Core Viewpoint - The article discusses the resilience of the online music industry during economic downturns, highlighting how entertainment products often thrive when consumers face financial challenges. It emphasizes the shift in user behavior towards paid subscriptions for music platforms, driven by improved copyright protections and changing consumer attitudes towards intellectual property. Group 1: Market Performance - As of early 2025, NetEase Cloud Music's stock price has increased by 117%, while Tencent Music's stock has risen by over 73%, with both companies reaching historical market valuations [8] - The revenue for online music platforms primarily comes from user subscription fees, as finding free music online has become increasingly difficult [9] - In 2020, Tencent Music achieved a net profit of 4.16 billion yuan, while NetEase Cloud Music reported a total revenue of 4.9 billion yuan but a net loss of 3 billion yuan [16] Group 2: Copyright and Competition - The copyright battle between online music platforms has intensified, with Tencent Music paying 570 million yuan to secure exclusive rights for Jay Chou's music [13] - The 2020 revision of copyright laws in China significantly strengthened the protection of digital music rights, leading to a decrease in piracy [17] - By the end of 2024, the total number of paid users on major Chinese music platforms is expected to reach 180 million, with Generation Z (post-95) making up 58% of this group [20] Group 3: User Behavior and Trends - Younger users, particularly those born after 2000, are expected to naturally adopt paid music subscriptions, similar to trends seen in Western markets [21] - The demand for high-quality content is increasing, but platforms must adapt to the evolving preferences of younger audiences [23] - The decline of exclusive copyrights has led to a slight decrease in Tencent Music's monthly active users (MAU), while NetEase Cloud Music has seen a small increase in MAU since late 2022 [24] Group 4: Future Growth Strategies - Tencent Music is focusing on enhancing the value of existing customers by offering exclusive concert ticket access and free listening options for light users [26] - The company has made significant acquisitions, including a stake in SM Entertainment and a full acquisition of Ximalaya, to strengthen its content production capabilities [28][30] - NetEase Cloud Music is leveraging its user-generated content (UGC) community and supporting independent artists to differentiate itself in the market [32] Group 5: Monetization Opportunities - The growth of online music platforms will depend on diversifying monetization strategies beyond music subscriptions, including podcasts, audiobooks, and live streaming [39] - The podcast market is projected to reach 7 billion yuan by 2025, catering to the needs of urban young users [41] - Platforms can also explore the potential of virtual idols and digital content to create new revenue streams [44]

Core Viewpoint - NetEase Cloud Music is a leading online music streaming platform in China, focusing on young users and leveraging a strong UGC community and original content to create a unique content barrier [1][2] Company Overview - NetEase Cloud Music's core business includes online music services, social entertainment services, and innovative value-added services [1] - The company is primarily controlled by NetEase Group, which holds approximately 60% of the shares, while GIC holds over 6% as the second-largest institutional shareholder [1] Competitive Landscape - The market is characterized by a duopoly between NetEase Cloud Music and Tencent Music, with Tencent holding a 66% market share and NetEase approximately 27% [2] - NetEase Cloud Music targets young users, with about 90% of its active users being post-90s generation [2] - The return of music copyrights to NetEase Cloud Music post-2021 has strengthened its competitive position [2] Financial Analysis - In 2024, NetEase Cloud Music's revenue is projected to be 7.95 billion yuan, a year-on-year increase of 1%, primarily due to a decline in social entertainment services [3] - Online music services account for 67% of the company's revenue, with 5.35 billion yuan expected from this segment, reflecting a 23% year-on-year growth [3] - Subscription revenue is anticipated to reach 4.46 billion yuan in 2024, up 22% year-on-year, driven by an increase in paying users [3] - The paid user penetration rate is expected to be 25.2%, an increase of 3.8 percentage points year-on-year [3] Profitability and Cost Structure - The adjusted profit for 2024 is projected at 1.7 billion yuan, a significant increase of 108% year-on-year [4] - The gross margin is expected to be 34%, up 7 percentage points year-on-year, due to improved copyright cost management [4] - Sales, management, and R&D expense ratios are projected to be 7.7%, 2.3%, and 9.8%, respectively, with potential for further optimization [4] Future Outlook - Revenue forecasts for 2025-2027 are 8.7 billion, 9.7 billion, and 10.8 billion yuan, representing year-on-year growth rates of 9%, 12%, and 12% [4] - Adjusted profit for the same period is expected to be 2.1 billion, 2.5 billion, and 3 billion yuan, with a CAGR of 21% [4] - The company is compared favorably to Spotify and Tencent Music in terms of valuation, with a target price range of 311-354 HKD, indicating a potential upside of 30-48% [4]

