Investment Rating - The report maintains a "Buy" rating for Tencent Music, with a target price of HKD 53.17 [4][2]. Core Insights - In Q2 2024, Tencent Music reported revenue of CNY 7.16 billion, a year-over-year decrease of 1.7% but a quarter-over-quarter increase of 5.8%. The company expects Q3 revenue to reach CNY 7 billion, reflecting a year-over-year increase of 6.7% [1]. - The gross margin for Q2 2024 was 42.04%, up 7.77 percentage points year-over-year and 1.10 percentage points quarter-over-quarter, driven by strong growth in music subscription and advertising services [1]. - The online music service revenue for Q2 2024 was CNY 5.42 billion, a year-over-year increase of 27.65% and a quarter-over-quarter increase of 8.33%. The company anticipates Q3 revenue of CNY 5.6 billion, a year-over-year increase of 23% [1]. - The social entertainment service revenue for Q2 2024 was CNY 1.74 billion, a year-over-year decrease of 42.84% and a quarter-over-quarter decrease of 1.42%. The company expects Q3 revenue to decline to CNY 1.4 billion [1]. Financial Summary - The report forecasts net profit attributable to shareholders for 2024, 2025, and 2026 to be CNY 6.7 billion, CNY 8.2 billion, and CNY 10.2 billion respectively, reflecting an upward adjustment due to increased ARPPU and gross margin [2]. - The expected ARPPU for Q3 2024 is CNY 10.9 per month, with a projected annual membership revenue of CNY 15.2 billion for 2024, a year-over-year increase of 26% [1][2]. - The report provides a comparison of valuation metrics with peer companies, suggesting a P/E ratio of 25 times for 2024 [2][8].

Investment Rating - The investment rating for Tencent Music is "Buy" with a target price of USD 14.00, indicating a potential upside of 25.9% from the current price of USD 11.12 [1][11]. Core Insights - Tencent Music's Q2 2024 profits exceeded expectations, with revenue of RMB 7.2 billion, a slight year-on-year decline of 2%. The gross margin improved to 42%, benefiting from subscription and advertising revenue growth [1][2]. - The adjusted net profit for Q2 was RMB 1.87 billion, a year-on-year increase of 22%, surpassing market expectations [1][2]. - The company is focusing on enhancing SVIP operations to improve ARPPU and expects a return to stable membership growth in the second half of the year [2][6]. Financial Performance Summary - Q2 2024 revenue was RMB 72 billion, with online music revenue at RMB 54 billion, a year-on-year increase of 28% [1][6]. - The number of music subscribers reached 117 million, with a net increase of 3.5 million in Q2, slightly below market expectations [1][6]. - Monthly ARPPU for music subscriptions was RMB 10.7, reflecting a 10% year-on-year increase [1][6]. Future Outlook - Management anticipates a 21% increase in music subscription revenue for Q3 2024, with a net addition of 1.7 million members for the year, down from previous estimates [2][6]. - The company has adjusted its revenue forecasts for 2024 and 2025 down by 2% and 4% respectively, while maintaining adjusted net profit expectations due to cost optimization [2][6]. Valuation - The target price has been revised down to USD 14.00, based on a sum-of-the-parts (SOTP) valuation, with music valued at USD 12, social at USD 1, and cash at USD 1 [2][8]. - The estimated P/E ratio for 2024 is 18.4, reflecting a stable outlook for profitability despite adjustments in revenue forecasts [4][8].

