Investment Rating - The report maintains a "Buy" rating for the company [1] Core Views - The company is expected to see a continuous increase in paid music subscriptions and ARPU, leading to an improvement in profit margins. The net profit forecasts for 2024, 2025, and 2026 are projected to be 6.6 billion, 8 billion, and 9.4 billion CNY respectively, reflecting an upward revision due to increased membership and gross margin expectations [5] - The company reported Q1 2024 revenue of 6.77 billion CNY, a year-over-year decrease of 3.4% and a quarter-over-quarter decrease of 1.8%. The Q2 revenue is anticipated to reach 7.38 billion CNY, showing a year-over-year increase of 1.3% and a quarter-over-quarter increase of 9.1% [4][6] - The online music service revenue for Q1 2024 was 5.01 billion CNY, a year-over-year increase of 43.0%. The company expects Q2 revenue from this segment to be 5.67 billion CNY, a year-over-year increase of 33.5% [4][6] Financial Summary - Revenue for 2022 was 28,339 million CNY, with a projected increase to 29,449 million CNY in 2024, reflecting a year-over-year growth of 6.1% [4] - The gross profit margin is expected to improve from 35.3% in 2023 to 42.0% in 2024, while the net profit margin is projected to rise from 17.7% to 22.5% in the same period [4] - The company’s earnings per share (EPS) is forecasted to increase from 1.43 CNY in 2023 to 1.93 CNY in 2024 [4] Market Performance - The company's stock has shown strong performance with a 12-month absolute return of 107.72% and a relative performance of 110.54% compared to the Hang Seng Index [2]

Tencent Music Entertainment (NYSE:TME) Q1 2024 Earnings Conference Call May 13, 2024 7:00 AM ET Company Participants Millicent Tu - Head of Investor Relations Cussion Kar Shun Pang - Executive Chairman Zhu Liang - Chief Executive Officer Min Hu - Chief Financial Officer Conference Call Participants Alicia Yap - Citigroup Alex Poon - Morgan Stanley Lincoln Kong - Goldman Sachs Zhang Lei - Bank of America Merrill Lynch Ellie Jiang - Macquarie Wei Fang - Mizuho Securities Thomas Chong - Jefferies Millicent Tu ...

Revenue Performance - Total revenue for Q1 2024 was RMB 6.77 billion (USD 937 million), a decrease of 3.4% YoY, primarily due to declines in social entertainment and other services, partially offset by strong growth in online music service revenue[2] - Online music service revenue increased to RMB 5,007 million in Q1 2024, up 43% from RMB 3,501 million in Q1 2023[16] - Social entertainment service and other service revenue decreased to RMB 1,761 million in Q1 2024, down 50% from RMB 3,503 million in Q1 2023[16] - Social entertainment and other service revenue decreased by 49.7% YoY to RMB 1.76 billion (USD 244 million), primarily due to adjustments in live interaction features and stricter compliance procedures since Q2 2023, as well as competition from other platforms[7] User Metrics - Online music subscription revenue reached RMB 3.62 billion (USD 501 million), a 39.2% YoY increase, driven by a 20.2% YoY growth in paying users to 113.5 million, with a net addition of 6.8 million users, the highest quarterly net increase to date[2] - Monthly active users (MAU) for online music services were 578 million, a 2.4% YoY decrease, while mobile MAU for social entertainment services dropped 28.7% YoY to 97 million[4] - Average revenue per paying user (ARPPU) for online music services increased 15.2% YoY to RMB 10.6, while ARPPU for social entertainment services decreased 55.4% YoY to RMB 73.4[4] Profitability - Net profit for Q1 2024 was RMB 1.53 billion (USD 212 million), a 27.5% YoY increase, with non-IFRS net profit at RMB 1.81 billion (USD 251 million), up 23.9% YoY[2] - Net profit for Q1 2024 was RMB 1.53 billion (USD 212 million), with non-IFRS net profit reaching RMB 1.81 billion (USD 251 million)[7] - Net profit attributable to equity holders of the company increased to RMB 1,422 million in Q1 2024, a 24% rise from RMB 1,148 million in Q1 2023[17] - Non-IFRS net profit reached RMB 1,812 million in Q1 2024, up 24% from RMB 1,463 million in Q1 2023[18] - Operating profit increased by 41.9% YoY to RMB 1.96 billion (USD 271 million) in Q1 2024, benefiting from improved operational efficiency and effective cost control[7] - Operating profit grew to RMB 1,959 million in Q1 2024, up 42% from RMB 1,381 million in Q1 2023[16] - Gross margin improved from 33.1% to 40.9% YoY, driven by strong growth in music subscription and advertising service revenue, as well as increased original content[7] - Gross profit rose to RMB 2,771 million in Q1 2024, a 20% increase from RMB 2,315 million in Q1 2023[16] Cash and Financial Position - The company's cash, cash equivalents, and term deposits totaled RMB 34.18 billion (USD 4.73 billion) as of March 31, 2024[2] - Cash, cash equivalents, and term deposits totaled RMB 34.18 billion (USD 4.73 billion) as of March 31, 2024, up from RMB 32.22 billion as of December 31, 2023[8] - Total assets increased to RMB 79,176 million as of March 31, 2024, compared to RMB 75,536 million as of December 31, 2023[20] - Cash and cash equivalents decreased to RMB 10,218 million as of March 31, 2024, down 25% from RMB 13,567 million as of December 31, 2023[20] - Time deposits increased to RMB 16,370 million as of March 31, 2024, up 65% from RMB 9,937 million as of December 31, 2023[20] - Total equity increased from RMB 55,907 million in 2023 to RMB 