Company Overview - TME is committed to the healthy development of China's online music industry[7] - TME has a large user base with 576 million online music MAUs[13] and 90 million social entertainment mobile MAUs[15] in 3Q2024 - TME boasts an extensive content library with over 200 million music and audio tracks[14, 20] and 480K+ indie musicians[15] - TME's total cash, cash equivalents, term deposits, and short-term investments reached RMB 3604 billion[15, 18, 49] Business Overview - TME has partnerships with hundreds of domestic and international music labels[20] - TME is expanding LLM capabilities, AIGC tools & full-suite of resources and services to streamline content production[21] - TME cultivates and empowers indie musicians & original music through Tencent Musician Platform[22] Financial Highlights - TME's online music monthly ARPPU was RMB 108 in 3Q24, a 49% year-over-year increase[37] - TME's revenue from music subscriptions reached RMB 384 billion in 3Q24, a 203% year-over-year increase[37] - TME's gross margin was 426% in 3Q24, a 69 percentage point year-over-year increase[37] - TME's Non-IFRS net profit was RMB 194 billion in 3Q24, a 291% year-over-year increase[37]

Investment Rating - The report provides a positive investment rating for the online music industry, highlighting its long-term growth potential due to stable demand and competitive dynamics [3][5]. Core Insights - The domestic music industry is experiencing stable demand, with leading companies differentiating themselves through community building and support for independent music content, indicating long-term growth potential [3]. - Compared to long video platforms, the online music sector benefits from higher switching costs, longer content lifecycles, and stronger payment stickiness, creating a favorable growth environment [4]. - The end of exclusive copyright agreements has reduced cost pressures, while regulatory guidance fosters healthy competition, enhancing growth potential [5]. - The overseas market, particularly Spotify, shows high growth potential through expansion in non-European and American countries, exploring higher-tier membership systems, and enhancing advertising capabilities [5]. Summary by Sections Industry Overview - The report indicates that the online music platforms are experiencing a 1% slight growth in overall MAU by December 2024, while video platforms show stagnation or decline in some cases [4][7]. - The community atmosphere and user relationships on music platforms create higher switching costs compared to video platforms, which rely heavily on top-tier content [4][14]. Competitive Landscape - The competitive landscape is characterized by two leading music platforms against four major video platforms, with music platforms benefiting from reduced copyright costs and a more fragmented content supply [31][39]. - The report notes that the domestic music market has entered a stable growth phase post-2020 regulatory normalization, with leading companies focusing on their core online music business [5][31]. Company Performance - Tencent Music and NetEase Cloud Music are positioned for steady growth, with Tencent Music reporting a MAU of 555 million and a 8.3% year-on-year increase in paid users as of Q1 2025 [5][13]. - NetEase Cloud Music's growth is attributed to its UGC community and support for independent musicians, with a current ARPPU of 6.9 yuan, indicating room for improvement compared to Tencent Music's 10.8 yuan [5][13]. International Market Insights - Spotify, as the largest global online music platform, has over 675 million users, with 263 million being paid subscribers, showcasing its significant market presence [47][87]. - The report highlights Spotify's strategy of expanding into non-European and American markets, which has been a key driver for its MAU growth [87][97]. Future Outlook - The report suggests that the online music industry is well-positioned for sustainable growth, driven by favorable competitive dynamics, regulatory support, and innovative strategies from leading companies [3][5].

Investment Rating - The report maintains a "BUY" rating for NetEase, indicating a potential return of over 15% over the next 12 months [19]. Core Insights - NetEase reported strong 1Q25 results with total revenue growing by 7% YoY to RMB28.8 billion, aligning with consensus estimates. Operating profit surged by 37% YoY to RMB10.4 billion, exceeding consensus by 25%, primarily due to disciplined operating expense control, which decreased by 14% YoY [1][2]. - The games business showed a reacceleration in revenue growth, increasing by 12% YoY in 1Q25, supported by a 19% YoY growth in contract liabilities, which is expected to bolster future revenue [1][7]. - The target price for NetEase has been raised to US$136.5 from the previous US$125.5, reflecting a 27.4% upside from the current price of US$107.11 [3][11]. Financial Performance Summary - **Revenue Forecasts**: The revenue for FY25 is estimated at RMB113.1 billion, with projections for FY26 and FY27 at RMB121.1 billion and RMB128.9 billion, respectively [2][8]. - **Profitability Metrics**: Adjusted net profit is expected to reach RMB40.1 billion in FY25, with a growth trajectory continuing into FY26 and FY27 [2][8]. - **Valuation Metrics**: NetEase is currently trading at a P/E ratio of 13.6x for FY25, which is in line with its two-year historical average [7][11]. Business Segment Analysis - **Online Games**: The online games segment is valued at US$121.8 billion, accounting for 89.2% of the total valuation, based on a multiple of 16x 2025E EV/EBIT, consistent with industry averages [11][12]. - **Youdao and Cloud Music**: Youdao is valued at US$0.7 billion, while the Cloud Music business is valued at US$3.8 billion, both based on industry-standard multiples [11][12]. - **Innovative Businesses**: The innovative businesses segment is valued at US$1.6 billion, reflecting a growing diversification strategy [11][12]. Market Position and Growth Drivers - The games business is expected to benefit from several highly anticipated global launches, including titles like MARVEL Mystic Mayhem and Destiny: Rising, which should further enhance revenue growth [7]. - Non-gaming segments are also improving efficiency, with a notable increase in gross profit margin for the Cloud Music segment despite a decline in revenue [7][8]. Share Performance - The market capitalization of NetEase stands at approximately US$67.99 billion, with a 52-week high of US$109.80 and a low of US$76.28 [3][4]. - Over the past month, the stock has seen an absolute increase of 9.3% [4].

