Investment highlights:

2024Q2 profits both increased year over year.

(1) Strong growth in performance. 2024Q2's revenue was 7.16 billion yuan (yoy -1.7%, qoq +5.8%), operating costs 4.15 billion yuan (yoy -13.3%, qoq +3.8%), IFRS net profit of 1.68 billion yuan (yoy +29.6%, qoq +18.3%), and non-IFRS net profit of 1.87 billion yuan (yoy +22.5%, qoq +10.0%). The year-on-year decline in revenue was mainly due to social entertainment services Revenue from other services declined. 2024Q2's gross profit margin was 42.0%, up 7.8pct year-on-year, mainly due to strong revenue growth in music subscriptions and advertising services and an increase in original content. 2024Q2 company's sales expenses/management expenses 0.21/0.938 billion yuan (yoy -0.5%/-10.2%, qoq +12.3%/-1.2%), sales expenses/management expenses ratio 2.9/13.1%, +0.04/-1.2pct year on year, +0.2/-0.9pct month-on-month, cost control is good.

(2) There is sufficient cash on the account. As of the end of 2024Q2, the company's cash and cash equivalents, time deposits and short-term investments totaled $35.03 billion, an increase of $0.85 billion over the end of 2024Q1.

The increase in paying subscribers and ARPU has driven strong growth in the online music subscription business.

(1) 2024Q2 online music business revenue of 5.42 billion yuan (yoy +27.7%, qoq +8.2%), of which subscription revenue is 3.74 billion yuan (yoy +29.4%, qoq +3.3%), mainly driven by paying users and ARPU value growth; advertising and other non-subscription revenue of 1.68 billion yuan (yoy +23.5%, qoq +20.9%), mainly driven by innovative advertising formats (incentive advertising model+investment advertising) As well as the increase in revenue from offline shows.

(2) The number of paying users and ARPU values grew steadily. The number of paying users in the online music business of 2024Q2 was 0.117 billion (yoy +17.7%, qoq +3.1%), the payment rate was 20.5% (YoY/ +3.8/+0.9pct), and the average monthly ARPU value was 10.7 yuan (yoy +10.3%, qoq +0.9%). The company continues to upgrade apps such as QQ Music and Kugou Music, expand cooperation with record companies, and launch more personalized benefits to enhance member stickiness. In addition, it provides digital album products with interactive features between artists and fans, hosts music festivals, and provides value-added services such as priority ticketing/artist peripherals to help the strong growth of the non-subscription business.

The social entertainment business continues to adjust dynamically.

The revenue from 2024Q2 social entertainment and other services was 1.74 billion yuan (yoy -42.8%, qoq -1.4%), mainly due to adjustments to some live streaming interactive features and implementation of stricter compliance procedures starting in 2023Q2, which intensified market competition. The number of paying users of the 2024Q2 social entertainment business is 0.0079 billion (yoy +5.3%, qoq -1.3%), the payment rate is 8.5% (up 3.0/0.2pct year over year), and the average monthly ARPU value is 73.2 yuan (yoy -45.8%, qoq -0.3%).

Profit forecast and investment rating: In 2024-2026, we expect the company's revenue to be 28.831/32.005/34.95 billion yuan, net profit to mother 6.338/7.622/8.604 billion yuan, and adjusted net profit to mother 7.088/8.387/9.385 billion yuan, corresponding adjusted PE of 21/18/16X.

Tencent Music has leading domestic online music platforms such as QQ Music and Kugou Music. It is optimistic about the number of long-term paying users and two-wheel drive with ARPU value. The revenue structure is healthier, and profitability is expected to continue to improve. Based on this, the first coverage was given a “buy” rating.

Risk warning: Risks such as the growth of paying users falling short of expectations, increased market competition, rising content costs, industry policy regulation, competition in other forms of entertainment, and competition on other music platforms.