According to the report from sealand, it is estimated that tencent music-SW(01698) will generate revenue of 28.831/32.005/34.95 billion yuan and have a net income attributable to the parent company of 6.338/7.622/8.604 billion yuan from 2024 to 2026, with adjusted net income attributable to the parent company of 7.088/8.387/9.385 billion yuan. Tencent music, which includes QQ Music and Kugou Music, leading online music platforms in China, is bullish on the dual drives of long-term paying users and ARPU values, expecting a healthier revenue structure and continuous improvement in profitability. Based on this, the first coverage of a "buy" rating is given.

The main views of Zhonghai Securities are as follows:

Profit growth both year-on-year and quarter-on-quarter was achieved in the second quarter of 2024.

(1) Strong performance growth. In 2024Q2, 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 decline in revenue is mainly due to reduced income from social entertainment services and other services. The company's gross margin in 2024Q2 was 42.0%, up 7.8 percentage points year-on-year, mainly due to strong growth in music subscription and advertising service income, as well as increased original content. The company's selling expenses/administrative expenses were 0.21/0.938 billion yuan in 2024Q2 (yoy -0.5%/-10.2%, qoq +12.3%/-1.2%), with selling expenses/administrative expenses ratios of 2.9/13.1%, up +0.04/-1.2 percentage points year-on-year, up +0.2/-0.9 percentage points quarter-on-quarter, showing good expense control.

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

The growth of paying 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 paid users and ARPU value; advertising and other non-subscription revenue of 1.68 billion yuan (yoy +23.5%, qoq +20.9%), mainly driven by innovative advertising formats (incentive advertising model + sponsorship advertising) driving advertising revenue growth and growth in offline concert revenue.

(2)The number of paid users and ARPU value steadily increased. In 2024Q2, the company's online music business had 0.117 billion paid users (yoy +17.7%, qoq +3.1%), a 20.5% subscription rate (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 apps such as QQ Music and Kugou Music, expand cooperation with record companies, introduce more personalized benefits to enhance member stickiness. In addition, it provides digital album products with artist-fan interactive features, hosts music festivals, and offers value-added services such as priority ticketing/artist merchandise, helping to drive strong growth in non-subscription business.

Continuous dynamic adjustments in the social entertainment business.

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