NetEase, Inc. (NTES)

NetEase, Inc. is a Cayman Islands holding company with operations primarily conducted through its China mainland subsidiaries and contractual arrangements with variable interest entities (VIEs) based in China mainland. The company operates in the highly competitive and rapidly changing Chinese market for internet content and services, with its primary businesses including online games, music streaming, online intelligent learning services, and internet content services. The online game industry is affected by factors beyond the company's control, including general economic conditions, the availability of other forms of interactive entertainment, evolving technologies, changes in player demographics and public tastes, government restrictions on playing online games, and the availability of alternative gameplay models such as cloud-gaming services.

The company faces intense competition primarily from global online game developers and operators such as Tencent, as well as established online and offline education service providers, manufacturers of smart hardware or devices in China, and leading digital media and entertainment providers. Competition is based on the design, quality, popularity, and efficacy of content offerings, overall user experience, effectiveness of marketing activities, the ability to attract and retain talented engineers, game designers, and creative professionals, and the ability to win collaboration relationships with game studios and content owners. Many existing and potential competitors have longer operating histories, greater brand recognition, better connections with the PRC government, larger customer bases, and significantly greater financial, technical, and marketing resources.

The company generates revenue primarily through an item-based revenue model for its online games, where players can play for free but are charged for the purchase of virtual items. Net revenues from the operation of online games accounted for 97.3% of the games and related value-added services segment's revenues for the year ended December 31, 2025 ¹. The company also generates revenue from advertising services, music streaming through membership subscriptions and sales of virtual items for social entertainment services, online intelligent learning services through Youdao, and e-commerce through its private label consumer lifestyle brand, Yanxuan.

The games and related value-added services segment includes the operation of online games as well as other related or ancillary services. Net revenues from the operation of online games accounted for 92.9%, 96.2% and 97.3% of the segment's revenues for the years ended December 31, 2023, 2024 and 2025, respectively ². Several mobile and PC games offered are licensed from third-party developers, which accounted for 4.6%, 7.4% and 9.5% of total net revenues in 2023, 2024 and 2025, respectively ³. The company has a number of licensing arrangements, including an exclusive agreement with Mojang AB, a subsidiary of Microsoft, to license the operation of Minecraft in the PRC, with the term most recently renewed in 2023 and extending until 2028 ⁴. Following the expiration of licenses covering several Blizzard games in China mainland in January 2023, the company entered into a new license arrangement with Blizzard in 2024 to operate those and other titles, including World of Warcraft, Hearthstone, and other titles in the Warcraft, Overwatch, Diablo, and StarCraft universes ⁵. The company also offers games that are co-developed, such as Diablo Immortal, which was developed with Blizzard ⁶. The Youdao business features integrating technology closely with learning, and Youdao has introduced a number of new intelligent learning products, such as Youdao Dictionary Pen X7 Pro and Youdao Space X ⁷. Youdao has developed a large language model (LLM) designed for the education sector called Confucius, and related AI tools such as Hi Echo, an AI-driven virtual English-speaking tutor, and Mr. P AI Tutor, a conversation-based tutorial function ⁸. The music streaming business is operated through majority-controlled subsidiary NetEase Cloud Music, which monetizes its platform primarily through sales of membership subscriptions for online music services and sales of virtual items for social entertainment services ⁹. The e-commerce business includes the private label consumer lifestyle brand, Yanxuan, which sells a wide range of products including pet food and supplies, home cleaning products, and bedding ¹⁰.

In 2023, 2024 and 2025, the amount of revenues generated by the VIEs accounted for 87.7%, 87.2% and 85.2%, respectively, of total net revenues ¹¹. Total assets of the VIEs, excluding amounts due from other companies in the NetEase group, represented 6.1% and 5.8% of consolidated total assets as of December 31, 2024 and 2025, respectively ¹². As of December 31, 2025, Youdao had an outstanding interest-bearing short-term loan of RMB878.0 million from the NetEase group and a US$300.0 million revolving loan facility ¹³. The company has a share repurchase program (2022 Share Repurchase Program) and as of the date of the filing, the company had 3,192,111,251 ordinary shares outstanding, par value US$0.0001 per share ¹⁴.