59,316 million in 2024, representing a growth of 6.1%[21] - Retained earnings rose from RMB 16,969 million in 2023 to RMB 18,391 million in 2024, a growth of 8.4%[21] - Total liabilities slightly increased from RMB 18,334 million in 2023 to RMB 18,421 million in 2024, a growth of 0.5%[21] Shareholder Returns - TME announced a 2023 annual cash dividend of approximately USD 210 million to shareholders of record[2] - The board approved an annual cash dividend policy, declaring a dividend of USD 0.1370 per ADS for 2023, with a total cash dividend payment of approximately USD 210 million[10] - The company repurchased approximately 32.2 million ADSs for about USD 235.5 million under the USD 500 million share repurchase program announced on March 21, 2023[9] Earnings Per Share - Basic and diluted earnings per ADS were RMB 0.92 (USD 0.13) and RMB 0.91 (USD 0.13), respectively, with non-IFRS basic and diluted earnings per ADS at RMB 1.11 (USD 0.15) and RMB 1.09 (USD 0.15), respectively[8] - Basic earnings per ADS grew to RMB 0.92 in Q1 2024, a 24% increase from RMB 0.74 in Q1 2023[17] Tax and Compliance - The effective tax rate for Q1 2024 was 19.9%, up from 12.2% in the same period last year, primarily due to a provision for income tax of RMB 107 million (USD 15 million) and changes in preferential tax rates for certain subsidiaries[7] Operational Costs - Operating costs decreased by 14.8% YoY to RMB 4.0 billion (USD 554 million), mainly due to a decline in revenue-sharing costs corresponding to the decrease in social entertainment service revenue, partially offset by increases in content copyright and payment channel costs[7] Cash Flow - Net cash inflow from operating activities increased from RMB 1,852 million in 2023 to RMB 2,686 million in 2024, a growth of 45%[22] - Net cash outflow from investing activities significantly increased from RMB 811 million in 2023 to RMB 5,498 million in 2024, a growth of 577.9%[22] - Net cash outflow from financing activities increased from RMB 80 million in 2023 to RMB 522 million in 2024, a growth of 552.5%[22] - Net decrease in cash and cash equivalents was RMB 3,334 million in 2024, compared to a net increase of RMB 2,583 million in 2023[22] - Ending cash and cash equivalents decreased from RMB 12,129 million in 2023 to RMB 10,218 million in 2024, a decrease of 15.8%[22] Strategic Initiatives - The company expanded its music library through partnerships with labels like TF Entertainment and HIM International, leveraging AI to enhance user interaction and fan engagement[5] - TME launched an audio large model and tested a new AI assistant to improve music discovery and user interaction, alongside introducing incentive points and interactive features to boost user engagement[6] - The company collaborated with Xiaomi SU7 and hosted the QQ Music Peak Festival to strengthen its core user base and promote in-car music consumption[6]

Share Structure and Voting Rights - Tencent Music Entertainment Group has a dual-class share structure, with Class A shares having one vote per share and Class B shares having fifteen votes per share[3]. - As of April 10, 2024, Tencent holds approximately 92.6% of the voting power through its ownership of 1,640,456,882 Class B shares and 159,996,879 Class A shares[6]. - The total number of outstanding shares is 3,432,154,260, comprising 1,767,205,005 Class A shares and 1,664,949,255 Class B shares[5]. - If all Class B shares were converted to Class A shares, Tencent would issue 1,664,949,255 Class A shares, representing about 94.2% of the total Class A shares outstanding[6]. - Tencent and Min River have committed to converting any Class B shares sold to non-affiliated entities into Class A shares prior to the transfer[7]. - EMI Group Limited holds 24,492,362 Class B shares, accounting for approximately 1.4% of the voting power[4]. - The early investors with nominal interests do not participate in the company's business and operations[6]. - The company has a total of thirteen different voting rights beneficiaries, with eight being early investors holding nominal interests[3]. - The voting rights of 18,581,530 Class A shares held by minority shareholders are also attributed to Tencent[5]. - The company is subject to the Hong Kong Stock Exchange rules regarding its dual-class share structure[3]. - The company has a dual-class share structure, with Tencent holding a significant proportion of voting rights, which may not align with the interests of all shareholders[8]. - The different voting rights structure allows Tencent and Min River to exert greater influence over company affairs and shareholder resolutions[8]. - Any changes in regulations or guidelines from the Hong Kong Stock Exchange could automatically invalidate the different voting rights commitments[8]. - The company emphasizes the potential risks for investors in companies with different voting rights structures, particularly regarding the alignment of interests[8]. Financial Performance and Growth - The company reported a significant increase in monthly active users, with a total of 100 million users across its online music services as of December 31, 2023, representing a 15% year-over-year growth[15]. - The average revenue per paying user for online music services reached RMB 12.50, an increase of 10% compared to the previous year[15]. - The paying user base for social entertainment services grew to 30 