4Q23 total revenue dropped by -7% YoY to RMB6.9bn, beating consensus/ BOCIe. Remarkable 41% YoY music growth contributed by accelerated 45% YoY music subs on both outperformed paying subs and ARPPU and 33% YoY music non-subs on strong ad and artist merchandise offset -52% YoY social plummet. 38.3% GPM beat consensus. We believe Co. will continue reap sustainable rewards from music segment on committed investments in content, devices, privileges, consumption scenarios, in-app features and technology especially AI integrations. Coupled with execution of buyback and potential dividend policies on strong cash positions, TOP BUY and raise our TP to US$13.0/ HK$51.0.

Key Factors for Rating

Sustainable solid music momentum with organic driving factors further uplift music GPM ceilings. We see Co. to reap sustainable rewards of their committed music investments in content (copyrights/ original music and long form audio), devices (mobile, PC and iOT), privileges, consumption scenarios, in-app features/ tools and technology, as well as their strong and dedicated executions. We maintain our view that Co. will balance ARPPU and paying user additions as a holistic view for music subs with additional efforts to explore new monetisation channels for music non-subs such as ad, artist merchandise, long form audio and iOT commercialisations. Moreover, integrations of AI into music and social ecosystems will further strengthen user experience, enhance production efficiency, expand monetisation channels and improve efficiency.

Thus, we raise our 2024-25E music revenue forecasts by 3% mainly driven by paying subs, leading to 2% increase of total revenue estimations. We expect strong music subs and ad momentum, revenue mix shift towards high margin segments (subs, ad and original content) and optimised content cost structures will further push midterm music GPM to 45%. Therefore, we nudge up our 2024- 25E group level GPM forecasts by over 300bps assuming solid music GPM expansion along the road and relatively stable social GPM within 35-40%. We also slightly raise our opex estimations to reflect Co.'s initiatives for effective user acquisition, tech investments and talent recruitments. We currently estimate FY2024E total revenue to grow 4% YoY driven by 28% YoY music growth which will fully offset -35% YoY social decline. 2024E GPM forecast was expanded to 40% with strong music GPM of ~43% and stabilised social GPM of 37%, leading to 23% adj. NPM (adj. Net profit to grow 14% YoY to RMB6.7bn).

4Q23: remarkable music drove solid margin expansion. Total revenue of RMB6.9bn (down -7% YoY) was 3%/1% above consensus/ BOCIe. Solid music revenue accelerated at 41% YoY to RMB5.0bn, with music subs and music non- subs both accelerated at 45% YoY and 33% YoY. Both 3.7m quarterly paying net additions of 106.7m paying users and 21% YoY of RMB10.7 monthly ARPPU contributed to music subs healthy momentum. Ad and merchandise sales supported music non-subs segment. Social revenue dropped by -52% YoY to RMB1.9bn. GPM beat consensus by further significantly expanded by 5.4ppts YoY/ 2.7ppts QoQ to 38.3% due to music Op leverage, revenue mix, in-house content contribution and improved cost efficiency. Adj. NPM was 22.8% impacted by accrual of withholding tax on capital return schemes. Co. repurchased US$71.5m shares in 4Q23 with the remaining 65% US$325.5m buyback quota till Mar 2025 as of end 2023.

Key Risks for Rating

Downside risks: 1) weak macro; 2) fierce competition; 3) regulation; 4) ineffective monetisation; 5) ADR delisting; 6) destructive M&A

Valuation

Maintain BUY and raise our P/E based TP to US$13.0/ HK$51.0, derived from 20.0x blended 2024E Non-GAAP PER by assuming 70% profit contribution from music (27.0x adj. PER, up from 25.0x previously) and 30% from social (unchanged 4.0x adj. PER) in 2024E and US$0.63 2024E Non-GAAP EPADS (vs. previously US$0.60) on latest Forex and share number assumptions.