Investment Rating - The report does not explicitly state an investment rating for Tencent Music Entertainment (TME) [2] Core Views - TME's 24Q2 performance exceeded expectations with a net profit of RMB 1.79 billion, up 33.1% YoY, and an adjusted net profit of RMB 1.99 billion, up 25.7% YoY [2] - Revenue for 24Q2 was RMB 7.16 billion, up 1.7% YoY, with an operating profit of RMB 2.2 billion, up 42.8% YoY, and an operating profit margin of 30.7% [2] - Online music service revenue grew 27.7% YoY to RMB 5.42 billion, driven by strong growth in subscription revenue and advertising income [2] - Social entertainment and other services revenue declined 42.8% YoY to RMB 1.74 billion due to adjustments in live streaming features and increased competition [2] - Gross margin and net margin have improved for nine consecutive quarters, with a gross margin of 42.0% and a net margin of 25.1% in 24Q2 [2] - The company expects steady growth in net paying users and anticipates ARPPU growth driven by SVIP offerings, which could further enhance profitability [2] Business Performance - Online music subscription revenue reached RMB 3.74 billion, up 29.4% YoY, with paying users increasing to 117 million, up 17.7% YoY [2] - ARPPU for online music services was RMB 10.7, up 10% YoY, with SVIP offerings expected to drive further ARPPU growth [2] - Advertising revenue saw strong growth due to diversified product offerings and innovative ad formats [2] - Social entertainment revenue declined due to stricter compliance measures and competitive pressures [2] Financial Metrics - Gross margin improved by 7.7 percentage points YoY to 42.0% in 24Q2 [2] - Net margin increased by 6.6 percentage points YoY to 25.1% in 24Q2 [2] - Adjusted net margin rose by 6.1 percentage points YoY to 27.8% in 24Q2 [2] - Sales expenses were RMB 210 million, with a sales expense ratio of 2.9%, flat YoY [2] - Management expenses were RMB 938 million, with a management expense ratio of 13.1%, down 1.2 percentage points YoY [2] Future Outlook - TME expects ARPPU growth to outpace net paying user growth in the second half of the year, driven by SVIP offerings [2] - SVIP benefits include early access to digital albums, enhanced audio quality features, and multi-device access, with a monthly price of RMB 40 compared to RMB 15 for regular members [2] - The company anticipates further improvements in gross and net margins for the full year [2]

Investment Rating - The report maintains a "Buy" rating for TME with a target price of $16.00, representing a potential upside of 21.9% from the current price of $13.13 [4][11]. Core Insights - TME's Q2 2024 total revenue decreased by 2% year-on-year to RMB 7.16 billion, aligning with consensus estimates. However, non-IFRS net income grew by 22% year-on-year to RMB 1.87 billion, exceeding expectations [2][3]. - The management emphasizes a balanced growth strategy focusing on music subscribers and ARPPU (Average Revenue Per User), with long-term goals of reaching 150 million music users and a monthly ARPPU of RMB 15 [2][3]. - The online music segment showed robust growth, with revenue increasing by 28% year-on-year to RMB 5.42 billion, accounting for 76% of total revenue. Paid users rose by 18% year-on-year to 117 million [2][3]. - The report forecasts an 8% year-on-year revenue growth in Q3 2024, driven by a 24% increase in online music revenue, despite a 29% decline in social entertainment revenue [2][3]. Financial Summary - For FY24E, total revenue is projected at RMB 28.415 billion, with a gross profit margin (GPM) of 42.2% and an adjusted net profit of RMB 7.501 billion [3][8]. - The GPM is expected to expand to 42.8% in Q3 2024, supported by improved online music margins and increased self-produced content [2][3]. - The report indicates a compound annual growth rate (CAGR) of 21% for TME's revenue from FY24 to FY26, driven by core music revenue growth and GPM expansion [2][3]. Valuation Metrics - The report provides a DCF valuation with a target price of $16.00, based on a WACC of 11.6% and a terminal growth rate of 2.5% [11][12]. - TME's current P/E ratio is 21 times FY24E earnings, which is considered fair by the report [2][3]. Market Performance - TME's stock has seen a 1-month decline of 13.2% and a 3-month decline of 11.3%, while it has increased by 36.3% over the past 6 months [5]. - The company has a market capitalization of approximately $20.23 billion and an average turnover of $32.1 million over the past three months [5]. Future Outlook - The management's focus on leveraging AI technology to enhance user experience and drive music streaming growth is highlighted as a key strategy moving forward [2][3]. - The report anticipates continued growth in the number of music users, with a net increase of 1.5 to 2 million users per quarter in the second half of 2024 [2][3].