million, reflecting a 20% increase year-over-year[15]. - The company achieved a paying user conversion rate of 25% for its online music services, up from 22% in the previous year[15]. - Total revenue for the fiscal year 2023 was RMB 10 billion, marking a 12% increase from RMB 8.93 billion in 2022[15]. - The company anticipates a revenue growth guidance of 15-20% for the fiscal year 2024, driven by user growth and new service offerings[15]. - The company plans to expand its market presence in Southeast Asia, targeting a 30% increase in user acquisition in the region over the next year[15]. - New product launches, including enhanced features for its social entertainment platform, are expected to drive user engagement and revenue growth in 2024[15]. - Research and development investments increased by 15% in 2023, aimed at improving streaming technology and user interface[15]. Regulatory Environment and Compliance - The company faces significant regulatory risks from Chinese authorities that could impact its ability to operate and attract foreign investment[22]. - Recent regulatory developments include the establishment of the National Data Bureau on October 25, 2023, to oversee data security and privacy, impacting companies with significant user data[35]. - The Cybersecurity Review Measures require network platform operators with over 1 million users' personal information to undergo cybersecurity reviews before going public abroad[35]. - The Data Cross-Border Flow Regulations, effective March 22, 2024, mandate security assessments for data processors providing data overseas under certain conditions, including the transfer of personal information of over 1 million individuals[36]. - The China Securities Regulatory Commission issued new rules on February 17, 2023, regarding the overseas issuance of securities, effective March 31, 2023, impacting the listing requirements for companies[37]. - The implementation of the "Trial Measures" introduces uncertainty regarding the company's ability to conduct future financing activities and comply with filing requirements to the China Securities Regulatory Commission (CSRC)[39]. - The CSRC has clarified that companies listed overseas before March 31, 2023, will be considered as existing listed companies and are not required to complete immediate filing procedures[39]. - Regulatory measures on live streaming businesses have been strengthened, including real-name registration and restrictions on user tipping for minors[40]. - The company may need to adapt its growth strategy in response to evolving regulations affecting the social entertainment industry, which could negatively impact its business and financial performance[41]. - The company faces potential adverse effects on its operations and financial condition due to increased regulatory scrutiny on live streaming platforms and hosts[41]. Financial Reporting and Internal Controls - The company is classified as a large accelerated filer under the Securities Exchange Act[11]. - Tencent Music has adopted International Financial Reporting Standards for its financial statements[11]. - The company has submitted all required reports under the Securities Exchange Act in the past 12 months[11]. - Tencent Music is not classified as a shell company[11]. - The company has maintained effective internal controls over financial reporting as per the Sarbanes-Oxley Act[11]. - The report indicates that Tencent Music is not required to submit reports under Section 13 or 15(d) of the Securities Exchange Act[11]. - The company has not made any corrections to previously issued financial statements[11]. - The English version of the annual report takes precedence over the Chinese translation in case of discrepancies[9]. - The company reported effective internal controls over financial reporting as of December 31, 2023, but acknowledges potential future deficiencies[120]. Variable Interest Entities (VIEs) - Tencent Music Entertainment Group operates through variable interest entities due to restrictions on foreign investment in certain sectors in China[19]. - The company relies on contractual arrangements with variable interest entities to guide their economic performance and obtain most of the economic benefits[19]. - The company has a unique structure that allows it to consolidate the financial results of its variable interest entities into its financial statements[19]. - Revenue from variable interest entities accounted for 99.1%, 96.8%, and 96.5% of total net income for 2021, 2022, and 2023 respectively[21]. - As of December 31, 2022, and December 31, 2023, total assets of variable interest entities represented 26.5% and 24.1% of consolidated total assets[21]. - The company faces significant risks if it fails to predict user preferences and provide content that meets user needs, which could adversely affect user acquisition and retention[47]. - The enforceability of contracts with VIEs is uncertain under Chinese law, which may complicate the company's ability to guide VIE activities effectively[130]. - The company relies on contractual arrangements with VIEs for economic benefits, but these arrangements may not provide the same level of control as direct ownership[129]. - Any failure by VIEs or their partners to fulfill contractual obligations could significantly adversely affect the company's operations and financial performance[130]. Taxation and Dividend Distribution - The effective tax rate applied was 25%, leading to a net distribution to shareholders of 67.5% of the available profit[25]. - The company anticipates a potential double taxation scenario that could reduce post-tax income to approximately 50.6% of pre-tax income if certain tax strategies fail[26]. - Future dividend distributions will be determined by the board based on operational performance, cash flow, and other relevant factors[24]. - The company has not declared or paid any cash or stock dividends on its Class A ordinary shares or American depositary shares[24]. - Chinese subsidiaries must allocate at least 10% of their after-tax profits to statutory reserves until the total reaches 50% of their registered capital, potentially limiting available distributable profits for dividends[33]. - The company’s ability to pay dividends to shareholders and U.S. depositary share holders is contingent on the dividends paid by its Chinese subsidiaries, which face restrictions under Chinese laws[33]. Market Competition and Strategic Positioning - The competitive landscape of the online music and audio entertainment industry in China is a significant factor for the company's strategy[19]. - The company is focused on increasing revenue and managing content-related costs to improve operating profit margins[19]. - The company is exploring strategic acquisitions to bolster its content library and enhance user experience, with a focus on local music labels[15]. - The company faces significant competition globally, which raises the likelihood of facing intellectual property claims[60]. - The company relies on popular live streamers and key opinion leaders to attract user engagement, which is critical for maintaining platform appeal[74]. - The company is actively seeking non-exclusive partnerships with upstream copyright holders following regulatory mandates[71]. - The company is negotiating the renewal of its framework agreement with the music rights organization, which has expired, and this could affect its ability to secure favorable licensing agreements[65]. User Engagement and Content Strategy - The company’s live streaming service revenue primarily comes from the sale of virtual gifts, and recent regulatory scrutiny in China may negatively impact monetization opportunities[66]. - The company introduced a paid streaming model for its online music service in Q1 2019 and continues to increase the number of songs under this model, but future success is not guaranteed[66]. - The company must continuously provide high-quality user experiences and introduce attractive content to increase paid user numbers and willingness to pay[66]. - The company has invested heavily in content acquisition and production, but may struggle to find appealing content or recover investments in this area[55]. - The company faces potential legal liabilities if it fails to act promptly upon receiving proper notifications from rights holders regarding infringing content[58]. - The company has implemented comprehensive measures to reduce the likelihood of using or providing content without proper permissions, including requiring users to confirm they will not upload infringing content[58]. Cybersecurity and Data Protection - The company must conduct regular risk assessments of its data processing activities and report findings to regulatory authorities as mandated by the Data Security Law[93]. - The implementation of the "Cybersecurity Review Measures" on February 15, 2022, expands the scope of cybersecurity reviews to include network platform operators handling personal information of over 1 million users[95]. - The "Personal Information Protection Law" effective from November 1, 2021, consolidates various rules regarding personal information rights and privacy protection applicable to data processing activities within mainland China[94]. - The company has implemented measures to protect user data, but cannot guarantee absolute security against unauthorized access or data breaches[91]. - Compliance with evolving cybersecurity, information security, and data protection laws may be costly and could necessitate unfavorable changes to the company's operations[91]. Economic and Market Conditions - Future business development and financial performance are expected to be influenced by macroeconomic conditions in China and globally[19]. - The global macroeconomic environment remains challenging, with uncertainties stemming from geopolitical tensions and economic policies in major economies[103]. - Economic challenges in China or globally could have a significant adverse impact on the company's business and financial condition[48]. - The fluctuation of the RMB against the USD and other currencies may significantly adversely affect the company's operating performance and investment value[155]. - The company is exposed to risks from potential deposit losses and systemic failures in financial institutions, which could impact overall economic stability[104]. Legal and Litigation Risks - The company is involved in ongoing litigation and regulatory scrutiny that could distract management from daily operations and require substantial cash payments for settlements or damages[86]. - The company may face significant adverse impacts on its business, financial condition, operating performance, cash flow, and reputation due to potential collective securities lawsuits involving its directors