Core views:

The company released its 24Q2 quarterly report: Tencent Music's 24Q2 revenue reached 7.16 billion yuan, YOY/QoQ -2%/+6%, vs. Bloomberg's agreed forecast of 7.13 billion yuan, which is basically in line with expectations. NonGaap's net profit to mother was 1.873 billion yuan, YoY +22%, QoQ +10%, vs. Bloomberg's agreed estimate of 1.829 billion yuan (over 2%). NongAAP's net profit margin was 26.2%, up 5.2 pct year on year and 1.0 pct month on month.

The music business is growing steadily. 24Q2's online music business revenue was 5.424 billion yuan, YoY +28% /QoQ +8%. 24Q2 subscription revenue was 3.74 billion yuan, YoY +29%, and QoQ +3%. The number of subscribers reached 0.117 billion, a net quarterly increase of 3.5 million month-on-month membership, YoY +17.7%. ARPU is 10.7 yuan, YoY +10%, QoQ +1%. The payment rate corresponding to the number of members/MAU in 24Q2 reached 20.5%, an increase of 3.8 pct over the previous year, and an increase of 0.8 pct over the previous month.

24Q2 non-subscription revenue reached 1.68 billion yuan, YoY +24%, and QoQ +21%. The performance of the advertising business benefits from the development of multiple forms of advertising products. Revenue from the social entertainment business was 1.736 billion yuan in 24Q2, YoY -43%, and QoQ -1%, which stabilized from month to month.

Profit forecast and investment advice: The membership growth performance was impressive in the first half of the year. The pace of membership growth is expected to slow down in the second half of the year. Judging from the target for the full year of 24, it is expected that the net increase in 14 million members will remain unchanged, and the long-term membership space and price increase trend will not change. Music performance is steady, diversified revenue is still being developed, and the social entertainment business still had some competitive pressure and macro influence in the second half of the year. The estimated 24-25 revenue is 28.2/31.5 billion yuan, up 1.7% and 11.7%; adjusted net profit to mother for 24-25 is 7.5/8.784 billion yuan, up 26.6% and 17.1%. The fair value of the company is estimated at US$13.16/ADS, or HK$51.24 per share, based on a segmented valuation, maintaining a “buy” rating.

Risk warning: The risk that emerging forms of entertainment will divert users and time, that the ceiling of membership business falls short of expectations, and that live streaming revenue will continue to decline.