According to the Wisdom Finance app, Sealand Securities has released a research report stating that from 2024 to 2026, Tencent Music-SW (01698) is expected to have revenue of 28.831/32.005/34.95 billion yuan, with a net income attributable to the parent company of 6.338/7.622/8.604 billion yuan and adjusted net income attributable to the parent company of 7.088/8.387/9.385 billion yuan. Tencent Music owns leading domestic online music platforms such as QQ Music and Kugou Music. Bullish on the long-term growth of paid users and ARPU values, the income structure becomes healthier, and profitability is expected to continuously improve. Based on this, initiating coverage and giving a "buy" rating.

The main views of Zhonghai Securities are as follows:

In 2024 Q2, both profit year-on-year and quarter-on-quarter achieved growth.

(1) Strong performance growth. In 2024 Q2, the company's revenue was 7.16 billion yuan (yoy -1.7%, qoq +5.8%), cost of goods sold was 4.15 billion yuan (yoy -13.3%, qoq +3.8%), IFRS net income attributable to the parent company was 1.68 billion yuan (yoy +29.6%, qoq +18.3%), non-IFRS net income attributable to the parent company was 1.87 billion yuan (yoy +22.5%, qoq +10.0%), the decrease in revenue year-on-year was mainly due to a decrease in social entertainment service and other service revenues. The gross profit margin of the company in 2024 Q2 was 42.0%, an increase of 7.8pct year-on-year, mainly driven by strong growth in revenue from music subscriptions and advertising services as well as increased original content. Sales expenses/management expenses of the company in 2024 Q2 were 0.21/0.938 billion yuan (yoy -0.5%/-10.2%, qoq +12.3%/-1.2%), with a sales expenses/management expenses ratio of 2.9/13.1%, an increase of +0.04/-1.2pct year-on-year, and an increase of +0.2/-0.9pct quarter-on-quarter, indicating good expense control.

(2) Sufficient cash on hand. As of the end of 2024 Q2, the company's cash and cash equivalents, fixed deposits, and short-term investments totaled 35.03 billion yuan, an increase of 0.85 billion yuan compared to the end of 2024 Q1.

The growth of paid users and ARPU drives strong growth in online music subscription business.

(1) In 2024Q2, the online music business revenue was 5.42 billion yuan (yoy +27.7%, qoq +8.2%), with subscription revenue of 3.74 billion yuan (yoy +29.4%, qoq +3.3%), mainly driven by the growth of paying users and ARPU values; advertising and other non-subscription revenue of 1.68 billion yuan (yoy +23.5%, qoq +20.9%), mainly due to innovative advertising formats (incentive advertising model + sponsorship advertising) driving advertising revenue growth and the increase in offline concert revenue.

(2) The number of paying users and ARPU values steadily increased. In 2024Q2, the company's online music business had 0.117 billion paying users (yoy +17.7%, qoq +3.1%), with a pay rate of 20.5% (yoy/qoq +3.8/+0.9pct), and an average monthly ARPU value of 10.7 yuan (yoy +10.3%, qoq +0.9%). The company continues to upgrade QQ Music, Kugou Music, and other apps, expand cooperation with record companies, launch more personalized benefits to enhance member stickiness. In addition, it provides digital album products with artist-fan interaction features, hosts music festivals, and offers value-added services such as priority ticketing/artist merchandise to boost the strong growth of non-subscription business.

Continuous dynamic adjustments in the social entertainment business.

In 2024Q2, the revenue from social entertainment and other services was 1.74 billion yuan (yoy -42.8%, qoq -1.4%), mainly due to adjustments made to some live interactive functions since 2023Q2 and the implementation of stricter compliance procedures, coupled with intensified market competition. The number of paying users for social entertainment business in 2024Q2 was 0.0079 billion (yoy +5.3%, qoq -1.3%), with a pay rate of 8.5% (yoy/qoq increase of 3.0/0.2pct) and an average monthly ARPU value of 73.2 yuan (yoy -45.8%, qoq -0.3%).