The China-based company is on its way to repurchasing billions worth of sharesOptions traders are targeting Tencent Music Entertainment Group (NYSE:TME) today, as the stock jumps to its highest level since July 2021. The China-based company yesterday repurchased 3.27 million shares for $1 billion, after last month announcing its intention to buy back a minimum of $12.8 billion this year. The stock also got a boost last week after boosting its advertising business with artificial intelligence (AI). So far to ...

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].

Investment Rating - The investment rating for Tencent Music (TME.N) has been upgraded to "Buy" [2][5][15] Core Insights - The online music business is experiencing robust growth, with an expected year-on-year increase of 25% in 2024. The company is also expected to continue improving its operational capabilities, leading to higher gross and profit margins [2][15] - As of December 2023, the company has a strong cash position, with cash and cash equivalents totaling 32.2 billion yuan [2][15] - The adjusted net profit forecast for 2024-2026 is set at 7 billion, 7.9 billion, and 8.8 billion yuan respectively, reflecting an upward adjustment of 3% to 5% [2][15] Summary by Sections Financial Performance - In Q4 2023, Tencent Music reported total revenue of 6.89 billion yuan, a year-on-year decrease of 7.2% but a quarter-on-quarter increase of 4.9%. Online music revenue accounted for 73% of total revenue [1][6] - The gross margin for Q4 2023 was 38.3%, up 5.4 percentage points year-on-year and 2.7 percentage points quarter-on-quarter. This increase is attributed to higher ARPPU in online music and growth in high-margin advertising business [1][6] - The adjusted net profit for Q4 2023 was 1.68 billion yuan, representing a year-on-year increase of 12.5% [1][6] Online Music Business - Online music revenue reached 5.02 billion yuan in Q4 2023, marking a year-on-year increase of 41%. Subscription revenue alone was 3.4 billion yuan, up 46% year-on-year [1][9] - The monthly ARPPU for online music was 10.7 yuan, reflecting a year-on-year increase of 20.2% [1][10] - The subscription payment rate reached 18.5%, an increase of 2.9 percentage points year-on-year, with the number of paid users growing by 20.6% [1][9] Social Entertainment Business - Social entertainment and other revenue totaled 1.87 billion yuan in Q4 2023, down 52% year-on-year. The monthly ARPPU for social entertainment was 78 yuan, a decrease of 54% year-on-year [1][12] - The company anticipates a narrowing of revenue decline in the social entertainment segment in 2024, expecting quarterly revenue to stabilize around 1.7 billion yuan [1][12]

Investment Rating - The report maintains a "Buy" rating for Tencent Music (TME) with a target price of $13.16 per ADS, equivalent to HKD 51.45 per share [4][30]. Core Insights - Tencent Music's Q4 2023 total revenue reached RMB 6.89 billion, exceeding consensus expectations by 3% [2][8]. - The gross margin for Q4 2023 was 38.3%, reflecting a year-over-year increase of 5.4 percentage points [2][24]. - Non-GAAP net profit for Q4 2023 was RMB 1.575 billion, showing a year-over-year growth of 10% [2][13]. - The music business revenue grew significantly, with subscription revenue reaching RMB 3.42 billion, a 45% year-over-year increase [2][13]. Summary by Sections Financial Performance - Q4 2023 total revenue was RMB 6.89 billion, with a year-over-year decline of 7% but a quarter-over-quarter increase of 5% [2][8]. - Gross margin improved to 38.3%, up 5.4 percentage points year-over-year [2][24]. - Non-GAAP net profit was RMB 1.575 billion, with a net profit margin of 22.8% [2][13]. Music Business Growth - Music revenue for Q4 2023 reached RMB 5 billion, a 41% increase year-over-year [2][13]. - Subscription revenue was RMB 3.42 billion, with a total membership of 106.7 million, reflecting a 21% year-over-year growth [2][13]. - Monthly ARPU increased to RMB 10.7, up 20% year-over-year [2][13]. Advertising and Other Revenue - Other revenue, primarily from advertising, was RMB 1.6 billion, showing a 33% year-over-year increase [2][18]. - The social entertainment segment generated RMB 1.871 billion, down 52% year-over-year, indicating a stabilization after adjustments [2][21]. Future Projections - Revenue forecasts for 2024 and 2025 are RMB 28.6 billion and RMB 33.1 billion, representing growth rates of 3.1% and 15.7% respectively [2][28]. - Adjusted net profit for 2024 and 2025 is projected at RMB 6.825 billion and RMB 8.258 billion, with growth rates of 15.2% and 21.0% [2][28]. - The report anticipates continued growth in the music business driven by increased subscription and advertising revenues [2][28].

