAccordingtherecentlyreleasedGPCreportandmajorplayers’mobilegamesperformance,themarketsizeofmobilegamein2015wasmuchlargerthanexpected.Wealsobelievethemobilegamingmarketwillhaveastrongermomentumintheshortterm,andthereforeadjustthegrowthrateof2016upward.Weloweredthelong-termCAGRabitgiventhemuchhigherbasein2015.Forsimilarreasons,weareholdingamorepessimisticviewontheoutlookofclient-basedgamemarket,andhaverevisedourestimationdownwardaccordingly.GamesMarketIn4Q15,FWJandWJOremainedontopoftheiPhonegrossrankinglist,consistentwithourexpectation…6NetEaseTencentRankJan2015Feb2015Mar2015Apr2015May2015Jun2015Jul2015Aug2015Sep2015Oct2015Nov2015Dec20151WeFire(全民突擊)WeFire(全民突擊)WeFire(全民突擊)FWJ(夢幻西游)FWJ(夢幻西游)FWJ(夢幻西游)FWJ(夢幻西游)FWJ(夢幻西游)FWJ(夢幻西游)FWJ(夢幻西游)FWJ(夢幻西游)FWJ(夢幻西游)2TopofTanker(我叫MT2)TopofTanker(我叫MT2)Shenwu(神武)WeFire(全民突擊)WeFire(全民突擊)WeFire(全民突擊)WeFire(全民突擊)TheLegendofMir(熱血傳奇)TheLegendofMir(熱血傳奇)WestwardJourneyOnline(大話西游)WestwardJourneyOnline(大話西游)WestwardJourneyOnline(大話西游)3Shenwu(神武)Shenwu(神武)MU(全民奇跡)Shenwu(神武)Shenwu(神武)WeFly(全民飛機大戰(zhàn))TheJourneyofFlower(花千骨)TheKingofFighters98(拳皇98終極之戰(zhàn)OL)WestwardJourneyOnline(大話西游)TheLegendofMir(熱血傳奇)TheLegendofMir(熱血傳奇)TheLegendofMir(熱血傳奇)4MU(全民奇跡)BladeofThreeKingdoms(三國之刃)DotArena(刀塔傳奇)MU(全民奇跡)WeFly(全民飛機大戰(zhàn))MU(全民奇跡)Shenwu(神武)WeFly(全民飛機大戰(zhàn))TheKingofFighters98(拳皇98終極之戰(zhàn)OL)TheKingofFighters98(拳皇98終極之戰(zhàn)OL)SixDragon3D(六龍爭霸3D)TheKingofFighters98(拳皇98終極之戰(zhàn)OL)5WeFly(全民飛機大戰(zhàn))WeFly(全民飛機大戰(zhàn))TopofTanker(我叫MT2)WeFly(全民飛機大戰(zhàn))MU(全民奇跡)Shenwu(神武)MU(全民奇跡)WeFire(全民突擊)WeFly(全民飛機大戰(zhàn))WeFly(全民飛機大戰(zhàn))WeFly(全民飛機大戰(zhàn))SixDragon3D(六龍爭霸3D)6DotArena(刀塔傳奇)MU(全民奇跡)BladeofThreeKingdoms(三國之刃)DotArena(刀塔傳奇)DotArena(刀塔傳奇)DotArena(刀塔傳奇)WeFly(全民飛機大戰(zhàn))Anipop(開心消消樂)WeFire(全民突擊)WeFire(全民突擊)TheKingofFighters98(拳皇98終極之戰(zhàn)OL)HeroWars(王者榮耀)7BladeofThreeKingdoms(三國之刃)DotArena(刀塔傳奇)FWJ(夢幻西游)BladeofThreeKingdoms(三國之刃)LandlordPoker(歡樂斗地主)Anipop(開心消消樂)Anipop(開心消消樂)9LZ(九龍戰(zhàn))WeChatDash(天天酷跑)ClashofKings-CoKHeroWars(王者榮耀)WeFly(全民飛機大戰(zhàn))8WestArena(亂斗西游)WestArena(亂斗西游)WeFly(全民飛機大戰(zhàn))Craz3Match(天天愛消除)BladeofThreeKingdoms(三國之刃)WeChatDash(天天酷跑)Craz3Match(天天愛消除)TheJourneyofFlower(花千骨)Anipop(開心消消樂)ClashofClansClashofKings-CoKWeFire(全民突擊)9ThunderFighter(雷霆戰(zhàn)機)TaichiPanda(太極熊貓)Craz3Match(天天愛消除)WestArena(亂斗西游)Anipop(開心消消樂)TopofTanker(我叫MT2)TheKingofFighters98(拳皇98終極之戰(zhàn)OL)Cangqiongbian(蒼穹變)ClashofKings-CoKCangqiongbian(蒼穹變)WeFire(全民突擊)ClashofKings-CoK10ChinesePaladin(仙劍奇?zhèn)b傳官方手游)Craz3Match(天天愛消除)BoomBeach全民主公TimiLegend(天天傳奇)Craz3Match(天天愛消除)DotArena(刀塔傳奇)Shenwu(神武)WeMOBA(全民超神)Anipop(開心消消樂)ClashofClansCrossFire(穿越火線)Top10GamesiniPhoneGrossRanking,Jan2015-Dec2015Source:AppAnnieMobileGame4Q15...butweloweredtheestimateofNetEase’stotalmobilegamingrevenuein4Q15duetothemediocreperformanceofnewlylaunchedgames7OthersPreviousEstimateNewEstimateFWJWJO566561Unit:USDMNWeloweredtheestimateofNetEase’smobilegamingrevenuein4Q15……becausetheperformanceofgameslaunchedin4Q15wasunsatisfactoryGameReleaseDateHighestiOSDailyGrossingRanksCurrentiOSGrossRanks(2016/01/28)HighestMonthlyGrossBillings夢想星城2015/10/07107288<USD1MN軍師很忙2015/10/12229>1,000<USD1MN率土之濱2015/10/201925~USD6MN石頭給我滾2015/10/22>1,000>1,000<USD1MN時空之刃2015/11/0426357<USD5MN泡泡喵海島歷險2015/11/23>1,000>1,000<USD1MN功夫熊貓22015/11/1923116~USD6MNKungFuPandaIIfellbelowexpectationduetothebadtimingoflaunch.AsKungFuPandaIIIwaslaunchedjustonemonthlater,NetEasehesitatedaboutallocatingmarketingresourcestoKungFuPandaII.PlayersarealsoconfusedbydifferentgameswiththesameIP.Source:AppAnnie,BDAinterviewandanalysisMobileGame4Q15WeraisedourestimateofFWJ’sgrossbillingsin2016becausethe3Q15forecastofMAUseemedtooconservative84Q16Avg.3Q16Avg.2Q16Avg.1Q16Avg.11/1509/1507/1505/15NewEstimatePreviousEstimateForecastofFWJ’sGrossBillingsUnit:USDMN11/151Q16Avg.2Q16Avg.4Q16Avg.3Q16Avg.05/1507/1509/15PreviousEstimateNewEstimateMAU

