Investment Rating - The report maintains a "Buy" rating for NetEase Cloud Music [3][8]. Core Insights - The report emphasizes the company's competitive advantages and growth potential, particularly focusing on its young user base and the resilience of the online music industry [7][8]. - The company has improved its liquidity and profitability significantly, with a return to profitability in 2023 and continued improvement expected in 2024 and 2025 [7][26]. Summary by Sections 1. Review: Return to Core Product and Improvement in Liquidity and Profitability - The company has refocused on its music core by simplifying its app and enhancing music recommendations and community experiences [19][22]. - Major copyright returns have strengthened the content offering, covering top artists across various genres [22][24]. - Liquidity has improved, with the proportion of mid-to-long tail equity increasing from 22.8% at the end of 2022 to over 31% currently [24][25]. - The company achieved a gross margin exceeding 36% in the first half of 2025, indicating a strong recovery [7][26]. 2. Industry: Strong Anti-Cyclicality and Favorable Market Structure - The online music market in China is projected to reach 28.8 billion RMB in 2024, growing at 20% year-on-year, with a CAGR of 32% from 2017 to 2024 [35][36]. - Young users are the primary growth driver, with nearly 70% of new users being from the post-2000 generation [37][38]. - The competitive landscape is stable, with Tencent Music and NetEase Cloud Music as the dominant players [40][41]. 3. Growth Drivers: Focus on Young Users with High Certainty and Potential - The user structure influences the company's differentiated copyright strategy, targeting a high proportion of young users [54][62]. - The company aims to increase its paid user base significantly, with projections suggesting a potential membership of over 88 million if the payment wall is raised [9][62]. - The community engagement is high, with average daily usage time nearing 80 minutes, indicating strong user loyalty [69]. 4. Profitability Forecast and Valuation - Revenue projections for 2025-2027 are 7.9 billion, 8.8 billion, and 9.8 billion RMB, respectively, with adjusted net profits of 2.86 billion, 2.33 billion, and 2.74 billion RMB [6][8]. - The report estimates a target market capitalization of 76.5 billion HKD for 2026, based on comparative company valuations [8][9].

Core Viewpoint - The online music industry is becoming a profitable business, with significant revenue growth reported by major players like Tencent Music and NetEase Cloud Music, driven by improved copyright management and user payment habits [1][3][6]. Financial Performance - Tencent Music reported total revenue of 8.44 billion yuan for Q2 2025, a year-on-year increase of 17.9%, with online music service revenue growing by 26.4% to 6.85 billion yuan [1]. - NetEase Cloud Music's revenue for the first half of 2025 was 3.827 billion yuan, a decrease of 6% from the previous year, but online music service revenue increased by 15.9% to 2.967 billion yuan [1]. - Tencent Music's adjusted net profit for the quarter was 2.64 billion yuan, up 33% year-on-year [1]. Market Dynamics - Online music services now account for 80% of Tencent Music's total revenue and 77.5% of NetEase Cloud Music's total revenue, a significant shift from 2018 when these figures were much lower [2]. - The competitive landscape has evolved, with Tencent Music and NetEase Cloud Music now focusing on online music services rather than social entertainment services, which previously dominated their revenue streams [2][3]. Copyright Management - The decline of music piracy in China, from 95% to below 5%, has been pivotal in the growth of the digital music industry, leading to a "copyright accumulation competition" among platforms [4]. - Tencent Music has secured exclusive rights to a significant portion of the music library, forcing competitors like NetEase Cloud Music to pay high prices for licensing [4][5]. - The copyright wars have driven up the prices of music rights, but they have also fostered a culture of paid subscriptions among users [6][7]. User Engagement and Payment Models - Tencent Music's online music subscription revenue reached 4.38 billion yuan in Q2 2023, with a 17.1% year-on-year growth, and the number of paying users increased to 124 million [7]. - NetEase Cloud Music's subscription revenue grew to 2.47 billion yuan, a 15.2% increase [7]. - The platforms have developed a tiered subscription model to enhance user engagement and payment rates, effectively turning music into a sustainable profit-generating business [7]. Competitive Landscape - The rise of new players like "Soda Music" and "Tomato Listening" is challenging the dominance of Tencent Music and NetEase Cloud Music, leveraging lower subscription fees and algorithm-driven user engagement [14][15]. - The competition is intensifying as these new entrants utilize short video platforms to attract users, creating a potential shift in the market dynamics [14][17]. - The future of the online music industry may evolve into a three-way competition, with Tencent Music, NetEase Cloud Music, and new entrants vying for market share [17].

Investment Rating - The report initiates coverage with a "Strong Buy" rating for NetEase Cloud Music [2][6] Core Views - NetEase Cloud Music focuses on "music community + technology empowerment" to build a differentiated advantage in the online music platform, actively expanding quality music content resources in the post-copyright era, targeting a younger demographic, and optimizing membership benefits, leading to continuous growth in membership scale and significant potential for ARPU increase [6][12][41] Summary by Sections 1. Company Overview - NetEase Cloud Music was launched in 2013, focusing on user experience and social innovation rather than engaging in copyright battles with industry giants, establishing a unique development path in the online music market [12][15] - The ownership structure is stable, with major shareholder NetEase holding approximately 59.54% of shares, ensuring concentrated strategic decision-making [17] 2. Core Business - The core business is divided into "online music services" and "social entertainment services," with a strong emphasis on creating a youthful, interactive music community [19] - The platform boasts over 150 million licensed songs and has established partnerships with major record labels, enhancing its content library and user engagement [20][22] 3. Revenue Growth - Online music service revenue is projected to grow by 23.1% year-on-year to 5.355 billion yuan in 2024, driven by optimized membership services and rich content [30] - The membership subscription revenue is expected to increase by 22.2% year-on-year to 4.459 billion yuan in 2024, reflecting the effectiveness of the membership system [30][37] 4. Community Ecosystem - The platform has built a unique community ecosystem that enhances user engagement, with daily user-generated content (UGC) interactions exceeding 1 million comments [59] - The average revenue per user (ARPU) is currently at 6.9 yuan, significantly lower than competitors, indicating substantial room for growth [63] 5. Financial Projections - Revenue is expected to reach 8.237 billion yuan in 2025, with adjusted net profit projected at 1.923 billion yuan, reflecting a strong growth trajectory [7][30] - The company aims to improve its profitability through strategic partnerships and enhanced user experiences, with a focus on expanding its membership base [37][41]