Core Viewpoint - Tencent Music has finalized the acquisition of Ximalaya for a total cash consideration of $1.26 billion, which includes the issuance of Class A ordinary shares [1] Group 1: Acquisition Details - The acquisition involves a total cash payment of $1.26 billion, with Tencent Music issuing Class A ordinary shares not exceeding 5.1986% of the total shares outstanding prior to the transaction [1] - Ximalaya will undergo a restructuring of certain existing businesses related to the transaction [1] - The completion of the transaction is subject to regulatory approvals and other closing conditions [1] Group 2: Recent Transactions - On May 30, HYBE sold its entire stake in SM Entertainment to Tencent Music's Hong Kong entity for approximately 243.3 billion KRW, equivalent to about 1.29 billion RMB, representing 9.38% of SM Entertainment [2][3] Group 3: Financial Performance - In Q1 2025, Tencent Music reported revenue of 7.356 billion RMB, a year-on-year increase of 8.7%, and an adjusted net profit of 2.226 billion RMB, up 22.8% [5] - Online music revenue grew by 15.9% year-on-year to 5.8 billion RMB, with subscription revenue increasing by 16.6% to 4.22 billion RMB [6] - The number of online paid users rose by 8.3% to 122.9 million, with average revenue per paying user (ARPPU) increasing by 0.3 RMB to 11.4 RMB [6] Group 4: User Engagement Challenges - Monthly active users (MAUs) for Tencent Music's online music services declined by 4.0% year-on-year to 555 million [7] - The decline in MAUs poses a direct constraint on Tencent Music's revenue potential [8] Group 5: Strategic Focus - Tencent Music is shifting its focus towards paid users, a strategy common among Tencent's subsidiaries [8] - The company has decided to no longer separately disclose operational metrics for its social entertainment segment, which saw a revenue decline of 11.9% to 1.55 billion RMB in Q1 [9] Group 6: Potential Benefits of Acquisition - The acquisition of Ximalaya is expected to provide Tencent Music with significant traffic, as Ximalaya reported 303 million MAUs in 2023, with 133 million being mobile users [13] - Ximalaya has developed a unique UGC content ecosystem and holds numerous audiobook copyrights, which could offer substantial monetization opportunities [13] - Tencent Music has a history of successful acquisitions, which have been pivotal in establishing its current market position [13]

Investment Rating - The report maintains a "Buy" rating for the company [4][6]. Core Views - The company reported Q1 2025 earnings with revenue of 7.356 billion RMB, a year-on-year increase of 8.7%, and adjusted net profit of 2.226 billion RMB, up 22.8% year-on-year, slightly exceeding consensus expectations [1][4]. - The growth in revenue and profit is attributed to a robust increase in paid user numbers and a rapid rise in ARPPU driven by the growth of SVIP (super members) [2][4]. - The company is expected to maintain its leading position in the industry, with strong integration capabilities and potential for profit margin expansion [1][4]. Summary by Sections Earnings Performance - In Q1 2025, online music revenue grew by 15.9% to 5.8 billion RMB, with subscription revenue increasing by 16.6% to 4.22 billion RMB. The number of online paid users rose by 8.3% to 122.9 million [2]. - The ARPPU increased by 0.3 RMB to 11.4 RMB, benefiting from the growth of SVIP members and more cautious promotional activities [2]. Profitability Metrics - The company's gross margin for Q1 2025 was 44.1%, up 3.2 percentage points year-on-year, supported by the continuous growth of paid users and a decrease in the revenue-sharing ratio for live streaming [3]. - The report maintains the assumption of profit margin improvement for the full year, with an expected gross margin of 45% for 2025 [3]. Financial Forecasts - The adjusted net profit forecasts for 2025-2027 have been raised to 8.881 billion RMB, 10.192 billion RMB, and 11.159 billion RMB, reflecting increases of 2%, 7%, and 4% respectively [4][11]. - The target price is set at 19.47 USD or 77.37 HKD, based on a 25x PE for 2025E [4][11].

Group 1 - Tencent Music reported a revenue of 7.356 billion yuan in Q1, representing a year-on-year growth of 8.7% and an adjusted net profit of 2.226 billion yuan, up 22.8% year-on-year [1] - The growth in revenue is primarily driven by the rapid expansion of the paid membership business, with online music revenue increasing by 15.9% to 5.8 billion yuan and subscription revenue rising by 16.6% to 4.22 billion yuan [1] - The number of online paid users grew by 8.3% to 122.9 million, with the average revenue per paid user (ARPPU) increasing by 0.3 yuan to 11.4 yuan [1] Group 2 - Despite the revenue growth, Tencent Music's monthly active users for online music services declined by 4.0% year-on-year to 555 million [2] - The focus on paid users has become a common strategy among Tencent's enterprises, as seen with the decline in monthly active users for Tencent's reading platform [2] Group 3 - Tencent Music's social entertainment revenue decreased by 11.9% year-on-year to 1.55 billion yuan, as the company shifts its strategic focus to core music business [3] - The company will no longer separately disclose operational metrics for the social entertainment segment [3] Group 4 - To sustain growth, Tencent Music must continue to promote music paid users, a strategy also mirrored by NetEase Cloud Music [4] - The overall music market is moving towards a stable yet unexciting monetization model, making free music access increasingly difficult [5] Group 5 - On May 14, Tencent Music's stock closed at 61.5 HKD per share, with a gain of 12.84% [6]