20221116-招银国际-Strong_earnings_beat_on_improvement_in_GPM_and_operating_efficiency_6页_1mb

TME (TME US) 3Q22 Financial Summary and Analysis

Core Content and Key Highlights

TME (TME US) reported its third-quarter 2022 financial results, showing a strong earnings beat despite a decline in total revenue year-over-year (YoY). The company's performance highlights the following:

• Total Revenue: Declined by 5.6% YoY to RMB7.4bn, but increased by 6.7% quarter-over-quarter (QoQ), largely in line with the consensus estimate.
• Non-IFRS Net Profit: Grew by 35.9% YoY to RMB1.4bn, exceeding the consensus estimate of RMB1.1/1.2bn.
• Gross Margin (GPM): Improved to 32.6% in 3Q22, surpassing the consensus estimate of 30.0%, driven by cost rationalization and recovery in ad revenue.
• Selling and Marketing (S&M) Expenses: Decreased by 58% YoY, reflecting effective cost control.
• Non-IFRS Net Margin: Rose by 5.7ppt YoY and 3.8ppt QoY to 18.7% in 3Q22, with expectations of margin expansion in 2023.

Business Performance Overview

Online Music Business

• Revenue Growth: Grew by 18.8% YoY to RMB3.4bn in 3Q22, primarily due to subscription revenue growth of 18.3% YoY and strong digital album sales (approximately 7 million units of Jay Chou's new albums sold).
• Subscriber Growth: The number of music subscribers increased by 19.8% YoY, with a net addition of 2.6 million.
• Future Outlook: TME expects further sequential growth in ARPPU due to reduced promotions and the introduction of super VIP services.

Social Entertainment Business

• Revenue Decline: Continued to face pressure, declining by 20.0% YoY to RMB3.9bn in 3Q22.
• Paid Users: Decreased by 29.5% YoY to 2.6 million.
• Strategic Response: TME is focusing on new initiatives like audio live streaming and overseas expansion to offset the domestic competitive pressures.

Earnings and Forecast Revisions

• 4Q22E Revenue: Expected to decline further by 2.9% YoY, but supported by growth in music subscription and recovery of ad business.
• 4Q22E Non-IFRS Net Profit: Projected to grow by 67.4% YoY, driven by cost control and low base.
• FY22/FY23/FY24E Non-IFRS Net Income Forecast: Revised up by 8.1/7.2/3.0%, reflecting improved GPM and operating efficiency.
• Target Price: Raised by 3.6% to US$6.84, based on DCF valuation with a WACC of 11.6% and terminal growth of 2.5%.

Financial Metrics and Valuation

Earnings Summary (YE 31 Dec)

Shareholding and Stock Data

• Market Cap: US$7,148.8m
• Shareholding Structure:
  • Tencent: 53.2%
  • Spotify: 8.2%

Share Performance

Valuation Metrics

• P/S (Price-to-Sales): 1.8x (FY22E), 1.7x (FY23E), 1.6x (FY24E)
• P/E (Price-to-Earnings): 13.7x (FY22E), 13.8x (FY23E), 12.1x (FY24E)
• DCF Target Price: US$6.84, representing 16x 2023E non-IFRS PE.

Analyst Recommendations

• CMBIGM Rating: BUY, based on the potential return of over 15% over the next 12 months.
• Analyst Certifications: The analyst certifies that the views expressed reflect their personal opinions and no compensation is tied to the report's content.
• Disclosures: CMBIGM provides general market insights and does not offer individual investment advice. The report is for informational purposes only and is not a buy/sell recommendation.

Summary of Key Figures

• Revenue Growth: 3Q22 revenue declined 5.6% YoY, but grew 6.7% QoQ.
• GPM Improvement: Increased by 3.0ppt YoY and 2.8ppt QoQ to 32.6%.
• Non-IFRS Net Profit: Grew 35.9% YoY to RMB1.4bn.
• S&M Expenses: Reduced by 58% YoY.
• Net Margin: Improved to 18.7% in 3Q22.
• Target Price: US$6.84, up 3.6% from US$6.60.

Conclusion

TME is showing resilience in its core online music business despite challenges in the social entertainment segment. The company's strong GPM improvement and effective cost control are driving non-IFRS net profit growth. Analysts maintain a BUY rating, citing positive earnings outlook and favorable valuation metrics. TME's strategic initiatives and focus on quality growth are expected to support future performance and margin expansion.