and senior management[87]. - The company cannot guarantee that its insurance will cover all or part of the defense costs related to ongoing litigation[87]. - The company faces potential penalties and adverse effects on its business and financial condition if it fails to comply with ESG-related regulations[121]. - The company may face significant losses if its securities are delisted from the NYSE or if it fails to submit timely financial reports as required by the SEC[171]. Strategic Partnerships and Collaborations - The company is seeking long-term partnerships with content collaborators, including cooperation with other Tencent ecosystem companies in the pan-entertainment sector[90]. - The company heavily relies on its strategic partnership with Tencent, which holds 92.6% of the voting power, and any negative developments in Tencent's market position could impact the company's business[123]. - Tencent's brand recognition and user base significantly enhance the company's reputation and marketing effectiveness, making it vulnerable to any negative publicity related to Tencent[123]. - The company may need to seek alternative partnerships if it cannot maintain favorable terms with Tencent, potentially impacting its operational capabilities[123]. Shareholder and Investor Relations - The trading prices of the company's American depositary shares and Class A ordinary shares may experience volatility, potentially leading to significant losses for investors[53]. - The dual-class voting structure limits the influence of Class A common stock and American Depositary Share holders on company matters, granting significant power to certain shareholders[54]. - The sale or potential sale of a large number of Class A common stock and/or American Depositary Shares may adversely affect their trading price[54]. - The company’s ability to attract and retain key personnel may be affected by the increase in share-based compensation expenses[119]. - The company has authorized a total of 436,999,865 shares for equity incentive plans, with 44,799,126 restricted stock units and options for 42,048,774 Class A ordinary shares granted but not exercised as of April 10, 2024[119].

Financial Performance - In 2021, 2022, and 2023, revenues generated by the VIEs accounted for 99.1%, 96.8%, and 96.5% of total net revenues, respectively[16]. - Revenues for the year ended December 31, 2023, reached RMB 27,752 million, a slight increase from RMB 28,339 million in 2022[27]. - Gross profit for 2023 was RMB 9,795 million, compared to RMB 8,773 million in 2022, reflecting a growth of approximately 11.6%[27]. - Operating profit for 2023 was RMB 6,059 million, a significant increase from an operating loss of RMB 404 million in 2022[28]. - Profit for the year 2023 was RMB 5,220 million, up from RMB 3,839 million in 2022, indicating a year-over-year growth of about 36%[28]. - The Group's revenues for the year ended December 31, 2021, were RMB30,949 million, with a gross profit of RMB9,404 million[26]. - The operating profit for the Group was RMB3,800 million for the year ended December 31, 2021[26]. - Profit for the year for the Group was RMB3,215 million for the year ended December 31, 2021[26]. Assets and Liabilities - As of December 31, 2023, total assets of the VIEs represented 24.1% of the consolidated total assets[16]. - Total assets as of December 31, 2023, amounted to RMB 75,536 million, compared to RMB 67,009 million in 2022, representing an increase of approximately 12.5%[30]. - Total liabilities for 2023 were RMB 18,334 million, a slight increase from RMB 17,882 million in 2022[30]. - Total equity as of December 31, 2023, was RMB 57,202 million, up from RMB 49,127 million in 2022, indicating a growth of about 16.4%[30]. - Cumulative capital contributions made by Tencent Music Entertainment Group to PRC subsidiaries amounted to RMB1,177 million (US$166 million) as of December 31, 2023[19]. Cash Flow - For the year ended December 31, 2023, the net cash inflow from operating activities was RMB 7,337 million, an increase from RMB 7,481 million in 2022[34]. - The net cash outflow from investing activities for 2023 was RMB (1,863) million, compared to RMB (1,446) million in 2022[34]. - The net cash outflow from financing activities in 2023 was RMB (1,538) million, a decrease from RMB (3,419) million in 2022[34]. - The company reported cash and cash equivalents of RMB 13,567 million for 2023, compared to RMB 9,555 million in 2022, reflecting a significant increase of approximately 42%[30]. - Cash and cash equivalents at the end of 2023 totaled RMB 13,567 million, up from RMB 9,555 million at the end of 2022[34]. Regulatory Environment - The company faced restrictions under PRC laws regarding the payment of dividends, which may affect its ability to distribute profits to shareholders[37]. - The National Data Bureau was established in 2023 to oversee data-related regulations, impacting the company's operations in data privacy and cybersecurity[40]. - The company is subject to new regulations regarding cross-border data flows, which may affect its international operations and data management strategies[42]. - The China Securities Regulatory Commission (CSRC) introduced new filing requirements for PRC domestic companies seeking to list overseas, effective March 31, 2023, impacting companies with over 50% of revenue from PRC operations[44]. - The revised Anti-Monopoly