Still growing, one way or another; reiterating Buy    Sometimes, the icing on top is better than the cupcake underneath. We wereinitially impressed with the strong top-line growth in e-commerce even thoughits earnings contribution is marginal, but left feeling slightly let down by thegame division. Between the two factors, we are inclined to give more qualitativeemphasis on top-line growth than bottom-line miss and believe NetEase remainsa strong structural growth story with a soft 2Q17print behind us; reiterating Buy.    Two key takeaways from 2Q17print    1) E-commerce is growing better than expected, considering seasonality, andour analysis suggests Kaola/Yanxuan GMV growth continued to accelerate yoy to>200. The gross margin miss for the division had more to do with increased costassociated with its music content licensing issue than any margin erosion for thee-commerce division itself. We believe stronger top-line growth warrants a minorincrease to our 2018EPS estimate, although NTES' overall 2Q17earnings was amiss. 2) Management indicated that a significant portion of the incremental S&Mis associated with the game business and is likely to continue at its elevated level.Previously, promotion cost tended to rise as the frequency of promotions used toretain/re-engage users went up. We had forecast continued cost increase. Thus,a 2Q17miss is not a quantitative surprise, but we will keep monitoring whetherthe game business needs rising investment to sustain momentum.    The bull and base cases still look attractive    Our discussion with investors leading into 2Q17suggests that the sequentialdecline for mobile games in 2Q17as well as 3Q17is broadly understood by themarket, but rising cost could be an aspect that weighs on the stock. On the otherhand, the growing value of e-commerce provides some offsetting value. Betweenthe two, we are inclined to remain positive on the overall business with mid-2017representing a downtime as games remain mostly in development.

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