Core views:

The company announced 2023 results: Cloud Music achieved revenue of 7.867 billion yuan in 23, a year-on-year decrease of 13%. vs. Bloomberg's agreed forecast (same below) was 7.869 billion yuan. The gross margin for '23 was 26.7%, compared to a consensus forecast of 26.1%, up 12.3pct year-on-year. Net profit for '23 was $734 million, compared to a consistent forecast of $549 million. Adjusted net profit was $819 million, with a profit margin of 10%. vs. the agreed forecast was $629 million, and a loss of $115 million for the same period in '22.

In the future, more attention will be paid to user growth and community differentiation, and commercialization capabilities based on music and community will gradually be consolidated. MAU reached 206 million in '23, an increase of 9% over the previous year. In '23, revenue from online music services reached 4.351 billion yuan, up 18% year on year. Among them, (1) membership subscription revenue was 3,649 billion yuan, up 20% year on year, and the number of paid members increased 15% year over year to 44.12 million, corresponding to a payment rate of 21.4%; the number of paid users was higher than 43.21 million yuan, which was the agreed market expectation.

The average monthly ARPU value increased 5% year-on-year to 6.9 yuan. (2) Non-subscription revenue was 700 million yuan, an increase of 6% over the previous year. Social entertainment revenue declined 34% year over year to $3,516 billion in 2023.

Profit forecasting and investment advice. Cloud music traffic is growing healthily, and revenue performance is steady based on commercialization such as subscriptions and advertisements. In the future, the company will continue to implement a differentiated music content community operation strategy and actively acquire customers to promote scale growth. Recent product revisions further revolve around upgrading users' listening experience and strengthening product barriers. We expect 24-25 revenue to reach 82/95 billion yuan, an increase of 5% and 15% over the same period. The company's gross margin increased rapidly in '23, thanks to the optimization of music copyright costs and the continuous contraction of the live streaming share ratio. We expect the company's NongAAP net profit to be 984 million yuan and 1,447 million yuan in 24-25. Referring to comparable companies, Cloud Music's 24-year profit was given a 22x PE valuation. The company's reasonable value was HK$110.05 per share, maintaining a “buy” rating.

Risk warning: Risks such as user monetization falling short of expectations, increased industry competition, and stricter regulations.