Zhongtong Securities has learned that Orient Securities has released a research report stating that it maintains a "buy" rating on Tencent Music-SW (01698). Due to the continuous increase in the proportion of the company's online music revenue in the overall structure and the expected improvement in the profit margin, it is expected that the net income attributable to the parent company in 2024-2026 will be 6.7/8.2/10.2 billion yuan (the original forecast for 2024-2026 was 6.6/8/9.4 billion yuan, due to the upward adjustment of member ARPPU and gross margin, and the downward adjustment of fee rate adjustment profit forecast). The target price is 53.17 Hong Kong dollars.

Orient Securities' main points are as follows:

Revenue for Q2 2024 was 7.16 billion (YoY-1.7%, QoQ+5.8%). The bank expects revenue to reach 7 billion in Q3 2024 (YoY+6.7%, QoQ-2.1%). The gross profit margin for Q2 2024 was 42.04% (YoY+7.77pp, QoQ+1.10pp), mainly due to the strong growth in music subscription and advertising revenue and the gradual increase in original content. Sales expenses for Q2 were RMB 210 million (YoY-0.47%, QoQ+12.30%), which remained basically unchanged from the same period last year. The company continues to manage promotion expenses with a focus on investment return rate. General and administrative expenses for Q2 were RMB 940 million (YoY-10.15%, QoQ-1.16%), mainly due to a reduction in personnel expenses. IFRS net income attributable to the parent company for Q2 was RMB 1.7 billion (YoY+29.58%, QoQ+18.28%); non-IFRS net income attributable to the parent company for Q2 was RMB 1.9 billion (YoY+22.50%, QoQ+9.92%).

Online music service for Q2 2024: 5.42 billion (YoY+27.65%, QoQ+8.33%), mainly benefiting from high-quality content, attractive member rights, optimized user operations, and effective promotion measures. The bank expects revenue to reach 5.6 billion in Q3 2024 (YoY+23%, QoQ+3.3%) and expects revenue to reach 22 billion in 2024 (YoY+27%). Q2 MAU was 570 million (YoY-3.9%, QoQ-1.2%); MPU was 117 million (YoY+17.7%, QoQ+3.1%); and ARPPU was 10.7 yuan/month (YoY+9.94%, QoQ+0.2%). The bank expects that as the penetration rate of SVIP higher ARPPU member packages increases, Q3 company ARPPU will continue to increase to 10.9 yuan/month and MPU will reach 119 million. The bank expects member income to reach 15.2 billion for the full year of 2024 (YoY+26%).

Social entertainment service for Q2 2024: 1.74 billion (YoY-42.84%, QoQ-1.42%). This was mainly due to adjustments made to some live broadcast interactive functions and the implementation of more stringent compliance procedures, as well as competition from other platforms. The bank expects revenue to reach 1.4 billion in Q3 2024 (YoY-30%, QoQ-19%). The decline in QoQ was mainly due to the continued tightening of compliance and macro factors. Q2 MAU was 93 million (YoY-32%, QoQ-4.1%); MPU was 10 million (YoY+5.33%, QoQ-1.25%); and ARPPU was 73.3 yuan/month (YoY-45.7%, QoQ-0.2%).

Risk warning

There are risks of reshuffling the market brought by Douyin's music platform launch, regulatory risks in live broadcasts, and increased internal competition in the live broadcast industry.