Sealand Securities released a research report stating that it expects tencent music-SW (01698) revenue to be 28.831/32.005/34.95 billion yuan from 2024 to 2026, with net income attributable to owners of the parent company of 6.338/7.622/8.604 billion yuan, and adjusted net income attributable to owners of the parent company of 7.088/8.387/9.385 billion yuan. Tencent Music, which owns QQ Music and Kugou Music, among other leading online music platforms in China, is bullish on the dual driving forces of long-term paid users and ARPU values, with a healthier revenue structure and expected continuous improvement in profitability. Based on this, the first coverage is given a 'buy' rating.

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 2024 Q2, the company's revenue was 7.16 billion yuan (yoy -1.7%, qoq +5.8%), operating costs were 4.15 billion yuan (yoy -13.3%, qoq +3.8%), IFRS net income attributable to owners of the parent company was 1.68 billion yuan (yoy +29.6%, qoq +18.3%), and non-IFRS net income attributable to owners of the parent company was 1.87 billion yuan (yoy +22.5%, qoq +10.0%). The year-on-year decline in revenue is mainly attributed to reduced revenue from social entertainment services and other services. The company's gross margin in 2024 Q2 was 42.0%, an increase of 7.8 percentage points year-on-year, mainly due to strong growth in music subscriptions and advertising services revenue, as well as an increase in original content. Sales expenses/management expenses of the company in 2024 Q2 were 0.21/0.938 billion yuan (yoy -0.5%/-10.2%, qoq +12.3%/-1.2%), and the sales expenses/management expenses ratio was 2.9/13.1%, an increase of +0.04/-1.2 percentage points year-on-year and +0.2/-0.9 percentage points quarter-on-quarter, indicating good expense control.

(2) Sufficient cash on hand. As of the end of 2024 Q2, 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 2024 Q1.

The growth of paying users and ARPU drives strong growth in online music subscription business.

(1) In 2024 Q2, 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 being driven by the dual growth of paid users and ARPU values; advertising and other non-subscription revenue reached 1.68 billion yuan (yoy +23.5%, qoq +20.9%), mainly due to innovative advertising formats (incentive advertising + sponsorship advertising) driving ad revenue growth and the growth in offline performance revenue.

(2) Steady growth in paid users and ARPU values. In 2024 Q2, the company's online music business had 0.117 billion paid users (yoy +17.7%, qoq +3.1%), a payment rate of 20.5% (yoy/hoh +3.8/+0.9 percentage points), and an average monthly ARPU of 10.7 yuan (yoy +10.3%, qoq +0.9%). The company continues to upgrade apps like QQ Music and Kugou Music, expand cooperation with record companies, introduce more personalized benefits to enhance member stickiness. Additionally, it offers digital album products with artist-fan interaction features, hosts music festivals, and provides value-added services such as priority ticketing/artist merchandise, all to drive strong growth in non-subscription businesses.

Continuous dynamic adjustments in the social entertainment business.

In Q2 2024, social entertainment and other service revenue was 1.74 billion yuan (YoY -42.8%, QoQ -1.4%), mainly due to the adjustment of some live interactive functions since Q2 2023 and the implementation of stricter compliance procedures overlaying intensified market competition. In Q2 2024, the number of paid users in social entertainment business was 0.0079 billion (YoY +5.3%, QoQ -1.3%), with a payment rate of 8.5% (3.0/0.2pct increase YoY/QoQ), and the average monthly ARPU value was 73.2 yuan (YoY -45.8%, QoQ -0.3%).