1Q24 beat on strong music business growth and GPM expansion

Investment Rating - The report maintains a BUY rating for the company, with a target price raised to US$16.00 from US$12.50 [2][12]. Core Insights - The company reported a 3% year-over-year decline in total revenue to RMB6.77 billion for 1Q24, but this was 3% above consensus estimates, driven by strong online music revenue growth [2]. - Non-IFRS net income increased by 21% year-over-year to RMB1.70 billion, exceeding consensus estimates by 7%, primarily due to gross profit margin (GPM) expansion of 7.9 percentage points year-over-year and effective operating expense control [2]. - The company announced its first annual cash dividend of US$0.137 per ADS, representing approximately a 1.0% dividend yield [2]. Revenue and Profitability - Online music revenue surged by 43% year-over-year to RMB5.01 billion in 1Q24, accounting for 74% of total revenue, with music subscription revenue growing by 39% year-over-year [2][11]. - The GPM improved to 40.9% in 1Q24, up 7.9 percentage points year-over-year, supported by strong growth in music subscription and advertising businesses [2][11]. - The report forecasts a 2% year-over-year decline in total revenue for 2Q24, while non-IFRS net income is expected to grow by 20% [2]. Financial Forecasts - The company’s revenue is projected to reach RMB28.83 billion in FY24, with a gross margin of 42.4% and adjusted net profit of RMB7.44 billion [3][9]. - The adjusted net profit is expected to grow to RMB10.39 billion by FY26, with a gross margin increasing to 44.7% [3][9]. - The report indicates a significant increase in the adjusted net profit margin, expected to reach 29.7% by FY26 [9][10]. Shareholder Returns - The company has enhanced shareholder returns through the announcement of an annual dividend and share repurchases, with 6.9 million ADS repurchased for US$61 million in 1Q24 [2][12]. - The total amount for the announced dividend is US$210 million, which is about 1.0% of the market capitalization [2]. Market Performance - The company’s market capitalization is approximately US$20.56 billion, with a 52-week high of US$13.57 and a low of US$6.02 [6]. - The stock has shown strong performance, with a 1-month increase of 12.6% and a 6-month increase of 81.0% [6].