TME （TME.US） Inline 2Q24 results； focus on balanced growth of music subs and ARPPU in 2H24E

Investment Rating - Maintain BUY with a target price of US$16.00, representing a potential upside of 21.9% from the current price of US$13.13 [4][17]. Core Insights - TME reported a total revenue decline of 2% YoY to RMB7.16 billion in 2Q24, aligning with consensus estimates. However, non-IFRS net income increased by 22% YoY to RMB1.87 billion, exceeding expectations [2]. - The company aims for balanced growth in music subscribers and ARPPU in 2H24E, with management reiterating a long-term target of 150 million music subscribers and RMB15 in monthly ARPPU [2][3]. - TME's earnings CAGR is projected at +21% over FY24-26E, driven by core music revenue growth and gross profit margin (GPM) expansion [2]. Revenue and Profitability - Online music revenue grew by 28% YoY to RMB5.42 billion in 2Q24, accounting for 76% of total revenue. Subscription and non-subscription revenues increased by 29% and 24% YoY, respectively [2]. - The number of paying users rose by 18% YoY to 117 million, with a monthly ARPPU growth of 10% YoY to RMB10.7 [2][9]. - GPM expanded by 7.7 percentage points YoY to 42.0% in 2Q24, attributed to margin improvements in the online music business and enhanced monetization strategies [2][3]. Future Outlook - For 3Q24E, total revenue is expected to grow by 8% YoY to RMB7.06 billion, primarily driven by a 24% YoY increase in online music revenue, despite a projected 29% YoY decline in social entertainment revenue [2]. - Management anticipates a slower pace of music subscriber net additions (1.5-2.0 million per quarter) but expects continued QoQ growth in ARPPU, supported by the high-value Super VIP program [2][3]. - GPM is forecasted to further expand by 0.8 percentage points QoQ to 42.8% in 3Q24E, with FY24E non-IFRS net income projected to grow by 27% YoY to RMB7.50 billion [2][3]. Financial Summary - Revenue projections for FY24E are RMB28.415 billion, with adjusted net profit expected to reach RMB7.501 billion, reflecting a 26.6% increase [8][12]. - The company’s gross margin is anticipated to improve to 42.2% in FY24E, with operating margin at 30.0% [8][12]. - The P/E ratio is projected to decrease from 21.1x in FY24E to 15.3x in FY26E, indicating a favorable valuation trend [3][16].