We maintained our “collect” rating and raised our target price to HK$51.44. The valuation level of 24.0 times the 2024 price-earnings ratio was maintained; we raised the target price to take into account the increase in projected earnings per share and the repurchase of the company's shares.

Tencent Music's results for the third quarter of 2024 are in line with market expectations, and we expect the company to further increase profit margins by increasing ARPU. According to Tencent Music's financial report for the third quarter of 2024, total revenue reached RMB 7.02 billion, an increase of 6.8% over the previous year. Online music subscription revenue reached RMB 3.84 billion, up 20.3% year over year.

The number of online music paying subscribers grew to 0.119 billion, up 15.5% year over year, with a net increase of 2 million over the previous month. Net profit was RMB 1.71 billion, up 35.3% year on year, and net profit attributable to equity holders of the company was RMB 1.58 billion, up 35.5% year on year. Gross margin continued to grow, rising to 42.6%, up 0.6 percentage points month-on-month and 6.9 percentage points year-on-year. The company continues to improve operating indicators through attractive member benefits, optimized user operations, and effective promotion measures. We expect the company to continue to use its position as the leading music streaming platform in China to steadily increase online music subscription revenue and average revenue per user, and increase its net interest rate.

We lowered our revenue forecasts for online music subscriptions and other online music services, and lowered our revenue forecasts for social entertainment services again. However, we raised our gross margin forecast, thereby improving our overall earnings per share forecast.

Revenue forecasts for the Online Music Services segment for 2024/2025/2026 were adjusted to RMB 21.55 billion (-2.2%)/RMB 25.45 billion (-0.7%)/RMB 28.98 billion (-1.2%), respectively. Revenue forecasts for the Social Entertainment Services segment were lowered to RMB 6.541 billion (-5.5%)/RMB 5.578 billion (-18.5%)/RMB 4.97 billion (-27.4%), respectively. The gross margin forecast was raised to 41.7% (+0.1 percentage points)/43.5% (+1.0 percentage points)/44.7% (+1.5 percentage points), respectively. Diluted earnings per share was the most important measure of the stock, rising to RMB 2.31 (+1.7%)/RMB 2.74 (+4.5%)/RMB 3.08 (+4.7%), respectively. Earnings per American Depositary Share also increased to RMB 4.63 (+1.7%)/RMB 5.49 (+4.5%)/RMB 6.16 (+4.7%), respectively.

Recently, the market share of online music distributors has surpassed that of traditional music distributors, giving them bargaining power to maintain the continuous rise in music subscription prices. Judging from its MAU trend, the online music industry has reached a point of saturation.

In the US, music revenue from digital marketing channels already accounts for 83% of the market share, according to RIAA data. Although there is no exact data for China, we think the distribution of income is similar. In China, where most users of Tencent Music are located, the music streaming media market is under a duopoly. QQ Music/Kugou Music/Kuwo Music platforms under Tencent Music occupy three seats among the five major music streaming platforms.

Spotify proved in 2024 that with a gradual increase in subscription prices in a saturated market, the user churn rate will hardly increase. We believe Tencent Music has the ability to increase ARPU by increasing subscription prices in the near future.