20210818-招银国际-Multiple_challenges_ahead_4页_842kb

TME (TME US) Company Update Summary

Core Content

This report provides an equity research update on TME (TME US), focusing on its financial performance, guidance, and strategic outlook for the second quarter of 2021 and beyond. It also includes key financial metrics, earnings forecasts, and analyst ratings.

Main Points

Financial Performance (2Q21)

• Revenue: RMB8.0bn, up 15.5% YoY, 1% below consensus.
• Adj. Net Income: RMB3.777bn, up 0.5% YoY, 7% above consensus.
• Music Subscribers: Grew by 40.6% YoY, with a paying user increase of 40.6%.
• Music MAU: Decreased by 4.3% YoY.
• Social Entertainment MAU: Decreased by 13.3% YoY.
• Paying User in Social Entertainment: Decreased by 12.7% YoY.

Guidance for FY21E

• Revenue Guidance: Down to +10% YoY, 7% below consensus.
• Music Subscribers: Expected to continue strong growth, with 4-5 million net additions in the coming quarters.
• Social Entertainment and Ads: Anticipated to face challenges, with revenue growth expected to be flat or negative.

Strategic Initiatives

• Content and Platform Flywheels: Includes cross-app karaoke campaigns, Tencent ecosystem synergies, and content creator support.
• Regulatory Impact: Regulations on exclusive music copyright have led to a focus on content and innovation, with potential short-term GPM dilution.

Earnings Forecast Adjustments

• Earnings Cut: FY21E adj. net income cut by 11%, FY22E by 30%, FY23E by 44%.
• DCF-Based Target Price: Reduced to US$12.0 from US$20.0.
• Current Price: US$8.9.
• Upside Potential: +34.8% from current price to target price.

Financial Highlights (FY19A to FY23E)

Key Financial Insights

• Revenue Mix: Social entertainment dominates revenue, accounting for 71.9% of FY19A revenue, with a declining trend over the years.
• Gross Margin: Expected to decrease by 1-5ppts in FY21-23E due to lower social revenue mix, increased content investment, and competition.
• Operating Margin: Expected to decline by 4.3ppts in FY21E and 6.9ppts in FY22E.
• Adj. Net Margin: Expected to decrease by 2.5ppts in FY22E and 3.9ppts in FY23E.
• Adj. Net Profit: Expected to grow by 7.4% in FY22E and 12.0% in FY23E.

Strategic Outlook

• Music Subscribers: Continued growth with a strong focus on paywall execution.
• Regulatory Challenges: Impact on music MAU and social entertainment revenue.
• Content and Platform Investments: Expected to drive long-term growth despite short-term margin dilution.
• Tencent Synergies: Anticipated to play a key role in unlocking total addressable market (TAM).

Analyst Rating

• Rating: BUY
• Target Price: US$12.0
• Reasoning: Despite short-term challenges, long-term growth prospects remain intact with Tencent synergies and content initiatives.

Shareholding and Performance

• Market Cap: US$15,098 mn

• Average 3-Month Turnover: US$197.46 mn

• 52-Week High/Low: US$32.25 / US$8.88

• Total Issued Shares: 835 mn

• Shareholding Structure:

  • Pacific Alliance: 6.01%
  • Baillie Gifford: 5.46%
  • BlackRock: 3.34%

• Share Performance:

  • 1-Month: -23.8%
  • 3-Month: -41.4%
  • 6-Month: -68.5%

Important Disclosures

• Auditor: Ernst & Young
• Research Analyst Certification: The analyst certifies that the views expressed are accurate and not influenced by compensation or trading activities.
• Conflicts of Interest: CMBIS may have investment banking relationships with the companies covered, which could affect objectivity.
• Use of Report: Intended solely for major US institutional investors and not for public distribution.

Conclusion

TME is facing mixed performance in 2Q21, with revenue growth but lower-than-expected social and ads revenue. The company is focusing on music subscribers and content investments to drive long-term growth, despite short-term margin dilution. Analysts maintain a BUY rating, with a reduced target price, indicating confidence in its future potential.