Executive Changes - Mr Zhenyu Xie has resigned from his executive positions as President, Chief Technology Officer, and board member, effective March 31, 2024, for personal reasons [1] - Mr Xie will continue to serve as a consultant to the company [1] - Ms Min Hu (Shirley Hu), the Chief Financial Officer, has been appointed as a director of the company, effective March 31, 2024 [1] Leadership Background - Ms Min Hu has over 20 years of experience in finance, including financial management, capital operations, mergers and acquisitions, and internal control [2] - Prior to joining Tencent Music Entertainment, Ms Hu held various controller roles in Tencent's business groups from 2007 to 2016 and served as the director of internal audit at Huawei Technologies [2] - Ms Hu holds professional certifications including CIMA, CPA Australia, CICPA, and CIA, and holds degrees in Industrial Foreign Trade and Systems Engineering [2] Company Overview - Tencent Music Entertainment Group is the leading online music and audio entertainment platform in China, operating popular apps such as QQ Music, Kugou Music, Kuwo Music, and WeSing [3] - The company's platform includes online music, audio, karaoke, live streaming, and online concert services, enabling users to discover, listen, sing, watch, perform, and socialize around music [3]

Investment Rating - The investment rating for Tencent Music (TME US) is "Buy" with a target price of $13.00, indicating a potential upside of 17.8% from the current price of $11.04 [1][7]. Core Insights - Tencent Music's Q4 2023 performance exceeded expectations, with total revenue of 6.89 billion RMB, a year-on-year decline of 7%, primarily due to adjustments in the social entertainment segment, which saw a 52% decrease [1][2]. - The adjusted net profit for Q4 2023 was 1.7 billion RMB, representing a 12% increase year-on-year, which was higher than both the report's and market's expectations [1][2]. - The online music segment showed strong growth, with revenue of 5.02 billion RMB, a year-on-year increase of 41%, driven by a 45% increase in music subscription revenue [2][5]. Summary by Sections Financial Performance - Q4 2023 total revenue was 6.89 billion RMB, down 7% year-on-year, but better than the market expectation of a 10% decline [5]. - Online music revenue reached 5.02 billion RMB, up 41% year-on-year, accounting for 73% of total revenue [2][5]. - The adjusted net profit for Q4 2023 was 1.7 billion RMB, with an adjusted net profit margin of 24% [1][5]. Membership and Revenue Growth - The number of music subscribers reached 107 million, with a net increase of 3.7 million in Q4 2023, resulting in a payment rate of 18.5% [2][5]. - Monthly ARPPU (Average Revenue Per Paying User) increased to 10.7 RMB, reflecting a 20% year-on-year growth [2][5]. - The report forecasts a 37% increase in music subscription revenue for Q1 2024 and a 25% increase for the full year [2][6]. Cost and Profitability - Gross margin improved to 38% in Q4 2023, benefiting from increased subscription and advertising revenues [1][5]. - The report anticipates a further increase in gross margin to 40% in 2024 due to better cost optimization in online music [2][6]. - The adjusted net profit for 2024 is projected to be 6.62 billion RMB, with a corresponding adjusted net profit margin of 23% [8]. Valuation and Market Outlook - The target price for Tencent Music has been raised to $13.00 based on a comparable music and copyright company average P/E ratio of 20x for 2024 [2][8]. - The company continues to see growth potential in music membership over the next two years, supported by scale effects and increased self-produced content [2][6].

