TME （TME.US） Inline 2Q24 results； focus on balanced growth of music subs and ARPPU in 2H24E

Inline2Q24results;focusonbalancedgrowthofmusicsubsandARPPUin2H24E BUY(Maintain) Target PriceUS$16.00Up/Downside21.9%Current PriceUS$13.13 TME announced 2Q24 results on 13 Aug: total revenue declined by 2% YoY toRMB7.16bn, in line with our/Bloomberg consensus estimate of RMB7.16/7.13bn;non-IFRS net income was up by 22% YoY to RMB1.87bn, 2/2% ahead ofour/consensus estimate. For 2H24E, management will focus more on balancedgrowth of music subs and ARPPU, expecting slower music subscriber net addsbut continued QoQ ARPPU growth, which has raised certain investor concerns.That said, management reiterated its long-term target (150mn music subscribers& RMB15 in monthly ARPPU). We remain upbeat on TME earnings CAGR overFY24-26E (+21%) fuelled by core music revenue growth and GPM expansion.We keep our FY24-26 non-IFRS net income forecast largely unchanged, andmaintain our DCF-derived TP at US$16.00. Maintain BUY Saiyi HE, CFA(852) 3916 1739hesalyi@ambi.com.hk Wentao LU, CFAluwentao@cmbi.com.hk Ye TAOfranktao@cmbi.com.hk Online music business maintains solid growth momentum. 2Q24 onlinesubscription/non-subscription revenue up by 29/24% YoY respectively. No. ofpaying users grew by 18% YoY to 117mn in 2Q24, with 3.5mn QoQ net adds,in line with our expectation. Monthly ARPPU grew by 10% YoY and largelyfiat QoQ at RMB10.7 in 2Q24. Advertising revenue also delivered strong YoYgrowth in 2Q24, thanks to the solid performance of ad-supported mode,interactive ads and sponsorship ads. Social entertainment and othersrevenue declined by 43% YoY but stabilized QoQ at RMB1.74bn in 2Q24(24% of total revenue), as live streaming business continued to face pressure. Stock Data Balancing music subs and ARPPU growth in 3Q24E. Looking ahead in3Q24E, we forecast total revenue to grow by 8% YoY to RMB7.06bn, primarilydriven by 24% YoY growth of online music revenue, but partially offset by a29% YoY decline in social entertainment revenue. For 2H24E, we expect aslower pace of music subscriber net adds (1.5-2.0mn per quarter) but continuedQoQ growth in ARPPU, underpinned by the solid performance of high-valueSuper VIP program. Leveraging Al tech, TME continues to improve listeningrecommendation middleware, with c.40% of streams generated fromrecommendations in 2Q24. GPM expansion to sustain in 3Q24E. Overall GPM expanded by 7.7pptYoY and 1.1ppt QoQ to 42.0% in 2Q24, owing to 1) online music businessmargin improvement; 2) ramp up of self-produced content:; and 3) enhancedmonetization of WeSing. Non-IFRS net margin increased by 5.2ppt YoY toQoQ to 42.8%. For FY24E, we estimate non-IFRS net income to grow by 27%YoY to RMB7.5Obn, supported by GPM expansion and opex control. TME'scurrent valuation of 21x FY24E PE remains fair in our view. Maintain BUY. Saursc: FactSct Businessforecastsupdateandvaluation DCFvaluation Our target price of USS16.00 is based on the DCF valuation methodology (WACC of 11.6%and terminal growth of 2.5%), Disclosures&Disclaimers Analyst Certification The research analyst who is primary responsibie for the content of this research repor, in whole or in part, certifies that with respect to the securities or issuerno part nf his ar her comgensatinn was, is, or will be, rtinectly ar indirectly, ralated to the specific views axpressed hy that analyst in this rapart. deal in or trade in tha stnck(s) covernd in this rmesnarch ropnr 3 business tays aftorthn ciate of issun ot this report: (3) sarve as an ofioor of ary of the HnngComrission) (1) have deakt in or traded in the stockls) covered n this research report within 30 calendar Gays prior to the dete ofissue of this report (2) willKong listed companies covered in tnis report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM Ratings Slock with polential rebun of +15%, to -10% over nest 12 monthsStock wth potential return of cver 15% over nsxt 12 montsStock is not rated by CMBIGMStock with potentigl loss of ovar 10% cver exl 12 morths HOLDBUYSELLNOTRATED : Industry expected to outperfarm tha reievant troad marke: benchmark over next 12 monthsIndastry epected to undecperfom the relevent broed market benchenerk over nexct 12 months CMB Intermational Global Markets Limited Address: 45/F, Chamaion Tower, 3 Garden RCMB Intemational Global Markets Limited ('CMBIGM') is s wholly owned subsidiary of CMB Internationsl Capital Corporation Limited (a wholly ownedng, Tel: (9521 3900 c88§ Faxc (852) 300 0900subsidisry of China Merchants Bank) Important Disclosures There sre risks involved in trensecting in ny secu/ities. The information conteinec in this reportmey not be suitsble for the purposes of al investors, CMBiCMciairecuiremerts.Pastperformenoehasno indicationoffutureperfomance.and actualevents maydifermaterialyfromthaiwhich iscontainedinthendividually tailored investme:nt advice. This report has been prepared without regard to.the individual investor spectmentobjectives,financialuostionperformance ofunderty