(Unit:MN)PayingRatio

(Unit:%)11/1509/1507/1510%13%15%11%12%10%13%4Q16Avg.05/1514%12%12%3Q16Avg.14%13%13%1Q16Avg.2Q16Avg.13%13%14%Forecast09/1505/1507/153Q16Avg.11/154Q16Avg.2Q16Avg.1Q16Avg.MonthlyARPPU

(Unit:USD)ForecastSource:BDAforecastMobileGame2016WealsorevisedtheforecastofWJO’sgrossbillingsupwardbybenchmarkingFWJ’s91Q16Avg.2Q16Avg.3Q16Avg.4Q16Avg.12/1511/1510/1509/15NewEstimatePreviousEstimateForecastofWJO’sGrossBillingsUnit:USDMNWeestimateWJO’smonthlygrossbillingsbyapplyinghalfofFWJ’smonthlygrossbillingsatthesamestageoflifecycle.Source:BDAforecastMobileGame2016WeholdanunchangedviewthatonlyoneofNetEase’spipelinegamesin2016islikelytoenterthetop10listofiOSgrossbillingranking10Ghost(倩女幽魂)MMORPG

NetEase’PCGame2016Q2Top5-10;USD20-30MNKungFuPanda3(功夫熊貓3)ARPGMovie2016/01/08Top10-20;USD10-20MN天下x天下

(X-World)ARPGNetEase’PCGame2016/01/21Top20-50;USD~10MNWestwardJourney:Unrivaled(夢幻西游無雙版)Action

FWJ2016Q1Top20-50;USD~10MNLuxiaofeng(陸小鳳傳奇)RPGGuLong'snovel2016Q1Top20-50;USD~10MNRaven(掠奪者)ARPG