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]

[Executive Summary](index=1&type=section&id=Executive%20Summary) [Fourth Quarter 2023 Financial Highlights](index=1&type=section&id=Fourth%20Quarter%202023%20Financial%20Highlights) TME reported a 7.2% YoY decrease in total revenues for Q4 2023, primarily due to a decline in social entertainment services, while online music services showed strong growth, with music subscription revenues increasing by 45.3% and net profit growing by 16.9% | Metric | Q4 2023 (RMB) | YoY Change | US$ (million) | | :-------------------------------- | :------------ | :--------- | :------------ | | Total Revenues | 6.89 billion | -7.2% | 971 | | Music Subscriptions Revenue | 3.42 billion | +45.3% | 481 | | Net Profit | 1.41 billion | +16.9% | 198 | | Net Profit Attributable to Equity Holders | 1.31 billion | +13.5% | 184 | | Non-IFRS Net Profit | 1.68 billion | +12.5% | 236 | | Diluted Earnings per ADS | 0.83 | +15.3% | 0.12 | | Music Paying Users | 106.7 million | +20.6% | - | | Monthly ARPPU - Online Music | 10.7 | +20.2% | - | - Total cash, cash equivalents, and term deposits as of December 31, 2023, were **RMB32.22 billion (US$4.54 billion)**[4](index=4&type=chunk) [Full Year 2023 Financial Highlights](index=1&type=section&id=Full%20Year%202023%20Financial%20Highlights) For the full year 2023, TME's total revenues decreased by 2.1% YoY, despite which music subscription revenues saw significant growth of 39.1%, contributing to a substantial 36.0% increase in net profit | Metric | FY 2023 (RMB) | YoY Change | US$ Equivalent | | :-------------------------------- | :------------ | :--------- | :--------------- | | Total Revenues | 27.75 billion | -2.1% | 3.91 billion | | Music Subscriptions Revenue | 12.10 billion | +39.1% | 1.70 billion | | Net Profit | 5.22 billion | +36.0% | 735 million | | Net Profit Attributable to Equity Holders | 4.92 billion | +33.8% | 693 million | | Non-IFRS Net Profit | 6.22 billion | +26.8% | 876 million | | Net Adds of Music Paying Users | 18.2 million | Up from 12.3M in 2022 | - | [Management Commentary](index=2&type=section&id=Management%20Commentary) [Executive Chairman's Comments](index=2&type=section&id=Executive%20Chairman's%20Comments) Mr. Cussion Pang highlighted 2023 as a pivotal transition year, noting accelerated growth in music subscription revenue and expanded net profits, driven by online music services mitigating social entertainment headwinds - 2023 marked a pivotal transition at TME, with **accelerated year-over-year growth in music subscription revenue** and **expanded quarterly net profits**[5](index=5&type=chunk) - Online music services' strong performance mitigated headwinds from social entertainment services[5](index=5&type=chunk) - TME is well-positioned for multi-faceted opportunities, underpinned by content and platform dual engines and the online music business's relatively counter-cyclical nature[5](index=5&type=chunk) [CEO's Comments](index=2&type=section&id=CEO's%20Comments) Mr. Ross Liang focused on efficiency and user experience, noting that deeper insights into users and content enhanced operational efficiency and personalization, and highlighted the positive impact of expanded user privileges and AI-empowered products on subscriber conversion and retention - Laser focus on execution resulted in a year of efficiency, with enhanced operational efficiency through deeper insights into users and content[5](index=5&type=chunk) - Expanded user privileges and AI-empowered products contributed positively to **subscriber conversion and retention**[5](index=5&type=chunk) - For 2024, TME remains dedicated to delivering a more compelling user experience and easier access to music across a broader range of use cases[5](index=5&type=chunk) [Operational Highlights](index=2&type=section&id=Operational%20Highlights) [Key Operating Metrics (Q4 2023)](index=2&type=section&id=Key%20Operating%20Metrics%20(Q4%202023)) In