Financial Performance - NetEase's total net revenues for 1Q25 were $3.973 billion, a 7.4% increase year-over-year[39] - Games and related value-added services contributed $3.314 billion in net revenues for 1Q25, up 12.1% year-over-year[39] - Net income attributable to the company's shareholders for 1Q25 was $1.42 billion, a 34.9% increase year-over-year[39] - Basic net income per ADS (GAAP) for 1Q25 was $2.24[9] - The company's net cash position as of March 31, 2025, was $18.9 billion[9] Business Segments - Youdao's net revenues for 1Q25 were $179 million, a 6.8% decrease year-over-year[39] - NetEase Cloud Music's net revenues for 1Q25 were $256 million, reflecting an 8.5% decrease year-over-year[39] - Innovative businesses and others generated $224 million in net revenues for 1Q25, a 17.5% decrease year-over-year[39] Games Highlights - Online games accounted for 98% of games and related value-added services net revenues in 1Q25[12] - Where Winds Meet surpassed 30 million registered players as of March 2025[18] - Once Human mobile game quickly claimed the No1 position on the iOS download charts in more than 160 regions upon its April 2025 launch[18]

Core Viewpoint - Tencent Music Entertainment Group (TME) is facing unprecedented challenges in the online music market, including declining subscription penetration, weakened exclusive copyright advantages, and a lack of original content development, which threaten its market share and reveal structural contradictions during its strategic transformation [3][4]. Subscription Penetration Battle - Tencent Music has over 600 million monthly active users, but its subscription penetration rate is approximately 8%, significantly lower than NetEase Cloud Music's 15%, reflecting differences in business models and user engagement strategies [5][6]. - NetEase Cloud Music enhances user willingness to pay through a community-oriented approach, transforming users from mere "music listeners" to an "emotional community," while Tencent Music relies on functional benefits, lacking emotional value [7][8]. - Tencent Music's attempts to boost subscription rates through low-price promotions have not been effective due to insufficient perceived value of music services, while NetEase Cloud Music has successfully created a positive cycle through differentiated content [9]. Post-Copyright Era - The end of the "copyright arms race" in July 2021, mandated by the State Administration for Market Regulation, has stripped Tencent Music of its core competitive advantage [11]. - Following the removal of copyright barriers, both platforms have a high overlap in music libraries, with over 80% similarity, significantly lowering user migration costs [12]. - Tencent Music's original content incubation efforts have been less successful compared to NetEase Cloud Music, which has effectively supported independent musicians and achieved a higher proportion of original song plays [13]. - Tencent Music's attempts to extend its industry chain through investments and acquisitions have faced challenges due to insufficient business synergy [14]. Social Function Shortcomings - Social features are crucial for enhancing user engagement, but Tencent Music lags behind in this area [17]. - NetEase Cloud Music has successfully integrated music with social interactions, resulting in high user activity, while Tencent Music's community features have low engagement [18][19]. - Data shows that Tencent Music's user retention rate has declined by 12% from 2021 to 2023, while NetEase Cloud Music's has increased by 7%, indicating weak social features lead to lower user loyalty [20]. Overseas Expansion Challenges - Tencent Music's overseas strategy has not achieved significant breakthroughs compared to global competitors like Spotify and Apple Music [22]. - The reliance on capital investments rather than product expansion has limited Tencent Music's ability to establish its own international brand, with its overseas product Joox holding less than 5% market share in Southeast Asia [22]. - Tencent Music's cultural output capabilities are lacking, as it remains focused on copyright resale rather than content innovation, unlike competitors who are reshaping global music trends [23]. - Increasing geopolitical risks and stricter regulations on Chinese companies in the U.S. are closing Tencent Music's window for overseas expansion [24].

Core Insights - KUKE Music Holding Limited has entered a strategic cooperation agreement with CMG IoV Digital Media to enhance in-vehicle audio experiences, aiming to set a new standard for high-quality audio ecosystems in vehicles [1][3] Company Overview - KUKE Music is a leading classical music service platform in China, offering approximately 3 million audio and video music tracks and providing music learning services [5] - The company collaborates with Naxos, the largest independent classical music content provider, giving it access to over 900 top-tier labels and record companies [5] Partnership Details - The collaboration will allow Beijing Kuke Music to provide CMG IoV Digital Media with access to its classical music library, audiobooks, and high-definition concert resources, filling a gap in non-popular music content for in-car scenarios [3] - CMG IoV Digital Media has surpassed 100 million users and collaborates with nearly 90% of leading automotive manufacturers, creating a "Sound Universe" with 1,300 live audio streams and over 5 million hours of premium audio content [2] Product Development - The partnership will develop customized in-vehicle audio products such as "Master Symphony Theater," "Music General Education Enlightenment Course," and "Classical Music Radio," tailored for smart cockpit environments [4] - The audio offerings will be designed to match driving scenarios and user profiles, providing a range of content from soothing jazz for long drives to educational audio during commutes [4]