TopKoreanGame2016Q2Top20-50;USD~10MNAudition(勁舞團)Casual

PCGame2016Possiblytop20-30inshortterm;USD5-10MNRichman(大富翁9)Casual

PCGame2016Possiblytop20-30inshortterm;USD5-10MNLegendOfDaggerLee(小李飛刀)RPG

GuLong'snovel2016Q1Top50;USD~5MNHandsomeSiblingsOnline(絕代雙驕OL)RPG

GuLong'snovel2016Q1Top50;USD~5MNWestwardJourney:HotBlood(大話西游熱血版)ARPG

WJO2016Top50;USD~5MNHeroesofTangDynastyZero(大唐無雙·零)RPG

NetEase’PCGame2016Q2Top50;USD~5MNTravelnoteofTangDynasty(大唐游仙記)RPG

N/A2016Q2USD1-5MNTheace'ssword(三少爺?shù)膭?RPG

GuLong'snovel2016summerUSD1-5MNMushroomWars:SpaceWars(蘑菇戰(zhàn)爭：太空戰(zhàn)記)Casual

LicensedIP2016Q1USD<1MNDemoncurse(伏魔咒)ARPG

LicensedIP2016Q2USD<1MNZhanhun(斬魂)Action

PCIP20161HUSD<1MNInfiniteWar(無限戰(zhàn)爭)Strategy

N/A20161HUSD<1MNTheWild(代號”狂野”)N/A

MovieIPEndof2016USD<1MNYaodaogirlIbunroku(妖刀少女異聞錄)N/A

LicensedIP2016USD<1MNInfinite

magicbucket(無限幻斗)Action

N/A2016USD<1MNPhantomofthesoul(魂之幻影)Action

N/AN/AUSD<1MNEstimatedLaunchDateIPGameExpectediOSRankingandPeakMonthlyGrossBillingGenreSource:CompanyInformationandBDAAnalysisMobileGame2016Intotal,thenetrevenueofNetEase’smobilegamesisexpectedtogrowby110%in201611MobileGame2016FWJWJOOthers2016F-4QEstimate2,5422016F-3QEstimate2,3952015E1,21387Unit:USDMNNetRevenueofNetEase’sMobileGames(2015-2016)PreviousEstimateNewEstimateYoY16/1597%110%NetRevenueofNetEase’sMobileGames(1Q16-4Q16)4Q163Q162Q161Q16NewEst.PreviousEst.Unit:USDMNYoY(NewEstimate)659%272%66%-1%Source:BDAforecastWeloweredtheestimateofNetEase’sPCgamerevenueforboth4Q15and2016,mainlyduetoafasterdeclineofRevelation,DemonSealsandWJOPC12333Prev.Est.OthersWJO124FWJRevelationDemonSealsNewEst.318124Unit:USDMNForecastofNetEase’sPCGameRevenueReasonforAdjustmentClient-basedGameWJOFWJRevelationDemonSealsNewEst.1,230541234186166102Prev.Est.1,372541282174222153Others4Q15E2016FRevelation(天諭)：Revenueisdecliningfasterthanexpected.FWJPC(夢幻西游)：NetRevenuecontinuedtodeclineQoQin4Q15,butslowerthanexpected.Thusweadjustedthe2016forecastupward.“Revelationistoodifficultandcomplicatedformostplayers,somanyplayerschurned.”-IndustryexpertDemonSeals(鎮(zhèn)魔曲)：Revenueisdecliningfasterthanexpected.“Thegame’sperformancedidn’tmeetthemarketexpectation.IheardthattheR&DteamhadstartedtodevelopamobilegamewiththeIPDemonSeals.”-IndustryexpertWJOPC