Law, effective August 1, 2022, imposes stricter regulations on internet platforms and can result in fines up to 10% of the operator's last year's sales revenue for monopolistic conduct[52]. Legal and Compliance Risks - The company faces risks related to user preferences; failure to anticipate these changes could lead to reduced user engagement and negatively impact financial results[63]. - The company may not have obtained complete licenses for certain copyrights, which could expose it to potential disputes and liabilities[69]. - The company is subject to uncertainties regarding the enforcement of laws and regulations in China, which could materially impact its operations[60]. - The company may face challenges in sourcing high-quality content, which could affect its ability to attract and retain users[64]. - The company has been involved in litigation related to copyright infringement claims, which could adversely affect its business and financial condition[77]. Market and Competitive Landscape - The company operates in a competitive industry, facing challenges from other online music services and emerging content forms like live streaming and user-generated videos[101]. - The online music and audio entertainment market is rapidly evolving, and the company must keep pace with technological changes and user behavior to avoid adverse impacts on its business[91]. - The company relies on strong brands like QQ Music, Kugou, Kuwo, WeSing, and Lazy Audio to maintain market leadership, emphasizing the importance of high-quality content and service offerings[89]. Strategic Initiatives - The company has launched a full suite of AI-powered music production tools in 2023, integrating AI into its offerings, which may lead to potential infringement claims and higher compliance costs[122]. - The company aims to increase the number of paying users by addressing challenges such as providing high-quality content and user experience, curating engaging content, and managing data security risks[88]. - The company has implemented measures to reduce copyright infringement risks, including requiring user agreements and adopting "notice and take-down" policies[74]. Shareholder and Governance Issues - As of April 10, 2024, Tencent holds 9.1% of the company's Class A ordinary shares and 98.5% of Class B ordinary shares, representing 92.6% of total voting power, which may lead to conflicts of interest and influence over shareholder actions[183]. - The company has authorized the issuance of up to 436,999,865 shares under its equity incentive plans, which may result in shareholding dilution for existing shareholders[176]. - The effectiveness of the company's internal control over financial reporting was confirmed as of December 31, 2023, but future audits may reveal material weaknesses that could impact investor confidence[178]. Economic and Operational Risks - Economic conditions in China are sensitive to global economic changes, and any severe slowdown could adversely affect the company's financial condition[155]. - The company's business prospects are significantly influenced by China's economic, political, and social conditions, as well as government policies[211]. - Adverse changes in economic conditions or regulatory policies in China could negatively impact the company's demand for services and competitive position[212].

Investment Rating - The report maintains a "Buy" rating for the company, with a target price of HKD 43.74 (CNY 39.67) for 2024 [2][4]. Core Insights - In Q4 2023, the company's revenue was CNY 6.89 billion, representing a year-over-year decline of 7.2% but a quarter-over-quarter increase of 4.9%. For Q1 2024, revenue is expected to reach CNY 6.5 billion, reflecting a year-over-year decline of 7.3% and a quarter-over-quarter decrease of 5.8% [1]. - The gross margin for Q4 2023 was 38.3%, an increase of 5.4 percentage points year-over-year and 2.7 percentage points quarter-over-quarter, driven by strong growth in music subscription and advertising services [1]. - The adjusted net profit for Q4 2023 was CNY 1.58 billion, showing a year-over-year increase of 9.5% and a quarter-over-quarter increase of 11.9% [1]. Revenue Breakdown - Online music services generated CNY 5.02 billion in Q4 2023, a year-over-year increase of 41.1% and a quarter-over-quarter increase of 10.3%. The revenue for Q1 2024 is projected to be CNY 4.79 billion, with an expected annual growth of 25% for 2024 [1]. - Social entertainment services generated CNY 1.87 billion in Q4 2023, a significant year-over-year decline of 51.7% and a quarter-over-quarter decline of 7.2%. The revenue for Q1 2024 is expected to be CNY 1.71 billion, with an anticipated annual decline of 34% for 2024 [1]. Financial Forecasts - The company’s net profit is projected to be CNY 4.9 billion in 2023, CNY 5.7 billion in 2024, and CNY 6.9 billion in 2025, reflecting adjustments in tax rate assumptions [2]. - The report anticipates continued improvement in profit margins due to the increasing share of paid music subscriptions and ARPU growth [2]. Key Financial Metrics - The company’s revenue for 2023 is estimated at CNY 27.75 billion, with a projected growth of 3.0% in 2024 and 6.0% in 2025 [3]. - The gross margin is expected to improve from 35.3% in 2023 to 40.4% in 2024 and 43.1% in 2025 [3]. - The net profit margin is projected to increase from 17.7% in 2023 to 19.9% in 2024 and 22.7% in 2025 [3].

