20211006-招银国际-Subs_intact_despite_soft_ads_and_social_5页_885kb

TME (TME US) Company Update Summary

Core Content

This document provides an equity research update on TME (TME US), including financial forecasts, earnings revisions, valuation models, and investment ratings. It outlines the company's performance in the third quarter of 2021 and its expected performance for the following years, considering market conditions and regulatory impacts.

Main Points

• Financial Performance in 3Q21E:

  • Revenue is forecasted to grow by +1% YoY, slightly below the consensus of +2%.
  • Adjusted net profit is expected to decline by -46% YoY, 13% below consensus, due to lower ad revenue mix, increased content investment, and intensified competition.

• Subscription Growth:

  • Music subscriptions are expected to grow by +31% YoY, with a +37% growth in subscribers, though ARPPU (Average Revenue Per Paying User) for music is -4% YoY.
  • Music subscription paying ratio is 11.2% for 3Q21E, up from 10.6% in 2Q21 and 8.0% in 3Q20.

• Segment Performance:

  • Online music service revenue is forecasted to grow by +25% YoY.
  • Social entertainment revenue is expected to decline by -10% YoY.
  • Subscription revenue is expected to grow by +31% YoY.
  • Others revenue is forecasted to grow by +16% YoY.

• Short-Term Pressures:

  • App-open ads and digital album sales face short-term headwinds due to regulations.
  • Social entertainment is expected to trend moderate, with uncertainty in virtual gifting regulations.

• Earnings Revisions:

  • CMBIS has cut earnings forecasts for FY21/22/23E by 0%/3%/3%, respectively.
  • The DCF-based target price has been lowered to US$10, down from US$12.0.

• Valuation and Growth:

  • The DCF valuation model shows a PV (FCF + Terminal Value) of US$10.
  • The company is expected to show FCF growth from -3% in FY21E to +21% in FY22E and +75% in FY23E.
  • Terminal growth rate is assumed at 3.0%.

Key Financial Metrics

Revenue (RMB mn)

• FY19A: 25,434
• FY20A: 29,153
• FY21E: 31,887
• FY22E: 35,330
• FY23E: 38,512

Adjusted Net Profit (RMB mn)

• FY19A: 4,903
• FY20A: 4,971
• FY21E: 3,777
• FY22E: 3,925
• FY23E: 4,401

Adjusted EPS (RMB)

• FY19A: 2.9
• FY20A: 3.0
• FY21E: 2.2
• FY22E: 2.3
• FY23E: 2.6

P/E Ratio

• FY19A: 15.6
• FY20A: 15.4
• FY21E: 20.5
• FY22E: 19.7
• FY23E: 17.6

P/B Ratio

• FY19A: 3.0
• FY20A: 2.6
• FY21E: 2.4
• FY22E: 2.2
• FY23E: 2.0

ROE (%)

• FY19A: 11.2
• FY20A: 9.4
• FY21E: 6.5
• FY22E: 6.4
• FY23E: 6.7

Investment Recommendation

• Rating: BUY (Maintained)
• Target Price: US$10 (Down from US$12.0)
• Upside/Downside: +44.9% from current price of US$6.9

Shareholding and Performance

• Market Cap (US$ mn): 12,068

• Avg 3 mths t/o (US$ mn): 176.01

• 52w High/Low (US$): 32.2 / 6.8

• Total Issued Shares (mn): 835

• Shareholding Structure:

  • Pacific Alliance: 6.01%
  • Baillie Gifford: 5.46%
  • Invesco: 4.13%

• Share Performance:

  • 1-mth: -20.2%
  • 3-mth: -52.9%
  • 6-mth: -64.5%

Strategic Initiatives

• TME launched Incentive Project 4.0 in Sep 2021 to attract indie musicians with 100% first-year rev sharing for three-year exclusive deals.
• The company anticipates further Tencent synergies in content creation (e.g., variety shows) and distribution (video account).

Key Ratios

• Operating Margin: 7.0% in FY21E, down from 10.4% in FY20A
• Pre-tax Margin: 9.6% in FY21E, down from 15.9% in FY20A
• Adj. Net Margin: 11.8% in FY21E, down from 17.1% in FY20A
• ROE: 6.5% in FY21E, down from 11.2% in FY19A

Analyst Certification and Disclosures

• The analyst certifies that the views expressed reflect personal opinions and not influenced by compensation.
• The analyst has not traded in the stock covered in the report within 30 days prior to its release and will not do so for 3 business days after release.
• CMBIS is not liable for any loss or damage incurred from relying on the report.

CMBIS Ratings

• BUY: Potential return of over 15% over next 12 months
• HOLD: Potential return of +15% to -10%
• SELL: Potential loss of over 10%
• NOT RATED: Stock is not rated

Important Disclosures

• The report is not investment advice and should be used with caution.
• CMBIS may have investment banking relationships with the issuers covered.
• The report is intended for major US institutional investors and may not be distributed to others.
• The information is based on publicly available data and may be subject to change.