(大話西游)：NetRevenueofWJOPCdroppedby11%QoQin4Q15,indicatingthatWJOwillalsobeaffectedbyseverecannibalization.Source:BDAforecastTableofContentsExecutiveSummaryGamingBusinessE-commerceBusinessAdsandOtherBusinessFinancialForecastCrossbordere-commercemarketgrewrapidlyin2015;Kaola’smarketshareslightlydecreasedin4QbecauseofTmallandAmazon’sprolongedpromotionduring11/11andblackFridays14Note:TheGMVscaleincludesbondedimportandoverseasdirectdelivery.Marketshare=GMVofplatform/TotalGMVoflistedplatform.MarketSizeandShareofLeadingCross-borderE-commercePlatformsin2015Source:BDAanalysis15%9%5%17%26%12%18%4,97525%10%10%25%13%8%2,57724%2%Others(Mia,XHS,VIPSandYMT)27%3Q154Q156,31224%9%10%23%11,08529%32%9%TmallInternationalJumeiKaolaAmazonJDGlobal2Q151Q1517%Unit:RMBMNThecross-borderecommercebusinessisstillsupportedbythegovernment,althoughtherewilllikelybeataxincreasein1H201615Manysourcesconfirmedthatthepersonalpostalitemtaxwillbereplacedbyacrossbordercomprehensivetaxin1H2016.Thepreviouspersonalpostalitemtaxhassetfourgradesoftaxrates(namely10%,20%,30%and50%)fordifferentproductcategories,andthereisaRMB50taxexemptionthreshold.Thecrossbordercomprehensivetaxratewillbechangedtoaround11%overallforallproductscategories;andtheRMB50taxexemptionwillbeabolished.However,theimpactbroughtbytaxincreaseshouldbelimited.Formanyproductscategories,thepriceincreaseresultedfromtaxincreasewouldbeonlyfewPPTSandwillnoteliminatethepricesgapbetweenoverseasanddomesticmarkets.Manycross-borderecommercebuyersaremorequalitysensitivethanpricesensitive,asourprevioussurveysuggests.“Relateddepartmentshaveagreedthatthenewcrossborderecommercetaxratewillbe30%-50%higherthanthecurrentpersonalitemstax,butstilllowerthanregularimporttransactions.”-EconomicInformationDailyHigherOverallTaxRatesSource:BDAanalysisThegovernmentisstillsupportiveindevelopingcrossborderecommercebyintroducingmoretrialcitiesandbuildmorebondedwarehouseinalltrialcities.Numberofcrossbordere-commercepilotcitieswillincreasefrom8to12,andnewbondedareaswereapprovedinallthesecitiesonJan6,2016.Thiscanalleviatethewarehouseshortageformanycross-borderE-commerceplayers.DalianTianjinQingdaoNingboShanghaiSuzhouGuangzhouShenzhenHefeiZhengzhouChongqingChengduMoreBondedCitiesandWarehousesOverthepastquarter,Kaolamaintaineditspricesand

hadpriceadvantageoveritscompetitorsSource:E-commerceWebsites,BDAanalysisandInterviewsMethodologyBDAchosemom&baby,cosmetics,healthcare,apparel,anddailygoodscategoriesonKaolaandTmall.HK;Thenchose6subdivisionsfrommom&baby,makeup,healthcareand2

subdivisionsfromapparelanddailygoods.Foreachsubdivision,wechose10

SKUs.Thereare220samplesintotal.WecomparedthepriceofSKUsonKaolawiththepriceofthesameSKUson7othercross-bordere-commercewebsites;Thepricesdonotincludefreightfees,formostcross-bordere-commercewebsiteshavefreeshippingpolicies.WechosethepricesofthebestsellersifthereweredifferentpricesforoneSKUonthesecross-bordere-commercewebsites.100%145%115%110%101%108%103%100%Mom&Baby…andmaintaineditspricingadvantageovermostcross-bordere-commerceplayersN=220CosmeticsHealthcareOverall110%107%118%105%109%111%108%100%97%121%116%108%114%107%102%100%102%122%118%108%109%111%106%100%100%116%118%108%108%117%107%100%n/a144%121%129%136%100%n/an/aApparelDailygoodsHealthcareOverallMom&BabyProductsCosmetics101%98%100%103%4QPricingas%of3QPricingN=117Kaola’spricingdidn’tchangemuchin4Q15…PriceComparisonofCross-borderE-commerce(PriceofKaolaas100%)16TmallInternationalgreatlyexpandeditsSKUin4Q,allotherplayersseemedtolagbehindTmallintermsofproductcoverageAsTmall.HKhasthemostabundantSKUsandlargestGMV,BDAchose5categoriesand20subdivisionsonTmall.HK.Then,wechosethetop10

SKUsfromeachsubdivision.Thereare200samplesintotal.Then,wecountedhowmanychosenSKUsarealsosoldonothercross-bordere-commercewebsites.Finally,wecomparedtheamountofSKUsonTmall.HKwiththeamountofthesameSKUson7othercross-bordere-commercewebsites.24%52%139%29%45%79%91%100%3Q15SKUComparisonofCross-borderE-commerce(TheSKUofTmall.HKas100%)N=200+40%+150%4Q15E3Q152Q15Kaola’sSKUamountgrewquickly…MethodologyPOPDirectSales…andproductcategoriesbecamecomprehensive10%Cosmetics20%Healthcare20%Others