[Table_Page] 公告点评|媒体Ⅱ 证券研究报告 [【Table_广Title] 发传媒&海外】腾讯音乐(TME)/ 公[Ta司ble评_In级ves t] 买入-美股/买入-H 当前价格 11.69美元/44.40港元 腾讯音乐-SW(01698.HK) 合理价值 13.16美元/51.45港元 前次评级 买入/买入 自制音乐占比提升带动毛利率持续优化 报告日期 2024-03-21 [ 核Tab 心le_S 观umm 点ary ：] 相[Ta对ble市_P场icQ表uot现e]  公司发布23Q4季报：23Q4总收入达到68.9亿元，YoY/QoQ -7%/+5%， 40% 30% vs.一致预期为 67 亿元（超 3%）。23Q4 毛利率为 38.3%, YoY/QoQ 20% 10% +5.4pct/+2.7pct 。 NonGAAP 归 母 净 利 润 为 15.75 亿 元 ， 0% -10% YoY/QoQ+10%/+12%，vs.一致预期为 15.55 亿元。23Q4 归母净利润 -20% 率为22.8%，YoY+3.5pct/QoQ+1.4cpt。 -30% SPX Index T ...

Financial Data and Key Metrics Changes - In Q4 2023, total revenues were RMB6.9 billion, down by 7% year-over-year, primarily due to a decline in revenues from social entertainment services [22] - IFRS net profit and non-IFRS net profit were RMB5.2 billion and RMB6.2 billion respectively, up by 36% and 27% year-over-year [22] - Gross margin for Q4 stood at 38.3%, marking an increase of 5.3 percentage points year-over-year [25] - For the full year 2023, total revenues were RMB27.8 billion, down by 2% year-over-year, while revenues from online music services were RMB17.3 billion, up by 39% year-over-year [28][29] Business Line Data and Key Metrics Changes - Music subscription revenues reached RMB3.4 billion in Q4 2023, a 45% increase year-over-year [22] - The number of online music paying users expanded to 106.7 million, representing a 21% increase year-over-year [23] - Advertising revenue showed strong growth year-over-year and sequentially, supported by diversified product offerings [24] Market Data and Key Metrics Changes - The online music business has consistently delivered strong performance, with total monthly subscribers reaching 107 million [34] - The demographic profile of users is aligned with China's population structure, with a significant portion of active users aged between 18 to 30 years old [38] Company Strategy and Development Direction - The company aims to leverage its content and platform dual engines to drive growth and capture opportunities in 2024 and beyond [14] - Continued investment in high-quality content and original productions, as well as new technologies like AIGC, is a priority [32] - The strategy includes enhancing user experience through technology and expanding into new areas such as artist merchandise and live performances [35] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future of the music industry and the company's ability to maintain solid growth in subscription services [34] - The company is focused on improving monetization and operational efficiency while exploring new growth opportunities [32] - The long-form audio segment is expected to see significant growth and integration with existing music platforms [39] Other Important Information - The company has repurchased 25.3 million ADS for a total cash consideration of US$175 million as part of its share repurchase program [28] - The effective tax rate for Q4 2023 was 17.3%, an increase from 12.2% in the same period of 2022 [26] Q&A Session Summary Question: What are the revenue growth expectations for 2024, particularly in the music segment? - Management indicated strong performance in 2023 and expressed confidence in continued growth driven by subscription services and advertising opportunities [34] Question: Can management elaborate on the user profile of newly converted members? - The user base is reflective of China's demographic structure, with a focus on younger users in tier 1, 2, and 3 cities [38] Question: What are the key drivers for gross margin expansion in 2024? - Gross margin increased due to significant growth in music subscription revenues, higher ARPPU, and a ramp-up in self-produced content [43] Question: How does the company leverage AIGC in its business? - AIGC is used to enhance user experience, improve content creation efficiency, and boost promotional materials for better conversion rates [55][57]

Exhibit 99.1 Tencent Music Entertainment Group Announces Fourth Quarter and Full-Year 2023 Unaudited Financial Results SHENZHEN, China, March 19, 2024 /PRNewswire/--Tencent Music Entertainment Group ("TME," or the "Company") (NYSE: TME and HKEX: 1698), the leading online music and audio entertainment platform in China, today announced its unaudited financial results for the fourth quarter and full year ended December 31, 2023. Fourth Quarter 2023 Financial Highlights Full Year 2023 Financial Highlights 1 • ...