For the fiscal year ended December 31, 2025, total net revenues were RMB106,852 million ¹⁵, compared to RMB100,850 million ¹⁶ for the fiscal year ended December 31, 2024. Net income attributable to NetEase, Inc. was RMB29,706 million ¹⁷ for 2025, compared to RMB27,127 million ¹⁸ for 2024. Diluted earnings per ADS were RMB18.62 ¹⁹ for 2025, compared to RMB16.80 ²⁰ for 2024. The company experienced a RMB775.9 million net foreign exchange loss in 2025 ²¹, compared to a RMB255.4 million net foreign exchange gain in 2024 ²² and a RMB133.0 million net foreign exchange loss in 2023 ²³.

The company's long-term growth strategy involves further expansion of its online games to players outside of China, with plans to continue launching online games in various international markets. The company has launched games such as Knives Out, Identity V, and Racing Master in Japan and other markets globally, and Once Human, Marvel Rivals, and Where Winds Meet globally ²⁴. The company plans to continue to launch its online games in various international markets ²⁵. The expansion involves risks including difficulties in anticipating player preferences outside of China, challenges in formulating effective local sales and marketing strategies, and challenges in identifying appropriate local business partners ²⁶. The company also plans to release numerous additional console game releases in the future, as many game players in international markets play games predominantly via consoles such as Xbox and PlayStation ²⁷.

The company continues to invest significant resources in innovation and exploring new products, services, and technologies to cater to rapidly changing customer demands and trends in the internet industry ²⁸. The company develops and uses artificial intelligence technologies throughout its businesses and continues to make investments in this area, including in-game audio and visual generative AI technologies to enhance user experience, such as providing in-game 'AI teammates' and using AI technologies in the development process for some games ²⁹. Youdao has developed Confucius, its large language model (LLM) designed for the education sector, and related AI tools such as Hi Echo and Mr. P AI Tutor ³⁰. The company is in varying stages of developing products, services, and internal business tools involving AI technologies ³¹.

The company has devoted and expects to continue to devote significant resources to the development of its online games ³². The strategy to develop and publish cross-platform games results in higher costs, as it requires additional R&D expenses and increased compliance costs to meet the varying requirements for each platform ³³. Releasing more online games overseas may involve additional marketing and distribution costs as well as licensing costs, which may further impact the profitability of online games ³⁴.

The company mainly relies on affiliates of China Telecom, China Unicom, and China Mobile to provide server and bandwidth service for internet users to access the NetEase websites and other online and mobile platforms ³⁵. The company also relies on cloud servers maintained by third-party cloud service providers particularly for the operation of its games outside of China mainland ³⁶. The company expects to be required to continue to expend significant resources to protect its IT and security systems ³⁷.

The company has devoted and expects to continue to devote significant resources to the development of its online games ³⁸. The company has a share repurchase program (2022 Share Repurchase Program) ³⁹. The company has paid dividends, with specific dividend amounts referenced for 2025 and 2024 ⁴⁰.

The company faces risks from the PRC government's steps to limit online game playing time for all minors and to control the content and operation of online games. In September 2021, the PRC government further limited the play of online gamers under 18 by prohibiting play on weekdays and limiting playing for one hour a day on Fridays, Saturdays, Sundays and PRC statutory holidays ⁴¹. All online games must be connected to the real-name verification system for anti-addiction to online games operated by the NPPA ⁴². On December 22, 2023, the NPPA publicly solicited opinions on the Draft Administrative Measures for Online Games which, if adopted, would stipulate, among other requirements, that online game publishers and operators may not publish and operate online games that make participation in battles compulsory, provide inducement rewards such as daily logins, first recharges, and continuous recharges, and must set user recharge limits ⁴³. As of the date of the filing, the Draft Administrative Measures for Online Games have not been formally adopted ⁴⁴. The company's current Online Publishing Service License has expired, and the company is in the process of renewing it, although it cannot be certain if or when such renewal will be granted ⁴⁵. During this renewal period, the company has engaged licensed third parties to obtain such approvals, and its operations have not been materially affected ⁴⁶.

