$Tencent Music(TME)$ Q4 delivers an earnings report that "exceeds profit expectations, but subscribers have concerns". $TME-SW(01698)$
Short term, high dividend + buyback support share price; medium term need to verify the logic of subscription user growth rebound and ARPPU improvement; long term competitive landscape is still the biggest variable.
Performance and Market Feedback
Core Financial Performance
Total Revenue: Q4 $7.46bn (+8.2% yoy), vs. $7.29bn expected; full year $28.4bn (+2.3% yoy)
Adjusted net income: Q4 2.5 billion yuan (+43% yoy), expected 2.23 billion yuan; full year 8.14 billion yuan (+30.7% yoy)
Online music subscription revenue: full year $15.23 billion (+25.9% yoy), Q4 $4.03 billion (+17.9% yoy)
Number of paid subscribers: Q4 online music paid subscribers 121 million (+13.4% yoy), SVIP subscribers over 10 million
ARPPU: Q4 online music users $11.1 (+3.7% yoy)
MARKET FEEDBACK: Opened higher, US stocks closed up 15.54% overnight (March 19), market feedback is positive, reflecting earnings exceeded expectations.Most of the market believes that cost control and long-term growth logic remains unchanged.
Investment highlights
Business structure transformation is effective, online music instead becomes a growth engine
Revenue structure optimization: online music service revenue share increased from 60% in 2023 to 76.5% in 2024 ($21.74 billion for the year, +25.5% yoy), while social entertainment revenue continued to contract (-36.1% yoy).
Subscription business driven: online music subscription revenue grew 25.9% for the full year, and the number of paid subscribers grew for 9 consecutive quarters to reach 121 million in Q4 (the world's second largest paid music platform).
SVIP strategy paid off: SVIP subscribers exceeded 10 million, ARPPU increased to RMB 11.1, and the user tiering strategy strengthened the realization ability.
Synergizing content and platform, technology empowers user experience
Deepening of content ecology: renewed contract with SM Entertainment and Kakao Entertainment to expand cooperation on sound effects, performances and derivatives; added new exclusive content such as Knife Lang and Luo Dayou to enhance user stickiness.
Application of AI technology: optimized personalized recommendation through AI to enhance user engagement, Q4 online music DAU/MAU increased by 8% year-on-year (not directly disclosed, inferred from user behavior).
Improved financial health and enhanced shareholder returns
Strong cash flow: full year free cash flow of $4.5 billion, supporting $1 billion share repurchase program (2025-2027) and $273 million annual dividend payout.
Improved gross margin: 42.3% from 35.3% in 2023, mainly due to an increase in the share of online music high margin business and cost control.
Industry and Competitive Environment Analysis
Domestic market space: China's music streaming paid penetration rate is only 10% (vs. 35% in the US), ARPPU is less than 1/3 of Spotify's, growth potential is clear.
Competitive landscape: NetEase Cloud Music, Jitterbug and other platforms compete for users, but Tencent Music maintains an advantage by virtue of copyright barriers (Universal, $Sony(SONY)$ $Warner Music Group Corp.(WMG)$ exclusive cooperation) and ecological synergies (WeChat, QQ).The company has maintained its advantage in terms of ecological synergies (WeChat and QQ traffic).
Responses to previous market concerns
Social entertainment business decline: the company explained by live streaming function compliance adjustment and competition intensification, but the decline narrowed quarter by quarter (-23.9% YoY in Q4 vs -42.8% YoY in Q2).
Sustainability of paid subscriber growth: Management is guiding for 1.5-2.0 million net new subscribers/quarter in 2025, down from 3.0 million in 2023, but is hedging against slower growth with a price increase for SVIP ($40/month).
International Market Expansion: International market is a long-term growth point, will choose markets carefully and work with local partners to localize operations.Currently, we are mainly focusing on the Southeast Asian market.
Layout in long audio and short drama: Long audio is an important growth area, and we will continue to invest resources in expanding our content library and exploring more business models, such as membership subscription and advertising.Short drama is a new attempt, currently at an early stage, and will be explored cautiously to find a suitable business model.
Summary
Tencent Music's 2024 results have proven the success of its "online music subscription + content ecosystem" strategy, and the double growth of paid subscribers and ARPPU has supported high-quality profitability.Despite short-term pressure on the social entertainment business, cost control and technological innovation will lay the foundation for long-term growth.
Management has strengthened shareholders' confidence through buybacks and dividend payouts, and with room for industry penetration to increase, we recommend paying attention to its revaluation opportunities in the "streaming media 2.0 era".
Probably because of the strong Peers like $Spotify Technology S.A.(SPOT)$ foreign investors are more generous in valuing TME, coupled with the recent upward trend of Chinese stocks as a whole, as well as the company's internal efficiency enhancement has exceeded expectations, it is easier to be recognized and favored by institutions.
Considering the overall guidance from the call was also positive, the market may price TME around a forward P/E (Forward PE) of 18-20x or even higher.
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