3Q24 Non-IFRS net profit slightly below our expectations

The company announced 3Q24 results: revenue of 7.015 billion yuan, up 6.8%, basically in line with our expectations (7.041 billion yuan) and Bloomberg's agreed expectations (7 billion yuan); non-IFRS net profit of 1.814 billion yuan, up 28.8% from month to month, slightly lower than our expectations (1.897 billion yuan) and Bloomberg's agreed expectations (1.919 billion yuan), mainly due to sales and Management costs were higher than expected.

Development trends

The net increase in the number of music paying users has slowed month-on-month, and the market is worried about the effectiveness of the SVIP promotion. Online music: 3Q24's revenue was 5.48 billion yuan, up 20.4% from the same period. Music subscription revenue also increased by 20.3% to 3.8 billion yuan. Among them, the number of paying users increased by 2 million to 0.119 billion. Among them, the company first revealed that the number of SVIP members exceeded 10 million, accounting for 8.4% of the number of paid users; ARPPU also increased by 4.9% to 10.8 billion yuan per month.

We believe that considering the net month-on-month growth and decline in the number of paying users in 3Q24 and current company valuations, investors are currently more concerned about the future growth space for the number of paying music users. Combined with the current macroeconomic environment and competitive landscape, there are certain concerns about the pace of SVIP progress. The company's performance conference mentioned that in the medium term, membership growth is still the main goal, driven by a combination strategy of basic members+SVIP; ARPPU growth may be driven by SVIP promotion. Non-subscription revenue increased 20% to 1.64 billion yuan in 3Q24. Social entertainment:

3Q24 revenue was 1.535 billion yuan, down 23.9% from the same period. The decline narrowed month-on-month, which was basically in line with market expectations.

3Q24 gross margin continued to increase month-on-month, and operating expenses increased slightly month-on-month. 3Q24's gross margin increased to 42.6%, benefiting from increased revenue from music subscriptions and advertising, ROC management of copyright costs, an increase in the share of homemade and co-created content broadcasts, a reduction in the share of social entertainment, and the contribution of K-song membership and advertising revenue. The company's performance conference mentioned that gross margin is expected to continue to rise in 4Q24 and 2025, but the increase may slow down in 2025. The company's 3Q24 sales expense ratio and management expenses both increased slightly from month to month. At the company's performance conference, it was mentioned that sales and management expenses are likely to rise steadily.

In 2025, the refined operation of paying users may be the core, focusing on the gradual release of long-term profit space. We believe that looking ahead to 2025, the net month-on-month increase in the number of paying users may slow down, and refined operation may be the core of the future. SVIP benefits include long audio, high-value sound quality and sound effects, early access to music albums, cross-terminal use, etc. The company also mentioned at the performance conference that it is planning a family membership package. The SVIP publication price is 40 yuan/month (currently there is an actual promotion), which is higher than the basic membership price of 15 yuan/month. We believe it is expected to help ARPPU grow. We believe that young users value high-value benefits, or that the SVIP core audience has some room for growth. If the pace progresses faster, it may boost investors' confidence in the future growth of subscription revenue and long-term profit margins.

Profit forecasting and valuation

Taking into account non-subscription music revenue and fee-side adjustments, we lowered our 24/25 non-IFRS net profit forecast by 0.2%/3.3% to 7.362/8.623 billion yuan. Currently, Hong Kong stocks correspond to 17.4/14.4 times, and US stocks correspond to 17.2/14.3 times 24/25 non-IFRS P/E. Maintain an outperforming industry rating. Considering the adjustment of profit forecasts and the slowdown in the number of short-term paying users, we lowered our target prices for Hong Kong and US stocks by 9.3%/9.5% to HKD52/$13.4. Hong Kong and US stocks both correspond to 20/17 times the 24/25 non-IFRS P/E, with 15%/16% upside respectively.

risks

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