According to the report released by CICC, they maintain a "outperform" rating on Tencent Music-SW (01698), however, due to the impact of external environment on social and entertainment businesses, the revenue forecast for 2024 and 2025 is lowered by 1.1% / 3.1% to 27.8/30.8 billion yuan. Non-IFRS net profit forecast for 2024 and 2025 remain unchanged. The target price is down by 12.4% to HKD 57.3, considering the short-term slowdown in growth trend. The company's 2Q24 revenue is 7.16 billion yuan, a decrease of 1.7%, slightly exceeding the bank's expectation (7.074 billion yuan) and basically in line with the market's expectation (7.155 billion yuan). Non-IFRS net profit is 1.873 billion yuan, an increase of 22.5%, exceeding the bank's expectation (1.8 billion yuan) and the market's expectation (1.853 billion yuan) mainly because the cost and management fees were lower than expected.

CICC's main points are as follows:

Online music revenue maintained healthy growth, and price drive may be more obvious in the second half of the year.

Online music: In 2Q24, the revenue was 5.424 billion yuan, an increase of 27.7%. Music MAU was 0.571 billion people, and subscription revenue increased by 29.4% to 3.74 billion yuan. The number of paying users increased by 3.5 million compared with the previous quarter, reaching 0.117 billion. ARPPU increased by 10.3% to 10.7 yuan/month, a slight increase compared to the previous quarter. The company's earnings conference mentioned that the company expects music subscription business growth to be driven by both quantity and price in the second half of 2024, and ARPPU growth rate may be higher than the growth rate of paying users (the net increase in the second half of the year may be lower than 10 million in the first half of the year). ARPPU may be driven by the promotion of SVIP products. Non-subscription revenue increased by 23.9% to 1.681 billion yuan. Social and entertainment: 2Q24 revenue was 1.736 billion yuan, a decrease of 42.8%, basically in line with market expectations.

Cost and expense control ability is strong, and the long-term profit improvement space is optimistic.

The gross margin rate increased by 1.1 ppt to 42% in 2Q24, mainly benefiting from the strong growth of music subscription and advertising service revenue, ROC management of copyrighted content, the increase of self-owned content proportion, and the growth of K song advertising and membership business. The company's sales expense rate in 2Q24 remained at a low level of 2.9%, and the management expense rate was 13.1%, which decreased compared with the same period last year and the previous quarter, and operating expenses were relatively restrained. The earnings conference stated that the sales expense rate in 2024 may remain flat year-on-year and the management expense rate may decrease year-on-year. The company is confident that the gross margin and net profit margin will increase year-on-year in 2024, and the net profit margin may perform better than the gross margin rate.

SVIP product's long-term driving force on subscription business is worth paying attention to, and its long-term healthy development is expected.

In the long term, in terms of the member rights matrix, the higher-priced SVIP product provides members with a multi-terminal, multi-scenario experience. Its current list price is 40 yuan/month, which is higher than the list price of the basic membership of 15 yuan/month. The company's earnings conference mentioned that SVIP product drive includes exclusive preview of music albums, high-value users attaching importance to sound quality and sound effects, and multiscreen listening of comprehensive contents such as music and audiobooks. The bank suggests to continue to pay attention to the trend of the increase in SVIP's proportion and its driving effect on subscription revenue and gross profit margin growth in the medium and long term.

Risk

Competition is intensifying, regulation is tightening, online music business growth is slowing down, and social and entertainment revenue is continuing to be under pressure.