Author: Pei Pei, head of the rogue regiment.

Source: Internet and Entertainment Troupe

Brief comment on performance

3Q19 achieved a revenue of 6.507 billion yuan, an increase of 31% over the same period last year, and a net profit of 1.026 billion yuan, an increase of 6.4% over the same period last year. Nonafers' net profit was 1.237 billion yuan, an increase of 8.0% over the same period last year.

Business analysis

Revenue from 3Q19, an online music service, increased by 48.9% compared with the same period last year, and the pace of online music payment accelerated. 3Q19, the company's mobile MAU for online music and social entertainment, was 661 million and 242 million, respectively, up 0.9% and 7.6% from a year earlier.According to our monitoring data, the average MAU growth rate of QQ Music and KuGou Music from July to October is still more than 10% year-on-year with a high base of users.The company has made a breakthrough in both the non-subscription service of digital album sales and the subscription service of members. According to the weekly list of QQ Music's top 20 best-selling albums, 3Q19 album sales are much higher than 1Q19 and 2Q19, further offsetting the decline in the copyright distribution business. The number of subscribers who pay for online music has grown at a year-on-year rate of nearly six quarters, with a 3Q19 of 35.4 million. As the benefits of user retention become apparent, ARPPU, an online music subscription service, rose 4.7 per cent year-on-year. The payment rate for 3Q19 subscription online music service is 5.4%, an increase of 1.6pct compared with the same period last year. Social entertainment services and other realized income was 13.128 billion yuan, up 37.2% from the same period last year; the payment rate was 5.0%, up 0.6 pct from the same period last year; and the monthly ARPPU was 127.3 yuan per person, up 7.4% from the same period last year, down 2.2% from the previous month due to increased competition.

The closed loop of fan economy is deepened, and the multi-dimensional and multi-level development model makes the business synergy benefit more and more significant. The online music and social entertainment businesses are not separated, and the "fan" mentality is the common starting point.Take Jay Chou's latest single "Don't cry" as an example, it not only directly brings digital album sales revenue, but more importantly, it attracts a large fan base of Jay Chou.Overlay company and Jewell copyright in-depth cooperation, strengthened QQ Music from the user positioning to compete with NetEase, Inc Yun music strength. "promise not to cry" added 12 million cover works within 10 days of its first release. From listening to songs to singing, the life cycle of songs has also been naturally extended. Not only for singers, movies and TV dramas and animated soundtrack music (OST) is also an important reflection of the fan economy, "Chen Li" and other TV series soundtrack albums are very popular.

The gross profit margin of the company is higher than the previous month, and the overall profit level is relatively stable. The company's 3Q19 gross profit margin was 34.0%, down 5.5pct from the same period last year, but increased by 1.1 pct compared with the same period last year; the net return rate was 15.8%, down 3.6% from the same period last year and 19.0% from the same period last year, and down 4.0pct from the same period last year.

Investment suggestion

We estimate that the Non-IFRS EPS in 2019-21 will be RMB 2.89 RMB 3.65 USD 4.81 respectively. Due to the stabilization of gross profit margin, it increased by 12.2%, 2.4% and 1.1% respectively compared with the last profit forecast. We maintain a valuation of 34 times 2020E Pamp E, with a target price of $17.70 and a "buy" rating.

Risk Tips:Copyright cooperation and user diversion risk; content regulation, goodwill impairment risk; data accuracy difference.

Performance Analysis of 3Q19 Tencent Music

Performance overview

3Q19 of subscription online music service increased by 48.9% compared with the same period last year, and the business synergy benefit is outstanding.

The company's 3Q19 achieved revenue of 6.507 billion yuan, an increase of 31% over the same period last year, of which revenue from subscription online music services was 945 million yuan, an increase of 48.9% over the same period last year. Revenue from subscription online music services, non-subscription online music services, social entertainment services and other services contributed 14.5%, 13.8% and 71.6%, respectively. Revenue from non-subscription online music services totaled 901 million yuan, an increase of 8.8 percent over the same period last year. This business mainly includes music rights distribution, digital album sales, and so on. Digital album sales at 3Q19 are growing rapidly, doubling from the same period last year, further offsetting the decline in revenue from the copyright distribution business. Revenue from social entertainment services and other services totaled 4.336 billion yuan, up 35.3% from a year earlier. Judging from the first three quarters of 2019, the company achieved revenue of 18.141 billion yuan in the first three quarters, an increase of 33.5 percent over the same period last year. Revenue from subscription online music services, non-subscription online music services, social entertainment services and other services contributed 13.5%, 14.1% and 72.4%, respectively. Revenue from subscription online music services totaled 2.453 billion yuan, up 35.9 percent from the same period last year, while revenue from non-subscription online music services totaled 2.56 billion yuan, up 15.8 percent from the same period last year, and social entertainment services and other income totaled 13.128 billion yuan, up 37.2 percent from the same period last year.

