2Q24 results exceeded our expectations

The company announced 2Q24 results: revenue of 7.16 billion yuan, down 1.7%, slightly exceeding our expectations (7.074 billion yuan) and basically in line with Bloomberg's agreed expectations (7.155 billion yuan); non-IFRS net profit of 1.873 billion yuan, up 22.5%, exceeding our expectations (1.8 billion yuan) and Bloomberg's agreed expectations (1.853 billion yuan), mainly due to costs and management expenses Below expectations.

Development trends

Online music revenue continued to grow at a healthy rate, and was more clearly price-driven in the second half of the year. Online music: 2Q24 generated 5.424 billion yuan, an increase of 27.7%. Music MAU was 0.571 billion, and subscription revenue also increased 29.4% to 3.74 billion yuan, of which the number of paying users increased 3.5 million month-on-month to 0.117 billion; ARPPU also increased 10.3% to 10.7 yuan/month, a slight increase from month to month. The company's performance conference mentioned that the company expects the growth of the music subscription business in the second half of 2024 to be driven by both volume and price growth. Among them, ARPPU's year-on-year growth rate may be higher than the growth rate in the number of paying users (net month-on-month increase in the second half of the year or lower than 10 million people in the first half of the year), and ARPPU may be driven by SVIP product promotion. Non-subscription revenue increased 23.9% to 1.681 billion yuan in 2Q24.

Social entertainment: 2Q24 revenue was 1.736 billion yuan, down 42.8% from the same period, basically in line with market expectations.

It has a strong ability to control costs and expenses, and is optimistic about the room for improving profitability in the medium to long term. 2Q24's gross margin increased by 1.1 ppt to 42% month-on-month, mainly benefiting from strong revenue growth in music subscriptions and advertising services, ROC management of copyrighted content, increased share of owned content, and growth in K-song advertising and membership businesses.

The company's 2Q24 sales expense ratio remained low, at 2.9%; the management expense ratio was 13.1%, which declined from month to month, and operating expenses were relatively controlled. The company's performance conference mentioned that in 2024, the sales expense ratio was either flat year on year, and the management expense ratio decreased year on year. The company is confident that gross margin and net interest rate will increase year on year in 2024, and the net margin performance is expected to be superior to that of gross margin performance.

Focus on SVIP products driving the subscription business in the medium to long term, and long-term healthy development can be expected. In the medium to long term, in terms of the membership benefit matrix, the higher-priced SVIP product provides members with a multi-terminal and multi-scenario experience. Its current publication price is 40 yuan/month, which is higher than the publication price of 15 yuan/month for basic members. As mentioned at the company's performance conference, the drivers of SVIP products include early listening to music albums, high-value users value sound quality and sound effects, and listening to a full range of content such as music and audiobooks on multiple devices. We recommend continuing to pay attention to the upward trend in the share of SVIP driving medium- to long-term revenue and gross margin growth in the subscription business.

Profit forecasting and valuation

Considering that the social entertainment business was affected by the external environment, 24/25 revenue was reduced by 1.1%/3.1% to 28.4/31.8 billion yuan, keeping the 24/25 non-IFRS net profit forecast unchanged due to cost and expense controls. Currently, Hong Kong stocks correspond to 20.6/17.0 times, and US stocks correspond to 19.5/16.3 times 24/25 non-IFRS P/E. Maintaining an outperforming industry rating, considering the short-term slowdown in the growth trend, the target prices for Hong Kong and US stocks were lowered by 12.4% to HK$57.3/ 12.9% to $14.8. Both Hong Kong and US stocks corresponded 22/18 times 24/25 non-IFRS P/E, with 7.1%/12.7% upside respectively.

risks

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