14 August 2024 | 6:40AM HKT Tencent Music Entertainment Group (tme) Buy Earnings Review: 2024 in-line: Shifting gear to ARPPU over subs, expectation reset but still long runway of growth; Buy TMEUpside: 27.7%12m Price Target: $14.20Price: $11.12 1698.HK12m Price Target: HK$55.10Price: HK$53.50Upside: 3.0% TME delivered in-line 2Q24 results (see our note) yet produced a mixed outlook over 2H24-2025 including: 1) A shift in gear of growth drivers may raise concerns for some investors on multiple contraction, ...

Investment Rating - The report maintains a "Buy" rating for Tencent Music Entertainment Group (TME) with a 12-month price target of US$16.00 per ADS and HK$62.30 for 1698.HK, indicating an upside potential of 21.9% [7][10]. Core Insights - Tencent Music reported 2Q24 revenue largely in line with expectations, showing a slight year-over-year decline of 2% but a significant increase in non-GAAP operating profit by 39% year-over-year [2][4]. - The company achieved a record high gross profit margin (GPM) of 42%, reflecting an 8 percentage point increase year-over-year, driven by operating leverage from online music services and subscriber growth [4][8]. - The number of paying subscribers increased by 3.5 million quarter-over-quarter, with an average revenue per paying user (ARPPU) of RMB 10.7, marking a 10% year-over-year improvement [4][8]. Financial Performance Summary - **Net Revenues**: RMB 7,160 million, down 2% year-over-year, and slightly below Goldman Sachs estimates [4]. - **Online Music Revenues**: RMB 5,424 million, up 28% year-over-year, indicating strong growth in this segment [4]. - **Adjusted Net Income**: RMB 1,873 million, a 22% increase year-over-year, slightly above estimates [4]. - **Gross Margin**: Increased to 42%, surpassing expectations, with a target of 45% in the medium term [4][8]. - **Operating Expenses**: Remained disciplined, with total OPEX largely flat quarter-over-quarter, reflecting a focus on cost management [4][8]. Subscriber and Revenue Metrics - **Total Subscribers**: 117 million, with a year-over-year growth of 18% [4]. - **ARPPU**: RMB 10.7, showing a 10% increase year-over-year [4]. - **Quarterly Subscriber Growth**: Sustained momentum with 3.5 million net adds [4][8]. Market Outlook - The management's outlook for 3Q growth in subscribers and ARPU, along with profitability expansion, will be critical to watch [2][4].

Investment Rating - The report maintains a "BUY" rating for the company with a target price of US$16.00, indicating a potential upside of 21.9% from the current price of US$13.13 [5][11]. Core Insights - The company reported inline 2Q24 results with total revenue declining by 2% YoY to RMB7.16 billion, while non-IFRS net income increased by 22% YoY to RMB1.87 billion, exceeding estimates [3][4]. - Management aims for balanced growth in music subscribers and ARPPU in 2H24E, with expectations of slower subscriber growth but continued ARPPU growth [3][4]. - The long-term target remains at 150 million music subscribers and RMB15 in monthly ARPPU, with a projected earnings CAGR of 21% over FY24-26E [3][4]. Revenue and Profitability - Online music revenue grew by 28% YoY to RMB5.42 billion in 2Q24, accounting for 76% of total revenue, with subscription and non-subscription revenues increasing by 29% and 24% YoY, respectively [3][4]. - The gross profit margin (GPM) expanded by 7.7 percentage points YoY to 42.0% in 2Q24, driven by margin improvements in the online music business and enhanced monetization strategies [3][4][10]. - For FY24E, non-IFRS net income is estimated to grow by 27% YoY to RMB7.50 billion, supported by GPM expansion and operational expense control [3][4]. Future Outlook - The company forecasts total revenue growth of 8% YoY to RMB7.06 billion in 3Q24E, primarily driven by a 24% YoY increase in online music revenue, despite a decline in social entertainment revenue [3][4]. - GPM is expected to further expand to 42.8% in 3Q24E, with continued focus on high-value programs and AI technology to enhance user experience [3][4][10]. - The company’s valuation remains fair at 21x FY24E PE, reflecting confidence in its growth trajectory [3][4].

