1Q24 results exceeded our expectations
The company announced 1Q24 results: revenue of 6.768 billion yuan, down 3.4%, slightly exceeding our (6.601 billion yuan) and market (6.554 billion yuan) expectations; non-IFRS net profit of 1.704 billion yuan, up 20.8%, exceeding our (1,606 billion yuan) and market (1,589 billion yuan) expectations, mainly due to lower costs and sales expenses than expected.
Development trends
Online music revenue continues to grow rapidly, setting a good tone for high-quality growth. Online music: 1Q24 revenue was 5.07 billion yuan, up 43% from the same period, accounting for 74% of music revenue. Music MAU increased slightly to 578 million, with subscription revenue increasing by 39.2% to 3.6 billion yuan, of which the number of paying users increased by 6.8 million to 114 million month-on-month. As mentioned in the company's performance conference, the company expects the number of paying users to increase year-on-year in 2024, or between 2022 and 2023, or 12.3 to 18.2 million; ARPPU also increased 15.2% to 10.6 yuan/month (due to increased subscription promotions during the Spring Festival). Non-subscription revenue also increased 54.1% to 1,380 billion yuan in 1Q24. The company's performance will indicate a significant increase in e-commerce advertisers' advertising revenue. The launch of a “gold coin” incentive advertising format in Q1 is expected to open up revenue space.
Social entertainment: 1Q24 revenue was 1,761 billion yuan, down 49.7%. Previously, market expectations were sufficient.
The ability to control costs has once again proven, and I am optimistic about the room for improving profitability in the medium to long term. 1Q24 gross margin increased 6.9ppt to 40.9% month-on-month, mainly benefiting from strong revenue growth in music subscriptions and advertising services, as well as an increase in the share of original content. The company's performance will suggest that gross margin for 2Q24 and 2024 is expected to continue to increase year-on-year. The absolute value of the company's 1Q24 sales expenses fell month-on-month. The sales expense ratio was relatively low at 2.8%; the management expenses ratio was 14.0%, down month-on-month, and operating expenses were relatively controlled.
The company's earnings conference also mentioned that net profit and net interest rates are expected to continue to rise in 2024.
The announcement of cash dividends for the first time shows confidence, and long-term healthy development can be expected. The company announced dividends for the first time in an announcement. For fiscal year 2023, the company announced a dividend of $0.137 per ADS, with a total cash dividend of US$210 million. According to the calculation, its total cash dividend accounts for 31.3% of IFRS net profit and 1.03% of IFRS net profit (calculated based on the closing price of US stocks on May 13, Beijing time); the company announced a repurchase plan of US$500 million on March 21, 2023, and has repurchased US$235.5 million as of March 31, 2024. We believe the company is confident in its long-term healthy development and values investor returns.
Profit forecasting and valuation
Due to strong growth in online music revenue and cost control exceeding expectations, we raised our 2024/2025 non-IFRS net profit forecast by 2.4%/1.9% to $73.80/8.914 billion yuan. Currently, Hong Kong stocks correspond to 21.0/17.3 times, and US stocks correspond to 19.8/16.4 times 2024/2025 non-IFRS P/E. Maintaining an outperforming industry rating and considering profit forecast adjustments and long-term development space for the music business, we raised our target prices for Hong Kong and US stocks by 28% to HK$65.4 and 28.8% to $17. Hong Kong and US stocks all correspond to 25/21 times 2024/2025 non-IFRS P/E, with 19.2%/27.4% upside, respectively.
risks
Competition is intensifying, regulations are tightening, online music business growth is slowing, and social entertainment revenue continues to be under pressure.