20230118-招银国际-Making_progress_into_scale_optimization_6页_1mb

TME (TME US) Summary

Core Content

TME, a leading online music and social entertainment company, is experiencing a gradual improvement in operating efficiency and is on track for a strong earnings rebound despite short-term revenue pressures. The company's online music business is showing signs of recovery, while the social entertainment segment continues to face challenges due to the impact of the surge in COVID-19 cases and intense competition.

Main Points

• Earnings Outlook: TME's 4Q22E is expected to show a 76% YoY increase in non-IFRS net income to RMB1.5bn, driven by stringent budget control and business model optimization.
• Revenue Trends:
  • 4Q22E: Total revenue is projected to decline by 4% YoY, with online music revenue increasing by 23% YoY to RMB3.6bn and social entertainment revenue dropping by 19% YoY to RMB3.8bn.
  • FY23/24E: Total revenue is expected to rebound by 5% / 8% YoY, mainly due to online music growth (projected at 15% / 15% YoY).
• Gross Margin: Improved from 28.8 / 32.6% in 4Q21/3Q22 to 32.9% in 4Q22E, driven by cost control and recovery of higher-margin services.
• Non-IFRS Net Profit: Expected to grow by 15.2% / 13.4% / 16.1% YoY in FY22E/FY23E/FY24E respectively, with a 15% CAGR from FY22 to FY24E.
• Valuation: Target price raised to US$10.50, reflecting a 22x / 19x non-IFRS PE for FY23E / FY24E, up from the previous US$6.84. Current price is US$8.99, with a 16.8% upside.
• Business Model Optimization: TME is leveraging traffic synergies and cost control to stabilize margins, especially in the online music segment.
• Market Position: TME remains the market leader in music subscriptions with 85 million users, and 38 million active users on Cloud Music.

Key Financial Forecasts

Valuation Metrics

Analyst Recommendation

• Maintain BUY: The company's resilient earnings growth and strong long-term profit profile justify the BUY rating.
• Target Price: US$10.50, representing a 16.8% upside from the current price of US$8.99.
• Valuation Justification: The current valuation of 16x FY24E PE is considered fair given the earnings growth and operating leverage.

Shareholding and Performance

• Shareholding Structure:
  • Tencent: 53.2%
  • Spotify: 8.2%
• Share Performance:
  • 1-month: 14.8% (Absolute) vs. 16.7% (Relative)
  • 3-months: 128.2% (Absolute) vs. 119.3% (Relative)
  • 6-months: 102.5% (Absolute) vs. 105.6% (Relative)

Key Financial Highlights

• Online Music Revenue: Expected to grow to RMB3.6bn in 4Q22E, with music subscription as the main growth driver.
• Social Entertainment Revenue: Projected to drop by 19% YoY in 4Q22E, but is expected to stabilize in FY24E.
• Operating Leverage: Strong operating leverage is anticipated in FY23/24E due to expenses optimization and top-line recovery.
• GPM Improvement: From 28.8 / 32.6% in 4Q21/3Q22 to 32.9% in 4Q22E.

Conclusion

TME is well-positioned for strong earnings growth and long-term profitability, despite short-term challenges in the social entertainment segment. The company's efficiency improvements and revenue recovery are expected to support margin stabilization and operating leverage, making it an attractive investment opportunity with a BUY rating.