Inline 1Q26 results; competition headwind persists
Inline 1Q26 results; competition headwindpersists Target PriceUS$17.50(Previous TPUS$20.00)Up/Downside92.9%Current PriceUS$9.07 TMEannounced 1Q26resultson 12 May: total revenuewas upby7% YoY toRMB7.90bnand non-IFRS net incomegrewby7% YoY to RMB2.27bn,both inline withBloombergconsensus estimates.For 2Q26E, weexpecttotal revenuetoincrease by 3%YoY, with growthfurtherdecelerating.Managementnotedthat thecompetitionheadwind persists, especially given the emerging copyrightissues due to AI. To weather the headwind, TME plans to further enhancecopyright protection, deepen cooperation with Tencent toacquireusers andimprove its content & IP ecosystems. Welowerour FY26-28Erevenue forecastby 0-1% and also our long-term cash flow estimatesin view of thecompetitivepressure. Wetrimour DCF-derived TP to US$17.5(previous: US$20.0 basedon DCF).That said, TME’s current valuation (10x FY26E non-IFRS PE) offersattractiverisk-reward,given itssteadyearnings growth,decent shareholderreturnand enhanced content ecosystem.Maintain BUY. China Internet Saiyi HE, CFA(852) 3916 1739hesaiyi@cmbi.com.hk Wentao LU, CFAluwentao@cmbi.com.hk Ye TAO, CFA(852)3850 5226franktao@cmbi.com.hk Music-related business maintained resilient growth.Music-relatedservicerevenuegrew by 12%YoY to RMB6.51bnin 1Q26: 1) Membershipservices revenuewasup by 7% YoY to RMB4.57bn (58% of total revenue),mainly fuelled by expansion of SVIP program and the launch of newmembershipproducts such as bubble,WeverseDM,and fan-clubmembership;2)Revenues from music-related services other thanmembership services grew by 28% YoY to RMB1.94bn (25% of totalrevenue), mainly driven by the solid YoY growth of revenue from offlineperformances and advertising.Social entertainment and others revenuedroppedby11% YoYtoRMB1.38bnin 1Q26.Looking into 2Q26E, weestimatetotal revenue to increase by 3% YoY to RMB8.73bn, with bothmembership and ads revenueslowingdown, as the intense competitionleads to churn of casual users. Shuyin GUO(852) 3916 3716guoshuyin@cmbi.com.hk Stock Data Acquisitionof Ximalaya received regulatory approval.The StateAdministration for Market Regulationon 12 Mayannounced to approveTME’sacquisitionof Ximalaya, with five restrictive conditions such as“[Theacquirer]must notincrease pricesorreduce service quality for theonlineaudio services”(Link). We expect theacquisitionwilllikelybe closed in2H26, which shall further enrich TME’s audio-related product offerings andimprove user experience. Increasing content and channel investment.OverallGPMexpanded by0.8ppt YoY to 44.9% in 1Q26, while non-IFRS net margin was largely flattishYoY at 28.8% in 1Q26, as the GPM expansion was offset by the increase inS&M expenses(+36% YoY). Lookingahead,managementexpectedGPMtostayflattish YoY in 2Q26E. To enhance shareholder return, the companyplans to complete the US$1bn stockrepurchaseprogram(c.7% of currentmarket cap)byMar 2027, in addition to the US$370mn cash dividendsrecently paid in Apr 2026. Source: FactSet Business forecasts updateand valuation DCF valuation Our target priceofUS$17.5isbased on the DCF valuationmethodology(unchangedWACC of9.6% and terminal growth of3.0%). Disclosures& Disclaimers Analyst CertificationTheresearch analyst who is primary responsible for the content of this research report, in whole or in part, certifies that withrespect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect hisor her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to thedateof issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3)serve as an officer of any of the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stock with potential return of +15% to-10% over next 12 monthsSELL:Stock with potential loss of over 10% over next 12 monthsNOT RATED: Stock is not rated byCMBIGM :Industry expected to outperform the relevant broad market benchmark over next 12 months:Industryexpected to perform in-line with the relevant broad market benchmark over next 12 months:Industry expected to underperform the relevant broad market benchmark over next 12 months CMB InternationalGlobal MarketsLimited Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong, Tel: (852) 3900 0888 Fax: (852) 3900 0800CMB InternationalG
