Tencent Music Q3 Earnings Review: Performance Met Expectations, with Strong Growth in Music Subscription Revenue

On November 14th, Tencent Music(TME) released its Q3 financial report. On November 15th, CMB International released a commentary on Tencent Music's Q3 financial report, stating that the company's performance in the third quarter met expectations, and that music subscription revenue growth was strong.

Stock rating: BUY

Closing price on the day of the financial report release: $8.25

CMB International target price: $8.90

Recent closing price: $8.40 (as of 11/28/2023)

TME released its Q3 2023 financial report, with total revenue decreasing by 11% YoY and 10% QoQ to RMB 6.6 billion, mainly impacted by the weakness in social entertainment business. Non-IFRS net income increased by 2% YoY to RMB 1.41 billion.

The core music subscription revenue further accelerated its growth in Q3 2023, with a YoY increase of 42%, mainly driven by steady growth in paid users and ARPPU. It is expected that total revenue in 4Q23E will decrease by 10% YoY to RMB 6.7 billion, and the management's current goal is to achieve positive total revenue growth and net profit margin expansion in FY24E.

CMB International has given a buy rating with a target price of $8.90, based on DCF valuation method (with WACC of 11.6% and terminal growth rate of 2.5%).

In 3Q23, TME's online music business grew by 33% YoY to RMB 4.6 billion, accounting for 69% of total revenue. Music subscription revenue grew by 42% YoY to RMB 3.2 billion, mainly driven by steady growth in ARPPU/paid users. Non-subscription music revenue grew by 15% YoY to RMB 1.4 billion and more innovative advertising formats were adopted to increase advertising revenue. TME will increase efforts to develop IoT business, promote Super VIP subscriptions, and launch family membership plans to drive music subscription revenue growth in 2024.

Social entertainment revenue decreased by 49% YoY to RMB 2 billion, accounting for 31% of total revenue in 3Q23. It is expected that social entertainment revenue will decrease by 53% YoY and 9% QoQ in 4Q23E, and gradually stabilize on a QoQ basis in FY24E.

The management expects GPM to continue to increase QoQ in the fourth quarter, further expanding the gross margin. It is expected that with the support of improving gross margin and cost control, non-IFRS net income in the fourth quarter will increase by 2% YoY to RMB 1.46 billion.