50%Mom&babyMom&baby40%DailyGoods18%10%CosmeticsHealthcareApparel18%15%Source:CompanyInformation,BDAanalysis173Q154Q1510%15%25%27%29%57%65%100%4Q15WeslightlyloweredKaola’sGMVestimatein2015,butKaolamaystillrealizeaGMVgrowthof180%+in2016Fthankstoitsmuchhighermarketingspending18ForecastofKaola’sGMV4Q16F3Q16F2Q16F1Q16F4Q15E3Q152015E2016F2Q151Q15+184%Unit:USDMNMarketingandWarehouseInvestment“In2016,Kaolawillcreateads,suchasTVadsandsubwayads.TheadvertisingbudgetofKaolawillbehigherthanotherdepartments.”-IndustryexpertKaolagrewrapidlywithlimitedadvertisementsandmarketingactivitiesin2015.However,Kaolawillincreaseitsmarketingexpenses,weforecastKaolatogenerateUSD700-800MNofGMVin2016.Kaolahas~100thousandSQMbondedwarehousesinuseandtensofthousandsofSQMbondedwarehousesunderconstruction.Theircapacityis~80thousandordersperday,yettheircurrentdailyutilizationis~50%.“Kaolaonlyusedinternaladvertisingresourcesin2015.TomeetaRMB60-80MNGMVgoal,Kaolawillbuyoutsidetrafficin2016.”-Industryexpert“Thecapacityofatraditionale-commercewarehouseisabout1orderperSQM,perday.Forabondedwarehouse,itmaybe0.8orderperSQM,perday.Kaolahasthepotentialtoincreaseitsdailyordernumberwithitsexistingbondedwarehouses.”-IndustryexpertSource:BDAanalysis2016F2015E4Q16F3Q16F2Q16F1Q16F4Q15E3Q152Q151Q15+181%Unit:USDMN3Q15Estimate4Q15EstimateKaola’sAOVwillfurtherdecreasein2016F;themarketingcostincreasewillcausetheOPmargintofallfrom-21%to-29%,andresultinaUSD~170MNlossinthewholeyearTheAOVofKaolawillcontinuetofallin2016:Productmixchange.TheSKUsofbothhigherandlowerAOVproductsareincreasing.However,lowAOVproductscontributemoreorders.Kaolaseparatesdifferenttypesofgoodsindifferentwarehouses,whichresultsinconsumersplacingordersseparately,loweringtheAOV.19Marketingcostwillbehigherin2016:InternalNetEaseusershavebeenusedupandKaolahastobuyoutsidetraffic.However,NetEaseusedtobeverycarefulininvestinginmarketing,thuswedidn’tprojectveryaggressively.AverageOrderValue(USD)COGSImporting&WarehousingProcurementCostUEForecastofKaola’sOrder,2016vs.2015OPEXDomesticFulfillmentMarketingR&DG&AOPLossperOrder-7.435.22.1(-21%)33.929.52.1(-29%)30.9-9.020152016TheOPmarginwillfallfrom-21%in2015to-29%in2016,whichleadstoanestimatedoperatinglossofUSD~170MNin2016comparedwithUSD~40MNin2015.Source:BDAanalysisInthelongrun,weexpectthatKaolacangraduallyimproveitsgrossmargin,butitmaynotachieveapositiveOPmarginuntil202320GrossMarginBDAforecast,2015E-2023FBDAanalysis15%15%15%12%8%4%0%-2%-2%S&MExpenseR&DExpenseG&AExpenseOPMarginGrossmarginwilllikelyremainat-2%till2016,duetotheincessantlyfiercepricewar.Grossmarginmaybeginimprovingin2017.WeexpectKaolatograduallyraisesthepricemark-upinthefaceofincreasingprofitabilitypressure.Besides,Kaolacancross-sellproductswithhighermargins,justasMiadid.Grossmarginremainsstableat15%after2021.AccordingtoJMEI,thesteady-stategrossmarginofmom&babycategoryis~10%,and~40%forbeautyandwellness.13%13%12%14%16%18%20%22%12%0%1%1%1%1%1%1%1%2%3%3%3%4%4%4%4%5%5%-1%2023F2022F-1%2021F-1%2020F-6%2019F-13%2018F-19%2017F-25%2016F-29%2015E-21%ProportionsofthefulfillmentcostcontinuesincreasingbecauseoftheAOVdecline.Proportionsofthemarketingexpensewillsurgein2016andfallslowlyinthefollowingyears.EconomiesofscalecanbeachievedintermsofG&Aexpenses.Technologyandcontentexpensesremainatastableproportionofnetrevenue.Kaolawon’tachieveapositiveOPmargininthenearfuture.Source:BDAanalysis21TableofContentsExecutiveSummaryGamingBusinessE-commerceBusinessAdsandOtherBusinessFinancialForecastWeraisedNetEase’sadsrevenueinbothshorttermandlongterm22Unit:USDMNBDAforecastofNetEase’sAdsRevenueUnit:USDMN+17%MobilePC2023F4422022F4152021F3912020F3702019F3512018F3352017F3122016F2872015E246201419148Source:BDAanalysis3QEstimate4QEstimateWeraisedtheforecastofNetEase’sadsrevenuetofactorinthestrongmonetizationinthemobileend.NetEasecurrentlysellsthemostofitsmobileadsinventorybytimelength(inCPTmodel);NetEasewillgraduallyintroduceCPCmodel;NetEaseisalsodevelopingaprogrammaticadssellingplatformtobettersellNetEase’sadsinventoryinbothPCandmobileend;2019F2622020F2682021F2762022F2852023F297+9%PCMobile2192018F2572015E2017F2402016F249201419148Otherbusinesseswillseelimitedupsidein2016;theofficialrestartofonlinelotterysalesmaytakeamuchlongertimethanexpected23LotterySalesMaynotRestartSoonEvaluationofNetEase’sOtherBusinessLinesOtherbusinessconsistsofrevenuefrompremiumemailservices,musicservice,etc.Thesebusinessarerelativelymaturedandwillnotexperiencemuchupsidefromyeartoyear.Source:BDAanalysisModerateGrowthforInsuranceBusinessDefensiveStrategyinFinancialServicesThoughtherearerumorsthatonlinelotterysellingmayrestartin2016,industryexpertssuggestthattheofficialrestartofonlinelotterysellingin2016isunlikelyduetotheconflictsofinterestsbetweenwelfarelotterydepartmentandsportslotterydepartment.NetEase’slotteryteamisrunningaunlicensedbusinesscalled“Huanlegou”,whichcontributesUSD~10MNrevenueperquarter.Userspaychumpchangeandhavechancestoattainlargecashprizes,whichisgamblinginnatureandveryrisky.Autoinsurancecontributeover80%ofNetEase’sinsurancesalesin2015.Currently3rdpartychannelsonlycontribute~15%ofonlineinsurancesales,withtherestsoldbyinsurancecompaniesownwebsites.Thankstothelowpenetrationofonlineinsurancesalesandthelowbase,NetEase’srevenuefromtheinsurancebusinesswilllikelygrowby20%-40%inthenextfewyear.StableOtherBusinessNetEasemainlyactedasasaleschannelofinvestmentproductsfor3rdparties,andNetEasechargesacommissionof0.2%-0.3%.NetEase’sfinancialserviceshavehadatotaltransactionvolumeofaroundRMB24BNin2015,laggingfarbehindLufax,Mayi,JDandothertier1andtier2players.NetEaseistakingadefensivestrategyinfinancialservicesbusiness,thusisnotexpectingitstransactionvolumetogrowaggressively.24TableofContentsExecutiveSummaryGamingBusinessE-commerceBusinessAdsandOtherBusinessFinancialForecastP&LSummary-3Q1525Note:1.Fordetails,pleaserefertotheforecastmodelUnit:USDMN201320142015E2016F2017F2018F2019F2020F2021F2022F2023F16-23

CAGR1Q152Q153Q154Q151Q162Q163Q164Q16NetRevenue1,2601,6043,0854,3324,6695,3006,0006,6837,6578,6379,57612%5016269321,0261,0291,0571,1301,116PCClientGame1,0771,1561,3181,2301,2171,1841,1591,1191,0851,037999-3%314316392296315286340289MobileGame01131,1472,1762,1502,3212,4662,5762,9193,2753,6388%89185369504569576532498Advertising1351912472782993173303453633834066%4159747442629679eCommerce002915829321,3971,9562,5433,1793,8154,38733%21518213787116146233Others4714482667280899911212814712%3715151516171717GrossProfit9201,1581,8862,4342,4262,5662,7642,9573,2293,4983,7746%341390577591610602650572R&D1261812793233734074434735045435836268747579788383S&M1502604636076627428219041,0311,1591,2817595141151150143160154G&A48641291521591751922072302502682328374136374039EBIT5966531,0141,3531,2321,2421,3091,3721,4631,5461,6413%180199325325345345368295PBT6827481,1681,5691,4661,5071,6091,7061,84