Q4 2023, online music paying users and ARPPU showed strong growth, while MAUs for both online music and social entertainment declined, and social entertainment ARPPU also saw a significant decrease | Metric | 4Q23 | 4Q22 | YoY % | | :-------------------------------- | :--- | :--- | :---- | | MAUs — online music (million) | 576 | 601 | (4.2%) | | Mobile MAUs — social entertainment (million) | 104 | 146 | (28.8%) | | Paying users — online music (million) | 106.7 | 88.5 | 20.6% | | Paying users — social entertainment (million) | 8.0 | 7.6 | 5.3% | | Monthly ARPPU — online music (RMB) | 10.7 | 8.9 | 20.2% | | Monthly ARPPU — social entertainment (RMB) | 78.0 | 169.6 | (54.0%) | [Strategic Initiatives](index=3&type=section&id=Strategic%20Initiatives) TME strengthened its content leadership through extensive partnerships and diverse offerings, enhanced platform value with improved user experiences and multi-device support, and leveraged AIGC for intelligent music discovery and artist creation - Strengthened content offerings with **over 200 million music and audio tracks** by the end of 2023, including renewed multi-year strategic cooperation with Universal Music Group[8](index=8&type=chunk)[10](index=10&type=chunk) - Enriched mid- to long-tail content with **over 3 million songs** published by **over 480,000 indie musicians** through Tencent Musician Platform[10](index=10&type=chunk) - Expanded user privileges and improved multi-device experience, including China's largest Dolby Atmos music library and upgraded in-car music experience[9](index=9&type=chunk)[10](index=10&type=chunk) - Integrated Large Language Models (LLMs) into music streaming for intelligent music discovery, upgrading features like the virtual DJ[10](index=10&type=chunk) - Introduced Venus' AI composition tool to support artists' music creation[10](index=10&type=chunk) [Fourth Quarter 2023 Financial Review](index=4&type=section&id=Fourth%20Quarter%202023%20Financial%20Review) [Total Revenues and Cost of Revenues (Q4 2023)](index=4&type=section&id=Total%20Revenues%20and%20Cost%20of%20Revenues%20(Q4%202023)) Total revenues for Q4 2023 decreased by 7.2% YoY, primarily due to a significant decline in social entertainment services, while cost of revenues also decreased, mainly driven by lower revenue sharing fees from social entertainment | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | YoY Change | | :-------------------- | :-------------------- | :-------------------- | :--------- | | Total Revenues | 6,893 | 7,425 | -7.2% | | Cost of Revenues | 4,252 | 4,978 | -14.6% | - The decrease in total revenues was mainly due to the decline in revenues from social entertainment services and others, partially mitigated by growth in online music services[4](index=4&type=chunk)[11](index=11&type=chunk) - Cost of revenues decreased mainly due to decreased revenues from social entertainment services leading to lower revenue sharing fees, partially offset by increased content costs of royalties and advertising agency fees[12](index=12&type=chunk) [Gross Margin and Operating Expenses (Q4 2023)](index=4&type=section&id=Gross%20Margin%20and%20Operating%20Expenses%20(Q4%202023)) Gross margin improved significantly by 5.3 percentage points to 38.3% in Q4 2023, driven by strong growth in music subscriptions and advertising, and the ramp-up of own content, while total operating expenses decreased by 7.0% YoY, mainly due to reduced employee-related and promotional expenses | Metric | Q4 2023 | Q4 2022 | Change | | :-------------------------------- | :------ | :------ | :----- | | Gross Margin | 38.3% | 33.0% | +5.3 ppts | | Total Operating Expenses (RMB million) | 1,266 | 1,361 | -7.0% | | Selling and Marketing Expenses (RMB million) | 255 | 266 | -4.1% | | General and Administrative Expenses (RMB million) | 1,011 | 1,095 | -7.7% | - Gross margin increase was primarily due to **strong growth of revenues from music subscriptions and