Financial Performance - In Q4 2023, Tencent Music Entertainment Group reported total revenue of RMB 6.89 billion (USD 971 million), a year-over-year decrease of 7.2%[2] - Net profit for Q4 2023 was RMB 1.41 billion (USD 198 million), a year-over-year increase of 16.9%[2] - The total revenue for the full year 2023 was RMB 27.75 billion (USD 3.91 billion), a year-over-year decrease of 2.1%[3] - Operating profit for Q4 2023 increased to RMB 1.71 billion (USD 241 million), a year-over-year growth of 23.5%[8] - Net profit for the full year 2023 was RMB 5.22 billion (USD 735 million), with profit attributable to equity holders of the company at RMB 4.92 billion (USD 693 million)[10] User Metrics - The number of online music paying users increased by 20.6% year-over-year to 106.7 million, with a net increase of 3.7 million users quarter-over-quarter[2] - The number of monthly active users for online music services was 576 million in Q4 2023, down 4.2% from 601 million in Q4 2022[4] - The number of online music paid users for the full year increased by 19.8% to 10.09 million, with average monthly revenue per paid user reaching RMB 10.0[9] Revenue Breakdown - Online music subscription revenue reached RMB 3.42 billion (USD 481 million) in Q4 2023, representing a year-over-year growth of 45.3%[2] - Online music service revenue grew significantly by 41.1% year-over-year to RMB 5.02 billion (USD 707 million), driven by accelerated growth in subscription revenue and advertising services[6] - Full year online music service revenue grew by 38.8% to RMB 17.33 billion (USD 2.44 billion), with subscription revenue increasing by 39.1% to RMB 12.10 billion (USD 1.70 billion)[9] - Social entertainment services and other services revenue decreased by 34.2% year-on-year to RMB 10.43 billion (USD 1.47 billion) from RMB 15.86 billion in 2022, primarily due to adjustments in live interaction features and stricter compliance procedures[10] Cost and Expenses - Operating costs decreased by 8.2% year-on-year to RMB 17.96 billion (USD 2.53 billion), mainly due to a decline in revenue-sharing costs corresponding to the drop in social entertainment services revenue[10] - Operating expenses decreased by 9.7% year-on-year to RMB 5.02 billion (USD 707 million), with operating expenses as a percentage of total revenue declining from 19.6% in 2022 to 18.1%[10] - Sales and marketing expenses were RMB 0.897 billion (USD 126 million), a decrease of 21.6% year-on-year, primarily due to reduced promotional expenses for social entertainment services[10] - General and administrative expenses were RMB 4.12 billion (USD 580 million), down 6.6% year-on-year, mainly due to reduced personnel expenses and one-time costs related to the secondary listing in Hong Kong in 2022[10] Profitability Metrics - Gross margin improved to 38.3%, up 5.3 percentage points from 33.0% in Q4 2022, primarily due to strong growth in music subscription and advertising service revenues[6] - Gross margin improved by 4.3 percentage points to 35.3% from 31.0% in 2022, driven by strong growth in music subscription and advertising service revenues[10] - The basic and diluted earnings per American Depositary Share (ADS) for the full year 2023 were RMB 3.15 (USD 0.44) and RMB 3.11 (USD 0.44), respectively[10] Cash and Assets - The total cash, cash equivalents, and short-term deposits amounted to RMB 32.22 billion (USD 4.54 billion) as of December 31, 2023[2] - The company maintained a cash and cash equivalents balance of RMB 32.22 billion (USD 4.54 billion) as of December 31, 2023, up from RMB 30.96 billion at the end of Q3 2023[8] - As of December 31, 2023, total assets increased to RMB 75,536 million from RMB 67,009 million as of December 31, 2022, representing an increase of approximately 12.5%[22] - Cash and cash equivalents increased significantly to RMB 13,567 million in 2023 from RMB 9,555 million in 2022, a growth of approximately 42.5%[24] Strategic Focus - Tencent Music's CEO emphasized the focus on enhancing user experience and increasing AI usage to improve member conversion and retention in 2024[3] - The company aims to leverage its content and platform strategy to capture diverse growth opportunities in the coming years[3] Share Repurchase - As of December 31, 2023, the company repurchased approximately 25.3 million ADS for about USD 174.5 million under a USD 500 million share repurchase plan announced on March 21, 2023[11]