The Zhitong Finance App learned that CICC released a research report stating that it maintained the Tencent Music-SW (01698) “outperforming the industry” rating and raised the 2024/2025 non-IFRS net profit forecast by 2.4%/1.9% to 73.80/8.914 billion yuan due to strong growth in online music revenue and cost control exceeding expectations. The target price increased by 28% to HK$65.4, taking into account profit forecast adjustments and long-term development space for the music business. The company announced 1Q24 results: revenue of 6.768 billion yuan, down 3.4%, slightly exceeding the bank's (6.601 billion yuan) and market (6.554 billion yuan) expectations; non-IFRS net profit of 1.704 billion yuan, up 20.8%, exceeding the bank's (1,606 billion yuan) and market (1,589 billion yuan) expectations, mainly due to lower costs and sales expenses than expected.

The main views of CICC are as follows:

Online music revenue continues to grow rapidly, setting a good tone for high-quality growth.

Online music: 1Q24's 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 people month-on-month, 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. 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 between 2022 and 2023, that is, 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 mention 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's 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 indicate that gross margin is expected to continue to increase year-on-year for 2Q24 and 2024. The absolute value of the company's 1Q24 sales expenses decreased month-on-month. The sales expense ratio was relatively low, 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 calculations, its total cash dividend accounts for 31.3% of IFRS net profit and a dividend rate of 1.03% (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. The bank believes that the company is confident in its long-term healthy development and values investor returns.

Risks: Competition is intensifying, regulations are tightening, online music business growth is slowing, and social entertainment revenue continues to be under pressure.