advertising services**, and the ramp-up of TME's own content[13](index=13&type=chunk) - Selling and marketing expenses decreased mainly due to reduced promotional expenses for social entertainment services, partially offset by increased spending on content promotion[15](index=15&type=chunk) - General and administrative expenses decreased primarily due to reduced employee-related expenses[15](index=15&type=chunk) [Revenue Breakdown by Service (Q4 2023)](index=4&type=section&id=Revenue%20Breakdown%20by%20Service%20(Q4%202023)) Online music services revenue surged by 41.1% YoY, driven by strong music subscription growth (45.3%) and increased advertising, while social entertainment services revenue plummeted by 51.6% due to adjustments in live-streaming functions and stricter compliance | Service | Q4 2023 (RMB million) | Q4 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Online Music Services | 5,022 | 3,559 | +41.1% | | Music Subscriptions | 3,420 | 2,350 | +45.3% | | Social Entertainment Services and Others | 1,871 | 3,866 | -51.6% | - Online music paying users increased by **20.6% to 106.7 million**, and monthly ARPPU expanded to **RMB10.7**, marking its seventh consecutive quarter of growth[14](index=14&type=chunk) - The decrease in social entertainment revenues was mainly caused by adjustments to certain live-streaming interactive functions and more stringent compliance procedures[14](index=14&type=chunk) [Operating Profit, Net Profit, and EPS (Q4 2023)](index=5&type=section&id=Operating%20Profit%2C%20Net%20Profit%2C%20and%20EPS%20(Q4%202023)) Operating profit grew by 23.5% YoY, reflecting improved operating efficiency, with net profit and non-IFRS net profit also seeing double-digit growth, and diluted EPS increasing to RMB0.83 | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Operating Profit | 1,714 | 1,388 | +23.5% | | Net Profit | 1,409 | 1,205 | +16.9% | | Net Profit Attributable to Equity Holders | 1,306 | 1,151 | +13.5% | | Non-IFRS Net Profit | 1,678 | 1,492 | +12.5% | | Diluted EPS (RMB) | 0.83 | 0.72 | +15.3% | | Non-IFRS Diluted EPS (RMB) | 1.00 | 0.91 | +9.9% | - Effective tax rate for Q4 2023 was **17.3%**, up from 12.2% in Q4 2022, mainly due to the accrual of withholding income tax[16](index=16&type=chunk) [Cash and Term Deposits (Q4 2023)](index=5&type=section&id=Cash%20and%20Term%20Deposits%20(Q4%202023)) As of December 31, 2023, TME's combined balance of cash, cash equivalents, and term deposits increased to RMB32.22 billion (US$4.54 billion) from RMB30.96 billion at the end of Q3 2023 | Metric | As of Dec 31, 2023 (RMB billion) | As of Sep 30, 2023 (RMB billion) | Change | | :-------------------------------- | :------------------------------- | :------------------------------- | :----- | | Cash, Cash Equivalents and Term Deposits | 32.22 | 30.96 | +1.26 | [Full Year 2023 Financial Review](index=5&type=section&id=Full%20Year%202023%20Financial%20Review) [Total Revenues and Service Breakdown (FY 2023)](index=5&type=section&id=Total%20Revenues%20and%20Service%20Breakdown%20(FY%202023)) Total revenues for FY 2023 decreased by 2.1% YoY, while online music services revenue grew strongly by 38.8%, driven by music subscriptions (up 39.1%) and advertising, but social entertainment services revenue declined significantly by 34.2% due to operational adjustments | Service | FY 2023 (RMB million) | FY 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Total Revenues | 27,752 | 28,339 | -2.1% | | Online Music Services | 17,325 | 12,483 | +38.8% | | Music Subscriptions | 12,100 | 8,700 | +39.1% | | Social Entertainment Services and Others | 10,427 | 15,856 | -34.2% | - Online music paying users increased by **19.8% to 100.9 million**, and monthly ARPPU expanded to **RMB10.0**[20](index=20&type=chunk) - The decrease in social entertainment revenues was mainly caused by adjustments to certain live-streaming interactive functions and more stringent compliance