14 Aug 2024 CMB International Global Markets | Equity Research | Company Update TME (TME US) Inline 2Q24 results; focus on balanced growth of music subs and ARPPU in 2H24E TME announced 2Q24 results on 13 Aug: total revenue declined by 2% YoY to RMB7.16bn, in line with our/Bloomberg consensus estimate of RMB7.16/7.13bn; non-IFRS net income was up by 22% YoY to RMB1.87bn, 2/2% ahead of our/consensus estimate. For 2H24E, management will focus more on balanced growth of music subs and ARPPU, expecting slower m ...

Financial Performance - Total revenues for Q2 2024 were RMB7.16 billion (US$985 million), a 1.7% year-over-year decrease, primarily due to a decline in social entertainment services revenues[1]. - Net profit for Q2 2024 was RMB1.79 billion (US$247 million), representing a 33.1% year-over-year growth[2]. - Total operating profit for Q2 2024 was RMB2.20 billion (US$302 million), a 42.8% year-over-year increase[13]. - The net profit attributable to equity holders for the period was RMB 1,682 million, reflecting a year-over-year increase of 29.6% from RMB 1,298 million[24]. - Tencent Music's non-IFRS net profit for the three months ended June 30, 2024, was RMB 1,985 million, up 25.0% from RMB 1,579 million in the same period of 2023[26]. - Basic earnings per share for Class A and Class B ordinary shares was RMB 0.54, compared to RMB 0.42 in the same quarter last year, marking a 28.6% increase[24]. Revenue Breakdown - Revenues from music subscriptions increased by 29.4% year-over-year to RMB3.74 billion (US$515 million), with paying users rising by 17.7% to 117.0 million[2]. - Revenues from online music services grew by 27.7% year-over-year to RMB5.42 billion (US$746 million)[10]. - Revenues from social entertainment services decreased by 42.8% to RMB1.74 billion (US$239 million) due to compliance adjustments and increased competition[11]. User Engagement and Growth - Monthly ARPPU for online music increased by 10.3% year-over-year to RMB10.7[4]. - The company launched new digital album offerings and enhanced user engagement through personalized privileges and advanced technology features[5][8]. - The company reported a total of 51.6 million monthly active users in its online music services segment as of June 30, 2024, a decrease from 45.6 million in the previous year[24]. Financial Position - Cash, cash equivalents, term deposits, and short-term investments totaled RMB35.03 billion (US$4.82 billion) as of June 30, 2024[15]. - The company has increased its financial assets at fair value through other comprehensive income to RMB 10,294 million as of June 30, 2024, from RMB 6,540 million at the end of 2023[28]. - Tencent Music's total assets grew to RMB 82,405 million as of June 30, 2024, compared to RMB 75,536 million at the end of 2023, indicating a growth of 9.8%[29]. - Total equity decreased from RMB 62,879 million to RMB 57,202 million, a decline of 9.7%[30]. - Total liabilities decreased from RMB 19,526 million to RMB 18,334 million, a decline of 6.1%[31]. Cash Flow - Net cash provided by operating activities increased from RMB 2,067 million to RMB 2,944 million, a growth of 42.4%[33]. - Net cash used in investing activities improved from a usage of RMB 1,339 million to a usage of RMB 693 million, a reduction of 48.3%[33]. - Cash and cash equivalents at the end of the period decreased from RMB 12,950 million to RMB 12,251 million, a decline of 5.4%[33]. Other Financial Metrics - Gross margin improved to 42.0%, up from 34.3% in the same period of 2023, driven by strong growth in music subscriptions and advertising[12]. - The gross profit for the same period was RMB 3,010 million, representing a gross margin of 42.0%, up from RMB 2,497 million and a gross margin of 34.3% in the prior year[24]. - Operating profit increased to RMB 2,198 million for the three months ended June 30, 2024, a growth of 43.0% year-over-year from RMB 1,539 million[24]. - Retained earnings increased from RMB 16,520 million to RMB 16,969 million, an increase of 2.7%[30]. - Non-controlling interests decreased from RMB 1,670 million to RMB 1,295 million, a decline of 22.4%[30]. - Current liabilities decreased from RMB 13,179 million to RMB 12,014 million, a decline of 8.8%[30]. - Total equity and liabilities decreased from RMB 82,405 million to RMB 75,536 million, a decline of 8.3%[31]. - Deferred revenue increased from RMB 2,952 million to RMB 2,854 million, a decline of 3.3%[30].

