TME(US:TME)2024-08-14 13:37Investment 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].