20230106-招银国际-云音乐-09899.HK-Solid_core_music_business_outlook_on_enriching_content_library_6页_1mb

Cloud Music (9899 HK) Summary

Core Content and Business Outlook

Cloud Music is focused on improving monetization and expanding its margin through a solid core music business. The company has made progress by adding a licensing agreement with Bin-Music, a leading Taiwan music label, which enriches its content library and marks a significant milestone since the end of exclusive licensing. This move is expected to enhance user traffic and subscriber growth.

The report forecasts that the online music business will accelerate from 2H22 onwards, with revenue growth of 15% / 23% / 19% YoY to RMB1.9 / 4.6 / 5.4 billion in 2H22 / FY23 / FY24E, driven by music subscription growth and the recovery of the ad business.

The social entertainment business is expected to recover in 2023, although it faces macroeconomic headwinds and increasing competition. Revenue growth is forecasted at 40% / 20% / 18% YoY to RMB5.2 / 6.2 / 7.3 billion in FY22 / FY23 / FY24E. The monthly ARPPU is expected to normalize from RMB452 in FY21 to RMB286 in FY24E.

Revenue and Profitability Projections

The company is projected to achieve quarterly breakeven by end of FY23E, supported by a steady improvement in gross margin. The gross margin is expected to expand from 2.0% in FY21 to 13.7% / 17.1% / 21.1% in FY22 / FY23 / FY24E. The gross margin still has potential, especially compared to TME's 30.1% in FY21.

Valuation and Target Price

Based on a DCF valuation with a WACC of 14.7% and a terminal growth rate of 2.5%, the target price is set at HK$108.6, which is 8.6% below the current price of HK$100.00. The current valuation is 1.7x 2023E PS, which is considered an attractive discount compared to TME's 3.4x 2023E PS.

The report also highlights that the current valuation offers an attractive risk-reward ratio, given the company's strong revenue CAGR and potential for margin improvement over FY21–FY24E.

Business Forecasts and Financial Summary

• Online Music Segment:

  • Revenue is forecasted to grow at 15% / 23% / 19% YoY to RMB1.9 / 4.6 / 5.4 billion in 2H22 / FY23 / FY24E.
  • Paying ratio is expected to rise to 28.5% in FY24E from 15.8% in FY21.
  • MPUs are forecasted to increase by 37% / 22% / 18% YoY in FY22 / FY23 / FY24E.

• Social Entertainment Segment:

  • Revenue is expected to grow at 40% / 20% / 18% YoY to RMB5.2 / 6.2 / 7.3 billion in FY22 / FY23 / FY24E.
  • Monthly ARPPU is projected to normalize from RMB452 in FY21 to RMB286 in FY24E.

Peer Comparison and Key Metrics

Cloud Music's current P/S ratio is 1.7x, significantly lower than TME's 3.4x, indicating a potential undervaluation.

Analyst Ratings and Investment Outlook

• CMBIGM Rating: BUY
• Target Price: HK$108.6
• Current Price: HK$100.00
• Up/Downside: 8.6%

The report maintains a BUY rating, highlighting the company's strong revenue growth potential and margin expansion, despite the challenges in the social entertainment segment.

Shareholding and Stock Data

• Market Cap (HK$ mn): 20,799.5
• Average 3 mths t/o (HK$ mn): 69.2
• 52w High/Low (HK$): 145.70 / 53.15
• Total Issued Shares (mn): 208.0

Shareholding Structure:

• NetEase: 61.4%
• Alibaba: 9.9%

Share Performance

The share has shown positive performance over the past 12 months, with a 12-mth Price Performance image included in the report.

Financial Highlights

• Gross Margin: Expected to rise from 2.0% in FY21 to 13.7% / 17.1% / 21.1% in FY22 / FY23 / FY24E.
• Adjusted Net Margin: Projected to improve from -14.9% in FY21 to -4.0% / -0.5% / +4.1% in FY22 / FY23 / FY24E.
• Net Cash (RMB mn): Expected to increase to 698 in FY24E, reflecting a strong financial position.

Conclusion

Cloud Music is positioned to benefit from its enriched content library and growing music subscription business. While the social entertainment segment faces challenges, the company is expected to recover and achieve profitability by FY24E. The current valuation is seen as attractive, and the BUY rating reflects confidence in its long-term growth potential and margin improvement.