20221025-招银国际-云音乐-09899.HK-Monetization_and_margin_improvement_on_the_horizon_28页_2mb

Summary of Cloud Music (9899 HK)

Core Content

Cloud Music is a leading online music platform in China, currently the second largest in terms of revenue and monthly active users (MAUs). The company is positioned for significant growth and margin improvement, driven by a variety of factors in the evolving China online music market. The investment thesis is based on the expectation of a secular shift towards pay-for-streaming, improved copyright protection, and rationalized licensing costs.

Main Points

• Market Position: Cloud Music holds a 19% market share of China's online music revenue in 2021, with an average MAU of 182mn and a DAU/MAU ratio above 30%.
• Monetization Potential: Despite being under-monetized compared to TME, Cloud Music has a strong growth trajectory with total revenue CAGR of 26.0% from 2021 to 2024E.
• Revenue Mix: In 2021, online music accounted for 47.0% of total revenue, while social entertainment represented 53.0%. By 2024E, the ratio is expected to shift to 39.6% and 60.4% respectively.
• Gross Margin Improvement: Cloud Music is projected to achieve adjusted net margins of +0.6% in 2023E and 3.8% in 2024E, compared to -14.9% and -3.8% in 2021E and 2022E, driven by lower licensing costs, higher contribution from social entertainment, and improved operational efficiency.
• Valuation: Cloud Music is currently trading at 1.1x 2023E PS, which is lower than TME's 1.3x 2023E PS. The DCF-derived target price is HK$110.0, implying 2.2x/1.8x 2022/2023E PS.
• Business Models: Cloud Music monetizes through membership subscriptions, advertising, digital album sales, and sublicense. The social entertainment segment is primarily driven by live streaming and virtual gift sales.

Key Drivers for Growth

• Rising Paying Ratio: Expected to increase from 13.8% in 2021 to 24.1% in 2025E, driven by the adoption of pay-for-streaming models and improved copyright protection.
• Growing ARPPU: Both TME and Cloud Music have low monthly ARPPU (RMB8.9 and RMB6.7 in 2021), with potential for improvement as platforms introduce premium memberships and reduce discounts.
• Rationalizing Licensing Costs: The regulator's ban on music copyright exclusivity in 2021 has led to more competitive and sustainable licensing agreements.
• Social Entertainment Expansion: The social entertainment segment is expected to grow at a CAGR of 31.7%, with a significant increase in paying users and revenue contribution.

Financial Forecast

Valuation and Investment Thesis

• Target Price: HK$110.0 based on DCF valuation.
• P/S Ratio: 1.1x 2023E PS, with a potential upside given its strong revenue growth and margin improvement.
• Investment Catalysts: Increasing monetization, margin expansion, and the secular shift in the online music sector.

Key Figures

• Market Growth: China's online music market is expected to grow at a CAGR of 17.6% to reach RMB33bn by 2025E.
• User Growth: China's online music user base is projected to reach 827mn by 2024E, growing at a CAGR of 3.2%.
• Content Expansion: Cloud Music has been actively expanding its content library by negotiating with major music labels.
• Advertising Opportunities: Ad revenue per MAU is low in China compared to global peers, but platforms are innovating to capture more ad market share.

Conclusion

Cloud Music is well-positioned to benefit from the ongoing transformation of the China online music sector. With a robust revenue growth trajectory and significant potential for margin improvement, the company offers an attractive risk-reward profile for investors. The investment thesis is based on the belief that Cloud Music will continue to evolve its monetization strategies and expand its social entertainment offerings, leading to a stronger financial position in the coming years.