procedures[21](index=21&type=chunk) [Cost of Revenues, Gross Margin, and Operating Expenses (FY 2023)](index=6&type=section&id=Cost%20of%20Revenues%2C%20Gross%20Margin%2C%20and%20Operating%20Expenses%20(FY%202023)) Cost of revenues decreased by 8.2% YoY, primarily due to lower revenue sharing fees from social entertainment, leading to a gross margin improvement of 4.3 percentage points to 35.3%, while total operating expenses decreased by 9.7% YoY with reductions in both selling & marketing and G&A expenses | Metric | FY 2023 (RMB million) | FY 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Cost of Revenues | 17,957 | 19,566 | -8.2% | | Gross Margin | 35.3% | 31.0% | +4.3 ppts | | Total Operating Expenses | 5,018 | 5,557 | -9.7% | | Selling and Marketing Expenses | 897 | 1,144 | -21.6% | | General and Administrative Expenses | 4,121 | 4,413 | -6.6% | - Gross margin increase was primarily due to **strong growth of revenues from music subscriptions and advertising services**, and the ramp-up of TME's own content[22](index=22&type=chunk) - Selling and marketing expenses decreased mainly due to reduced promotional expenses for social entertainment services[26](index=26&type=chunk) - General and administrative expenses decreased primarily due to reduced employee-related expenses and expenses related to the Hong Kong secondary listing incurred in 2022[26](index=26&type=chunk) [Operating Profit, Net Profit, and EPS (FY 2023)](index=6&type=section&id=Operating%20Profit%2C%20Net%20Profit%2C%20and%20EPS%20(FY%202023)) Operating profit for FY 2023 increased significantly by 36.4% YoY, driven by improved operating efficiency and cost controls, with net profit and non-IFRS net profit also showing strong double-digit growth, and diluted EPS reaching RMB3.11 | Metric | FY 2023 (RMB million) | FY 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Operating Profit | 6,059 | 4,443 | +36.4% | | Net Profit | 5,220 | 3,839 | +36.0% | | Net Profit Attributable to Equity Holders | 4,920 | 3,677 | +33.8% | | Non-IFRS Net Profit | 6,223 | 4,907 | +26.8% | | Diluted EPS (RMB) | 3.11 | 2.27 | +37.0% | | Non-IFRS Diluted EPS (RMB) | 3.74 | 2.93 | +27.6% | [Other Corporate Information](index=7&type=section&id=Other%20Corporate%20Information) [Share Repurchase Program](index=7&type=section&id=Share%20Repurchase%20Program) As of December 31, 2023, TME had repurchased 25.3 million ADSs for a total consideration of US$174.5 million under its US$500 million Share Repurchase Program announced in March 2023 - Repurchased **25.3 million ADSs** for **US$174.5 million** under the **US$500 million Share Repurchase Program**[27](index=27&type=chunk) [Social Responsibilities](index=7&type=section&id=Social%20Responsibilities) TME collaborated with local governments and Tencent Charity in Q4 2023 to organize music events, such as the Shenzhen-Linzhi Music Festival, to promote cultural and economic development in ethnic minority regions and boost rural tourism - Collaborated with local governments and Tencent Charity to organize music events, like the 2023 Shenzhen-Linzhi Music Festival, to promote cultural and economic development in ethnic minority regions[28](index=28&type=chunk) [Exchange Rate Information](index=7&type=section&id=Exchange%20Rate%20Information) All RMB to USD translations in the announcement were made at a rate of RMB7.0999 to US$1.00, based on the noon buying rate on December 29, 2023, as per the Federal Reserve Board's H.10 statistical release - All translations from RMB to USD were made at the rate of **RMB7.0999 to US$1.00**, the noon buying rate in effect on December 29, 2023[29](index=29&type=chunk) [Non-IFRS Financial Measure Explanation](index=7&type=section&id=Non-IFRS%20Financial%20Measure%20Explanation) TME uses non-IFRS net profit to evaluate operating results and for financial decision-making, believing it helps identify underlying business trends by excluding certain expenses like amortization of intangible