With fan economy as the center, business synergy benefits are emerging at an accelerated pace. The digital album sales, subscription music and social entertainment business are not separated. Whether it is the payment of music or the realization of live streaming with music as the core, its foothold is the user's "fan" mentality and multi-level entertainment needs. The exploration of the breadth and depth of love for songs, singers or anchors is one of the company's strategies. Take Jay Chou's latest single "promise not to cry" released by QQ Music on September 16, 2019 as an example.This digital single album not only made a record breakthrough in sales, but also directly brought revenue to the company's non-subscription music business (cumulative sales of 25.83 million yuan in the first month of release)More importantly, this move has also attracted a large fan base of Tencent Music, coupled with the deep cooperation between Chou and Jay Chou to expand the copyright coverage of the Jewell brand, strengthening the strength of QQ Music to compete with Jay Yun Music from the perspective of user positioning. Not only Jay Chou, but also Lin Junjie, Jolin Tsai and other powerful singers in the Chinese music world are also working closely. Users open member services to enjoy more song listening services, and they can also sing cover songs on national songs. Deepening the entertainment immersion experience of users with common hobbies represented by Jay Chou in Tencent Music's whole product line has also achieved remarkable results.Within 10 days of the first release of Jay Chou's "promise not to cry", 12 million new cover works have been added to the singing of the whole people, and the songs have become popular as soon as they are touched.

In the third quarter of 2019, in addition to pop Chinese singers, European and American singers and idol groups, there is another bright spot, that is, the strength of OST (Original Sound Track, film and TV series or animated soundtrack music), which is also another manifestation of fan economy. For example, Tencent's popular TV series "Chen Ling"Since "Chen Xiang Ling Guofeng Music album" was released on QQ Music on July 8, the cumulative sales have exceeded 7.88 million yuan.Ranked in the top 10 of QQ Music's list for 12 consecutive weeks. OST albums such as animated "Spirit Cage", TV series "you without Secrets" and TV series "time knows" are also frequently on the list.

The number of users continues to expand, and the process of paying for online music is accelerated.

The number of users of the company's online music and social entertainment continues to grow, and digital album sales are growing strongly. 3Q19, the company's online music and social entertainment mobile MAU are 661 million and 242 million respectively, of which the online music mobile MAU only includes the MAU of subscription services, excluding the number of users sold by digital albums or singles. Online music and social entertainment mobile MAU growth rates are 0.9% and 7.6%, respectively.According to the continuous tracking of QQ Music's best-selling album list, we found that the sales of 3Q19 albums are much higher than those of 1Q19 and 2Q19, with monthly sales exceeding 80 million yuan during the summer vacation in July and August.Thanks to the fan economy, the cumulative sales of QQ Music's top 20 digital albums in the first three quarters of 2019 were 337 million yuan. As of November 11, 2019, compared with QQ Music and NetEyun Music, the former MAU is about 1.4 times that of the latter, while in terms of cumulative sales of the top 10 digital albums, QQ Music far surpasses NetEase, Inc Yun Music, and the former is about 4.4 times that of the latter. In the long run, the deepening of the copyright moat is expected to further help Tencent Music win the battle for market share.

Competition in the mobile music and mobile singing industries is relatively stable, with QQ Music and KuGou's music MAU still growing at more than 10 per cent year-on-year. Tencent Music's KuGou Music, QQ Music and Kuwo Music are among the best, and the total contract of MAU in October 2019 is 4.5 times that of NetEYun Music MAU. In October 2019, the national singing MAU is about 3.1 times that of the singing bar MAU. Judging from the year-on-year growth rate of MAUThe MAU of QQ Music and KuGou music maintained relatively rapid growth, with MAU growth rates of 13.0% and 13.9% respectively in October 2018 compared with the same period last year.At present, the overall level of MAU has stabilized, and the decline in 3Q19 growth rate has narrowed significantly compared with the same period last year.

