20230322-招银国际-Expect_a_year_of_mild_recovery_in_FY23_6页_1mb

TME (TME US) Summary

Core Content and Key Information

TME (TME US) reported its 4Q22 financial results on 21 March, with total revenue declining by 2% YoY to RMB7.4bn, in line with consensus and CMBI estimates. The full-year revenue for 2022 declined by 9% YoY, primarily due to weak performance in social entertainment and ad businesses amidst macroeconomic uncertainty. However, the music subscription business showed resilience, growing by 19% YoY. Non-IFRS net income for 4Q22 increased by 73% YoY to RMB1.4bn, and the full-year non-IFRS net income rose by 14% YoY to RMB4.7bn. Management expects a mild recovery in FY23, with mid-single-digit total revenue growth and low-teens non-IFRS net profit growth. The target price remains at US$10.50, and the recommendation is to Maintain BUY.

Main Business Highlights

• Online Music Service Revenue: Grew by 24% YoY in FY23, reaching RMB3,559mn in 4Q22, and accounted for 48% of total revenue. This growth was driven by strong subscription and ad recovery.
  • Subscribers: Increased by 16% YoY to 88.5mn, with a QoQ net addition of 3.2mn.
  • Paying Ratio: Rose by 3.2ppt YoY to 15.6%.
• Social Entertainment Revenue: Declined by 18% YoY in 4Q22, representing 52% of total revenue. The decline was attributed to intensified competition and the impact of the pandemic.
  • Expected Performance in FY23: A milder decline is anticipated due to growth in audio live streaming and international business.

Financial Performance and Projections

Valuation and Forecast

• DCF Valuation: Target price is US$10.50, based on a WACC of 11.6% and terminal growth of 2.5%.
• Equity Investment: Valued at RMB7.5bn as of 31 Dec 2022, which is 7% of the DCF-derived valuation.
• Non-IFRS Net Income CAGR: Expected to grow at 15% over FY23-25E.

Business Forecasts Update

• Revenue Forecast: Revised slightly for FY23-25E, with an increase in adjusted net profit.
• Gross Profit: Expected to grow from RMB9,709mn in FY23E to RMB12,137mn in FY25E.
• Operating Profit: Projected to increase from RMB4,928mn in FY23E to RMB6,843mn in FY25E.
• Non-IFRS Net Profit: Forecast to grow from RMB5,450mn in FY23E to RMB7,250mn in FY25E.
• Non-IFRS EPS: Expected to increase from RMB3.4 in FY23E to RMB4.5 in FY25E.

Financial Metrics and Trends

• Gross Margin: Projected to increase from 32.7% in FY23E to 35.8% in FY25E.
• Operating Margin: Expected to rise from 16.6% in FY23E to 20.2% in FY25E.
• Non-IFRS Net Margin: Forecast to grow from 18.3% in FY23E to 21.4% in FY25E.

Shareholding and Market Data

• Shareholding Structure:
  • Tencent: 53.2%
  • Spotify: 8.2%
• Market Capitalization: US$12,497.4mn
• 52-Week High/Low: US$9.18/US$3.61
• Total Issued Shares (mn): 1,590.0
• Share Performance:
  • 1-month: -1.9%
  • 3-months: -0.5%
  • 6-months: +71.6%

Analyst Certification and Ratings

• Analyst Certification: The analyst certifies that the views expressed in the report reflect their personal views and that no part of their compensation is related to the specific views in the report.
• CMBIGM Ratings:
  • BUY: Stock with potential return of over 15% over next 12 months.
  • OUTPERFORM: Industry expected to outperform the relevant broad market benchmark over next 12 months.

Disclaimer and Risk Information

• Important Disclosures: The report contains information that may not be suitable for all investors. It is not tailored to individual needs and is based on public information. Past performance does not guarantee future results. The value and returns of investments are uncertain and may fluctuate.
• CMBIGM Responsibilities: CMBIGM is not liable for any loss, damage, or expense incurred from relying on the information in this report.
• U.S. Distribution: CMBIGM is not a registered broker-dealer in the U.S. and the report is intended solely for major U.S. institutional investors.