TME(US:TME) Zhao Yin Guo Ji·2024-08-14 03:23Investment 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].