1Q24 total revenue was RMB6.8bn, beating consensus and BOCIe by 3% on outstanding music. Music revenue grew at 43% YoY to RMB5.0bn mainly contributed by music subs and music ad. Efficient operations and successful multi-channel promotions during CNY drove historically high of 6.8m quarterly paying net adds to 113.5m while ARPPU was relatively stable QoQ at RMB10.6. 40.9% GPM and efficient opex led to 25.2% adj. NPM, beating consensus. We deem Co. will reap sustainable financial rewards due to their strengthened and diversified music monetisations driven by strong operational executions, committed investments and enhanced efficiency on flourishing music ecosystems. Coupled with capital return package consisting of consistent buyback execution and recurring annual dividend policy, maintain BUY and raise our TP to US$16.0/HK$63.0.
Key Factors for Rating
Enhanced and diversified music monetisations drive sustainable growth. We deem Co. to sustainably reap rewards on their strong operational executions and committed investments on music-related content formats (both licensed and original offerings), diversified privileges, innovative features empowered by AIGC capitalisation, improved listening experience on technological upgrade and deepened integrations with Tencent ecosystem. Diversified monetisation models, especially ads and merchandise sales on organically growing music consumptions, will further drive music non-subs. We maintain our 2024-26E music revenue forecasts unchanged by uplifting paying subs estimations by 1% while trimming ARPPU forecasts by 2% to reflect Co.'s operations for L-T sustainable growth. We lift our 2024/25/26 GPM forecasts by 176bps/ 128bps/ 42bps respectively to mainly reflect strong music Op leverage and optimised streaming sharing ratio. Coupled with efficient ROI- oriented opex, we lift our 2024-26 adj. EPADS forecasts by 11-12%.
1Q24: outstanding quarter on astonishing music; US$210m FY2023 cash dividend. Total revenue was RMB6.8bn (down -3% YoY), 3% higher than consensus and BOCIe. Music revenue accelerated 43% YoY to RMB5.0bn, with music subs and music non-subs logging 40% YoY and 53% YoY respectively. Efficient operations and multi-channel promotions during CNY contributed to historically high of 6.8m quarterly music paying net adds to 113.5m. While monthly ARPPU was relatively stable QoQ at RMB10.6, solid ad on diversified products especially free ads mode on eC advertisers drove music non-subs momentum. Social revenue dropped by -50% YoY to RMB1.8bn. GPM continued to expand by 7.9ppts YoY/ 2.6ppts QoQ to 40.9% due to music Op leverage, revenue mix, original content contribution and improved cost efficiency. Coupled with efficient opex, adj. NPM was 25.2%, beating consensus of 24.1%. Co. repurchased US$61m shares in 1Q24 with remaining 53%/US$264.5m buyback quota till Mar 2025 as of Mar 2024. In addition, Co. has announced a recurring annual dividend plan and decided to pay US$210m for FY2023.
Key Risks for Rating
Downside risks: 1) key label collaboration; 2) fierce competition; 3) regulation;
4) weak macro; 5) ineffective monetisation; 6) ADR delisting.
Valuation
Maintain BUY and raise our P/E based TP to US$16.0/ HK$63.0, derived from 23.0x blended 2024E adj. PER by assuming 70% profit contribution from music (30.0x adj. PER) and 30% from social (5.0x adj. PER) and US$0.68 2024E adj. EPADS (vs. previously US$0.63) on latest Forex and share number assumptions.