TENCENT MUSIC ENTERTAINMENT GROUP(TME.US)：UPGRADE TO BUY WITH CLEAR L-T PATH FOR MUSIC OVERWHELMING N-T LUKEWARM SOCIAL

We see clear L-T outlook for TME’s music segment in terms of both topline growth and GPM expansion. Strong music subs (estimated to grow high teens YoY in next 3 years) fuelled by both increased paying ratio and ARPPU and music advertising ramp up support music topline growth. Revenue mix, optimised content cost and improved long form audio GPM benefits overall music GPM. Though social still facing N-T challenges mainly due to competition, we expect Co. to ramp up its investments in new social initiatives given its disciplined S&M controls and sufficient cash reserves. Upgrade to BUY with TP of US$9.30/ HK$36.50 on clear L-T path for music overwhelming N-T lukewarm social.
Key Factors for Rating
Clear L-T path for music business. We believe TME’s music segment will show strong topline growth in next 3-5 years mainly driven by its subscription business and advertising ramp up. We forecast its music subs to deliver high teens YoY in next 3 years supported by both increased paying penetration and ARPPU. Driven by content paywall strategy, attractive privileges, upgraded product features and disciplined marketing, music paying ratio is expected to improve from 14% in 2021 to 22% in 2025 with annual net paying additions exceeding 10m each year, in our view. We expect ARPPU to display 6% YoY in 2023-2025E mainly due to SVIPs. Music ad ramp up are due to: i) resumed growth of open splash ad; ii) new ad formats (free ad mode); and iii) sponsor ad from TME live and TME land which will further boosted by China’s reopening progress. Considering all above factors, we model total music revenue to log mid-teens YoY in 2023-2025E. Furthermore, music GPM in next few years is benefitted by i) rev mix shift; ii) optimised label content cost; and iii) improved long form audio GPM (expected to reach breakeven by end 2023).
Disciplined S&M while investments for new social initiatives to offset N-T pressure. We expect that traditional social business will continue to be under pressure in the near to medium term mainly due to competition. We largely keep our 2022-24E social topline forecasts unchanged but assume more investments in their audio live streaming and overseas social initiatives going forward. We expect Co. to further squeeze and reallocate their S&M. Considering all above factors, we expect Co.’s overall GPM and GAAP OPM to reach 34% and 20% in 2025E from 30% and 12% in 2021. Non-GAAP Net profit is estimated to grow at 15% 2021-2025E CAGR, in our view.
Key Risks for Rating
Downside risks: 1) domestic social streaming competition; 2) regulation; 3) ineffective monetisation; 4) ADR delisting; and 5) destructive M&A
Valuation
We upgrade to BUY with new TP of US$9.30/ HK$36.50, based on 20x blended 2023E Non-GAAP PER and US$0.46 Non-GAAP EPADS. We think it is a reasonable PER given recent Internet valuation repair, its L-T optimistic outlook for music, partially offsetting N-T weakness on its traditional streaming business.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。