The number of subscribers paying for online music has grown at a year-on-year high for nearly six quarters, with 3Q19 reaching 35.4 million and ARPPU rising. 3Q19, subscription to online music and social entertainment and other payment rates are 5.4% and 5.0%, respectively, up 1.6pct and 0.6pct year-on-year. From the perspective of ARPPU, 3Q19 subscriptions to online music and social entertainment and other monthly ARPPU are 8.9 yuan per person and 127.3 yuan per person respectively. The subscription to online music service ARPPU increased by 4.7% compared with the same period last year, and increased by 3.5% compared with the same period last year. In 3Q19, social entertainment and other services ARPPU rose 7.4 per cent year-on-year, hit by competition from emerging forms of entertainment such as short videos in terms of user duration, down slightly from the previous month to 2.2 per cent.

3Q19 gross profit margin rose month-on-month, profit level stabilized

The company's 3Q19 gross profit margin improved 1.1pct compared with the previous month, and the overall profit level is relatively stable. The company made a net profit of 1.026 billion yuan in the third quarter and 2.94 billion yuan in the first three quarters of 2019, up 6.4% and 8.5% respectively over the same period last year. Excluding intangible assets and other amortization, equity incentive fees, equity investment income, changes in the fair value of resale shares and income tax effects of mergers and acquisitions, the company realized Non-IFRS return net profit of 1.237 billion yuan and 3.566 billion yuan in the third quarter and the first three quarters of 2019 respectively, up 8.0% and 8.7% respectively over the same period last year. In the third quarter of 2019, the company's gross profit margin was 34.0%, down 5.5pct from a year earlier and up 1.1pct from a month earlier. In the first three quarters of 2019, the company's gross profit margin was 34.1%, down 5.9pct from a year earlier. Since 2019, with the increase of the company's copyright investment and the natural rise in prices, the cost of content has increased a lot. And in terms of revenue sharing, the proportion of content providers (anchors) has also increased due to the increased competition among platforms such as short videos. In terms of operating rates, the sales expense rate and management expense rate in the third quarter of 2019 were 7.9% and 11.1% respectively, decreasing 0.8pct and increasing 0.1 PCT respectively compared with the same period last year; in the first three quarters of 2019, the sales expense rate and management expense rate were 7.6% and 10.8% respectively, declining 1.1pct and improving 0.1pct respectively.

Risk hint

Music copyright has a certain authorization period, and the long-term cooperative relationship with copyright owners has a certain degree of uncertainty.The distribution of music content of QQ Music, KuGou Music and Kuwi Music of the company depends on the procurement and authorization of music copyright, and there is some uncertainty in the long-term cooperation with copyright holders.

The competition in the live broadcast industry is fierce, and the company has some uncertainty about the attraction and retention of user traffic.Under the diversification of pan-entertainment, users' demand for live broadcast is changing with each passing day. If the live broadcast platform can not respond and respond to the new needs of users in a timely manner, it may face the risk of user loss.

The live broadcast platform is highly dependent on content resources, and the retention of anchors is uncertain.The paid services of the company's KuGou Live, Kuwo Juxing and National singing rely largely on high-quality anchors' resources, the cooperative relationship between anchors and platforms is uncertain, and the company may face the risk of loss of anchors' resources.

The content of live streaming and music is extensive and the platform is not easy to monitor, so the company may face regulatory policy risks such as illegal content.The live broadcast platform has a wide range of users and uploads a lot of content, so the control of the quality of some content may face regulatory restrictions.

Goodwill impairment risk.As of 3Q19, the company has goodwill worth 17.14 billion yuan, which is the largest non-current asset subject, mainly from the integration of China Music Group (CMC) in 2016.Although we judge that the risk of goodwill impairment in the short term is small, we can not completely eliminate this risk.

Differences in the accuracy of the data.The relevant MAU data in this paper come from the own technical testing of the National Gold Securities Research and Innovation Center. Due to differences in statistical methods and caliber, the data do not rule out discrepancies with the official data.We strive to analyze the data objectively and fairly on the existing technical level.