20220711-招银国际-Better-than-feared_social,_with_stable_margin_4页_782kb

TME (TME US) Company Update Summary

Core Content

CMB International Global Markets has released an equity research update on TME (TME US), focusing on its 2Q22E performance and future outlook. The report highlights that TME's results are better-than-feared, with revenue and adjusted net profit showing resilience despite headwinds in the advertising and social entertainment segments.

Main Points

Financial Performance in 2Q22E

• Revenue: Expected to be RMB6.7bn, a decline of -17% YoY.
• Adjusted Net Profit: Estimated at RMB906mn, a -22% YoY decline.
• Adjusted Net Profit Margin (Adj. NPM): Maintained at 14%, attributed to effective cost control.
• Gross Margin (GPM): Stable at 28% in 2Q22E, with a slight YoY dilution to 28% in FY22E due to changes in revenue mix and investments.

Revenue Breakdown

• Online Music Service: Slight YoY decline of -5%, with subscription revenue growing by +18%.
• Social Entertainment: Expected to decline by -24% YoY, but the impact from regulations is manageable.
• Others: Declined by -40% YoY, showing pressure on non-subscription segments.

Subsidiary Growth

• Subscription Revenue: Demonstrated strong momentum, with growth of +18.5% in FY22E.
• ARPPU Recovery: Improved from 1Q22, contributing to subs growth.

Earnings Forecast

• Earnings Forecast Raised: FY22-24E earnings forecast increased by 2–5% due to better-than-feared social entertainment and effective opex control.
• Target Price (TP): Maintained at US$5.5, which is 17.5x FY22E P/E, up from the previous TP of US$4.6.

Key Financial Metrics

Market Position and Performance

• Market Cap: US$9,069 million.
• Share Performance:
  • 1-month: +31.4%
  • 3-months: +3.1%
  • 6-months: -15.6%
• Shareholding Structure:
  • Baillie Gifford: 4.38%
  • Canada Pension Plan: 4.31%
  • Blackrock: 3.57%

Analyst Ratings and Recommendations

• Rating: HOLD.
• Target Price (TP): US$5.5 (+7.8% upside from current price of US$5.1).
• CMBIGM Ratings:
  • BUY: Potential return of over 15%.
  • HOLD: Potential return of +15% to -10%.
  • SELL: Potential loss of over 10%.
  • NOT RATED: Not rated by CMBIGM.

Outlook and Challenges

• Social Entertainment: Better-than-feared, with -24% YoY decline in 2Q22E, due to manageable impact from regulations.
• Ads Revenue: Under pressure due to soft macroeconomic conditions, but e-commerce ads during the 618 festival provided some offset.
• Challenges: Regulatory and competitive pressures are expected to linger into 2H22E.
• Ads Recovery: Uncertain in 2H22E due to macroeconomic uncertainty, but long-term growth is expected from incentive ads and online concerts.

Margin Stability

• GPM: Stable at 28% in 2Q22E, with slight dilution in FY22E.
• Operating Margin: Improved to 12.4% in 2Q22E, up from 12.2% in 1Q22E.
• Adj. Net Margin: Maintained at 13.6%, due to effective opex control.

Key Ratios

Disclosures

• Analyst Certification: The views expressed accurately reflect the analyst’s personal views, and no compensation is linked to the report.
• Conflict of Interest: CMBIGM may have investment banking relationships with the companies discussed and may have conflicts of interest.
• Legal Disclaimer: This report is for the use of intended recipients only and may not be reproduced, reprinted, sold, or published without prior written consent.

Conclusion

TME is expected to show better-than-feared results in 2Q22E, with a focus on resilient subscription revenue and stable margins. Despite challenges in the advertising and social entertainment segments, the company's effective cost control and subscription growth provide a positive outlook. The HOLD recommendation reflects the analyst's belief that the stock's potential return is within a moderate range.