Revenue Performance - Total revenue for Q2 2024 was RMB 7.16 billion (USD 985 million), a year-over-year decrease of 1.7% primarily due to declines in social entertainment services and other services revenue, partially offset by strong growth in online music services revenue [3]. - Total revenue for Q2 2024 was RMB 7.16 billion (USD 985 million), a decrease from RMB 7.29 billion in Q2 2023 [7]. - Online music service revenue grew by 27.7% year-over-year to RMB 5.42 billion (USD 746 million), driven by a 29.4% increase in subscription revenue to RMB 3.74 billion (USD 515 million) [8]. - The total revenue for the six months ended June 30, 2023, was RMB 14,290 million, a 5.5% increase from RMB 13,550 million in the same period last year [18]. Profitability - Net profit for Q2 2024 was RMB 1.79 billion (USD 247 million), a year-over-year increase of 33.1%, while net profit attributable to equity holders was RMB 1.68 billion (USD 231 million), up 29.6% year-over-year [3]. - Operating profit for Q2 2024 increased by 42.8% year-over-year to RMB 2.20 billion (USD 302 million) [9]. - Non-IFRS net profit for the three months ended June 30, 2023, was RMB 1,348 million, representing a 10.5% increase compared to RMB 1,221 million in the same period last year [18]. - The company reported a net profit attributable to equity holders of RMB 1,298 million for the three months ended June 30, 2023, compared to RMB 1,100 million in the same period last year, marking a 17.9% increase [19]. User Metrics - Online music subscription revenue increased by 29.4% year-over-year to RMB 3.74 billion (USD 515 million), with the number of paid users growing by 17.7% to 117 million, and a net increase of 3.5 million users quarter-over-quarter [3]. - Monthly active users for online music services decreased by 3.9% year-over-year to 571 million, while mobile monthly active users for social entertainment services dropped by 31.6% to 93 million [5]. - The number of online music paying users increased by 17.7% year-over-year to 117 million, with an average revenue per paying user of RMB 10.7 [8]. Cash and Investments - As of June 30, 2024, the total balance of cash, cash equivalents, time deposits, and short-term investments was RMB 35.03 billion (USD 4.82 billion) [3]. - Cash and cash equivalents totaled RMB 35.03 billion (USD 4.82 billion) as of June 30, 2024, up from RMB 34.18 billion [12]. - The company reported cash and cash equivalents of RMB 12,251 million as of June 30, 2024, down from RMB 13,567 million as of December 31, 2023 [22]. - The net cash outflow from investing activities for the six months ended June 30, 2024, was RMB 4,805 million, compared to an outflow of RMB 528 million for the same period in 2023 [24]. Operating Expenses - Operating expenses decreased by 8.5% year-over-year to RMB 1.15 billion (USD 158 million), with a reduction in general and administrative expenses by 10.2% [9]. - The total operating costs for the three months ended June 30, 2023, were RMB 7,286 million, a slight decrease from RMB 7,300 million in the same period last year [18]. Future Outlook - The company expects continued growth in online music services and anticipates a recovery in social entertainment services in the upcoming quarters [17]. - The company plans to continue expanding its market presence and investing in new technologies and products to drive future growth [20]. Shareholder Returns - The company declared a cash dividend of USD 0.0685 per ordinary share, totaling USD 212 million, to be paid on June 2024 [11]. Asset and Liability Overview - The total assets of Tencent Music as of June 30, 2024, were RMB 82,405 million, an increase from RMB 75,536 million as of December 31, 2023 [22]. - Total liabilities increased to RMB 19,526 million as of June 30, 2024, from RMB 18,334 million as of December 31, 2023 [23]. - The company’s equity attributable to shareholders was RMB 62,879 million as of June 30, 2024, up from RMB 57,202 million as of December 31, 2023 [23].