TENCENT MUSIC ENTERTAINMENT(1698.HK)：4Q24 CLEAN BEAT; UPLIFTED 2025 EARNINGS CONTRIBUTED BY ARPUPRIORITISED MUSIC SUBS STRATEGY DESPITE INCREASED OPEX-格隆汇

机构：中银国际
研究员：Raphael CHEN

　　4Q24 8% YoY topline led consensus/ BOCIe by 2%. 2.0m quarterly music subs net adds met consensus while RMB11.1 monthly ARPPU slightly beat. Ad remained the main driver for 12% YoY music non-subs revenue. -13% YoY social revenue outperformed streets’ expectation. 32.3% OPM beat consensus. We expect Co. will pursue sustainable music subs growth by prioritising more on ARPPU contributed by promotion operations and SVIP while maintaining our 8.0m music subs net adds in 2025 and 150m music subs by end 2028. Ad will continue to facilitate music non-subs growth. Our higher earnings forecasts reflect uplifted GPM estimates mainly due to ARPPU prioritised strategy despite increased opex assumptions on AI and original content investments. Maintain BUY and new TP of US$16.5/ HK$64.8.
　　Key Factors for Rating
　　ARPU prioritised for sustainable music subs growth; Ad momentum sustains. We expect Co. will pursue high quality music subs topline growth by prioritising more on healthy ARPPU momentum contributed by promotion operations and SVIP while maintaining our 8.0m paying subs net adds in 2025. We deem SVIP will have S-T positive impacts on user time spent and retention and will gradually contribute ARPPU growth in the mid term. We also maintain our 150m music subs estimate by end 2028. We see iOT will be a much longer music subs driver. Ad will continue to be the main growth engine for music non- subs in 2025 mainly driven by solid ad-supported mode for free users and interactive incentivised ad mode for subs. Thus, we raise our FY2025-26 music subs revenue forecasts by 1% with unchanged music subs estimates and 1% uplifted ARPPU estimates. This leads to our raised GPM forecasts. Despite our increased opex assumptions mainly due to AI-related and original music content investments, our FY2025-26 adj. EPADS estimates increase by 5-9% due to our higher GPM estimates and latest share counts estimate on new buyback.
　　4Q24: clean beat; US$273m annual dividends; new 2-year US$1bn buyback. Total revenue grew 8% YoY to RMB7.5bn, 2% above consensus and BOCIe. Music revenue jumped 16% YoY to RMB5.8bn, with music subs and music non-subs logging 18% YoY and 12% YoY respectively. 2.0m quarterly music paying net added to 121.0m led to continued improvement of 21.8% music paying penetration. Music monthly ARPU was RMB11.1. Solid music ad momentum and monetisations of artist merchandises and live performances continued to facilitate music non-subs growth.
　　Social revenue dropped by -13% YoY to RMB1.6bn. GPM continued to expand by 5.3ppts YoY/ 1.0ppt QoQ to 43.6%, in line with BOCIe. OPM was 32.3%, beating consensus of 30.5%. Co. declared a US$273m FY2024 annual divided with promised 30% payout. Co. has completed their current US$500m buyback scheme by Jan 2025 and announced a new 2-year US$1b buyback programme till Mar 2027.
　　Key Risks for Rating
　　Downside risks: 1) underperformed music paying subs; 2) key label collaboration; 3) fierce competition; 4) regulation; 5) ineffective monetisation.
　　Valuation
　　Maintain BUY and raise our TP to US$16.5/ HK$64.8, derived from 21.0x blended 2025E adj. PER by assuming 85% profit from music (23.0x adj. PER) and 15% from social (7.0x adj. PER) and uplifted US$0.79 (from US$0.74 previously) 2025E adj. EPADS.