The company faces risks from the political relationships between China and other countries, which may result in bans or restrictions that could impact its products. For instance, in September 2020, the government of India announced the ban of 118 mobile applications of Chinese origin, including several of the company's products ⁴⁷. The company also faces risks from export controls and trade sanctions explicitly or implicitly involving China, which could negatively affect its business operations ⁴⁸. On October 7, 2022, the U.S. BIS announced a new set of export control rules aimed at restricting China's ability to obtain advanced semiconductor chips, develop and maintain supercomputers, and manufacture advanced semiconductor chips ⁴⁹. These rules may prevent the company from acquiring advanced semiconductors which may impede its ability to effectively develop new technologies and services ⁵⁰. The company also faces risks from the U.S. government's 'America First Investment Policy' memorandum issued on February 21, 2025, which directed U.S. government agencies to take actions to restrict Chinese investments in the U.S. ⁵¹.

The company's management emphasizes the importance of developing and introducing popular, high-quality online games in a timely and successful manner to compete effectively and generate revenues. Management acknowledges that the company operates in a highly competitive, quickly changing environment, and player preferences for online games are difficult to predict. The company's future success depends not only on the popularity of its existing online games but also on its ability to develop new high-quality online games and expand its game portfolio with games in a variety of genres that are in line with market trends and to successfully monetize such games. Management also highlights the importance of prolonging the lifespan of existing online games through continual improvement and updates with new features and functionalities that appeal to existing game players, attract new game players, and improve overall player loyalty. The company remains committed to investing in online games, but acknowledges that the online gaming market is rapidly evolving with games in an expanding range of genres and formats being introduced by both the company and its competitors. Management also notes the strategic importance of expanding the company's online games and game player base internationally, with plans to continue launching online games in various international markets. The company has launched several games on console, such as Naraka: Bladepoint and Marvel Rivals, and has introduced cross-platform games such as Where Winds Meet and Once Human, with further cross-platform releases planned ⁵⁷.

For the fiscal year ended December 31, 2025, total net revenues were RMB106,852 million ⁵⁸, compared to RMB100,850 million ⁵⁹ for the fiscal year ended December 31, 2024. Net income attributable to NetEase, Inc. was RMB29,706 million ⁶⁰ for 2025, compared to RMB27,127 million ⁶¹ for 2024. Diluted earnings per ADS were RMB18.62 ⁶² for 2025, compared to RMB16.80 ⁶³ for 2024. The company experienced a RMB775.9 million net foreign exchange loss in 2025 ⁶⁴, compared to a RMB255.4 million net foreign exchange gain in 2024 ⁶⁵ and a RMB133.0 million net foreign exchange loss in 2023 ⁶⁶. Net revenues from the operation of online games accounted for 97.3% of the games and related value-added services segment's revenues for the year ended December 31, 2025 ⁶⁷. Revenues generated by the VIEs accounted for 85.2% of total net revenues in 2025 ⁶⁸. As of December 31, 2025, the company had 3,192,111,251 ordinary shares outstanding ⁶⁹.

The company faces significant risks from the PRC government's regulatory actions on online games, including restrictions on minors' play time and the potential adoption of the Draft Administrative Measures for Online Games, which could impose requirements such as banning inducement rewards like daily logins and first recharges, and setting user recharge limits ⁵². The company's Online Publishing Service License has expired and is in the process of renewal, creating uncertainty for new game approvals ⁵³. The company's reliance on contractual arrangements with VIEs, which generated 85.2% of total net revenues in 2025 ⁵⁴, exposes it to risks if the PRC government finds these arrangements non-compliant with laws restricting foreign investment in value-added telecommunications services and other regulated industries. The company faces risks from U.S. export controls on advanced semiconductors, which could impede its ability to develop new technologies and services ⁵⁵. The company also faces risks from the potential determination that it is an 'investment company' under the Investment Company Act of 1940 due to its significant holdings of time deposits, which could lead to material adverse consequences including the inability to comply with U.S. reporting obligations and potential delisting from Nasdaq ⁵⁶.