assets, share-based compensation, and net losses/gains from investments - Non-IFRS net profit helps identify underlying trends by excluding amortization of intangible assets, share-based compensation expenses, net losses/gains from investments, and related income tax effects[30](index=30&type=chunk)[33](index=33&type=chunk) - Non-IFRS net profit should not be considered in isolation or as an alternative to IFRS measures, and may not be comparable to similarly titled measures presented by other companies[31](index=31&type=chunk) [About Tencent Music Entertainment](index=8&type=section&id=About%20Tencent%20Music%20Entertainment) Tencent Music Entertainment Group is China's leading online music and audio entertainment platform, operating popular apps like QQ Music, Kugou Music, Kuwo Music, and WeSing, with a mission to create endless possibilities with music and technology - TME is the leading online music and audio entertainment platform in China, operating QQ Music, Kugou Music, Kuwo Music, and WeSing[34](index=34&type=chunk) - TME's mission is to create endless possibilities with music and technology, enabling users to discover, listen, sing, watch, perform, and socialize around music[34](index=34&type=chunk) [Safe Harbor Statement](index=8&type=section&id=Safe%20Harbor%20Statement) The press release contains forward-looking statements made under the 'safe harbor' provisions of the U.S. Private Securities Litigation Reform Act of 1995, which involve inherent risks and uncertainties that could cause actual results to differ materially from expectations - The press release contains forward-looking statements made under the 'safe harbor' provisions of the U.S. Private Securities Litigation Reform Act of 1995[35](index=35&type=chunk) - Forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contained in any forward-looking statement[35](index=35&type=chunk) [Investor Relations Contact](index=8&type=section&id=Investor%20Relations%20Contact) Contact information for Tencent Music Entertainment Group's Investor Relations is provided for inquiries - Investor Relations Contact: ir@tencentmusic.com, **+86 (755) 8601-3388 ext. 818415**[36](index=36&type=chunk) [Financial Statements](index=9&type=section&id=Financial%20Statements) [Consolidated Income Statement](index=9&type=section&id=Consolidated%20Income%20Statement) The consolidated income statement provides a detailed breakdown of revenues, costs, expenses, and profits for both the fourth quarter and full year ended December 31, 2023, compared to the prior year | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | FY 2023 (RMB million) | FY 2022 (RMB million) | | :-------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Online music services revenue | 5,022 | 3,559 | 17,325 | 12,483 | | Social entertainment services and others revenue | 1,871 | 3,866 | 10,427 | 15,856 | | Total revenues | 6,893 | 7,425 | 27,752 | 28,339 | | Cost of revenues | (4,252) | (4,978) | (17,957) | (19,566) | | Gross profit | 2,641 | 2,447 | 9,795 | 8,773 | | Total operating expenses | (1,266) | (1,361) | (5,018) | (5,557) | | Operating profit | 1,714 | 1,388 | 6,059 | 4,443 | | Profit for the period/year | 1,409 | 1,205 | 5,220 | 3,839 | | Profit attributable to equity holders | 1,306 | 1,151 | 4,920 | 3,677 | | Diluted Earnings per ADS (RMB) | 0.83 | 0.72 | 3.11 | 2.27 | [Unaudited Non-IFRS Financial Measure Reconciliation](index=11&type=section&id=Unaudited%20Non-IFRS%20Financial%20Measure%20Reconciliation) This section reconciles IFRS net profit to non-IFRS net profit for both the fourth quarter and full year 2023, detailing adjustments for amortization, share-based compensation, investment gains/losses, and related tax effects | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | FY 2023 (RMB million) | FY 2022 (RMB million) | | :-------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Profit for the period/year (IFRS) | 1,409 | 1,205 | 5,220 | 3,839 | | Amortization of intangible and other assets | 111 | 126 | 445 | 498 | | Share-based compensation | 183 | 178 | 736 | 834 | | Losses/(gains) from investments | 23 | — | (7) | (141) | | Income tax effects | (48) | (17) | (171) | (123) | | Non-IFRS Net Profit | 1,678 | 1,492 | 6,223 | 4,907 | | Non-IFRS Net Profit Attributable to Equity Holders | 1,575 | 1,438 | 5,923 | 4,745 | | Non-IFRS Diluted EPS (RMB) | 1.00 | 0.91 | 3.74 | 2.93 | [Consolidated Balance Sheet](index=13&type=section&id=Consolidated%20Balance%20Sheet) The consolidated balance sheet presents TME's financial position as of December 31, 2023, and December 31, 2022, detailing assets, equity, and liabilities | Metric | As of Dec 31, 2023 (RMB million) | As of Dec 31, 2022 (RMB million) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Total assets | 75,536 | 67,009 | | Total equity | 57,202 | 49,127 | | Total liabilities | 18,334 | 17,882 | | Cash and cash equivalents | 13,567 | 9,555 | | Term deposits (Non-current) | 8,719 | 6,530 | | Term deposits (Current) | 9,937 | 11,291 | | Financial assets at fair value through other comprehensive income | 6,540 | 3,168 | [Condensed Consolidated Statements of Cash Flows](index=15&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The condensed consolidated statements of cash flows provide an overview of cash generated from operating, investing, and financing activities for both the fourth quarter and full year ended December 31, 2023 | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | FY 2023 (RMB million) | FY 2022 (RMB million) | | :-------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Net cash provided by operating activities | 1,977 | 2,494 | 7,337 | 7,481 | | Net cash used in investing activities | (193) | (1,108) | (1,863) | (1,446) | | Net cash used in financing activities | (576) | (383) | (1,538) | (3,419) | | Net increase in cash and cash equivalents | 1,208 | 1,003 | 3,936 | 2,616 | | Cash and cash equivalents at end of period/year | 13,567 | 9,555 | 13,567 | 9,555 |

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]

Core Insights - Tencent Music Entertainment Group (TME) reported a 20.6% year-over-year increase in music paying users, reaching 106.7 million, with a monthly ARPPU growth of 20.2% [1][4] - The company experienced a total revenue decline of 7.2% year-over-year in Q4 2023, primarily due to decreased revenues from social entertainment services [2][5] - Music subscription revenues grew by 45.3% year-over-year, contributing significantly to the overall revenue despite the decline in other segments [2][3] Financial Highlights - Total revenues for Q4 2023 were RMB 6.89 billion (US$ 971 million), down from RMB 7.43 billion in Q4 2022 [2][5] - Net profit for Q4 2023 was RMB 1.41 billion (US$ 198 million), reflecting a 16.9% year-over-year increase [2][5] - For the full year 2023, total revenues were RMB 27.75 billion (US$ 3.91 billion), a decrease of 2.1% compared to 2022 [3][5] Operational Highlights - Monthly active users (MAUs) for online music decreased by 4.2% year-over-year to 576 million, while mobile MAUs for social entertainment dropped by 28.8% [4][5] - The company expanded its content offerings, partnering with over 200 record labels and publishing over 3 million songs from indie musicians [4][5] - TME enhanced user experience through technology innovations, including a larger Dolby Atmos music library and personalized app features [4][5] Strategic Initiatives - TME's focus on AI-driven tools, such as the upgraded virtual DJ feature and the Venus AI composition tool, aims to improve music discovery and artist creation [5][6] - The company hosted various offline music events to promote cultural and economic development, particularly in ethnic minority regions [7] Shareholder Returns - Under its US$ 500 million share repurchase program, TME repurchased 25.3 million ADSs for a total consideration of US$ 174.5 million as of December 31, 2023 [6]