To The Moon

$Tencent Music(TME)$ has risen from -7% back to +4% after announcing its Q1 earnings, with investors relatively anything but concerned about its Q1 performance in the current environment.

Earnings situation and market feedback

A quick look at the core numbers:

• Total Revenue: $2.1B (+6% yoy, in line with guidance)

• Online Music Subscription Revenue: $0.8B (+12% yoy, pay rate 22%/-)

• Social Entertainment Revenue: $1.1B (+2% yoy, continuation of low growth)

• Adjusted net income: $0.4B (+8% yoy, margin 19%/+1% yoy)

• Profit Margin: Adjusted Net Margin 19% (+1% yoy)

• Cash Flow: $0.5B in operating cash flow (covers dividend rate of 30%)

Market Reaction:

Performance on May 13 after the earnings release ranged from -7.5% to a high of +4%, a sharp swing that also reflected investors' attitude towards the "volume-price balance" strategy.Despite the positive signals from the increase in payment rate and the growth of SVIP share (undisclosed data), the market is concerned that the continued contraction of the user pool (undisclosed DAU) may limit the long-term space.

However, short-term mid-cap sentiment is optimistic and could be a guiding factor for the upside.

Keywords: 1. short-term neutral: subscription unit price increase to offset weak subscriber growth, but need to verify the sustainability; 2. long-term concerns: whether the pendant strategy can hedge against macro pressures (e.g., the impact of trade war on advertising).

Key investment points

1. Subscription business: from "rising volume and price" to "making up for volume with price".

• Key indicators: growth of paying headcount slowed down (+3% yoy vs +5% last quarter), but ARPPU increased significantly (+9% yoy), mainly due to the penetration of SVIP and other high-interest packages; payment rate of 22% is close to the level of long-running videos (e.g., 25% in Aqiyi), but music users still need to be cultivated to pay for their music.

• Strategy analysis: the company has shifted to "prioritize heavy users", through tiered benefits (such as sound quality, concert privileges) to enhance the value of a single user, but we need to be wary of the loss of free users to competitors (e.g., NetEase Cloud Music).

2. Competitive landscape and operational efficiency

• Industry comparison: European and American streaming media (Spotify +15% yoy) benefit from price increases, while TME relies more on operational optimization:

  • Ad revenue: +5% yoy, inventory boosts offset brand budget contraction;

  • Digital albums: high volatility (reliant on top stream releases), limited Q1 contribution.

• UE model improvement: gross margin improved to 32% (+2pct yoy), mainly due to content cost control (shifting from rights acquisition to split model).

3. Performance Guidance and Analyst Focus

• 2025 Outlook: management maintains full year revenue +5-7% guidance, implied H2 growth pickup (low base effect);

• Analyst Q&A core questions:

  • Q: SVIP penetration ceiling? A: No specific target was disclosed, but emphasized that "core user ARPPU still has 30% room for improvement";

  • Q: Progress of social entertainment transformation? A: Contribution from new scenarios such as virtual live streaming is <5%, which still needs to be observed.

4. Valuation drivers

• Catalysts: Payment rate exceeds 25% + SVIP share exceeds expectation; trade war easing leads to advertising recovery.

• Risks: user pool continues to shrink (Q1 undisclosed MAU); policy risks (regulation of digital album sales).

• Current valuation of 15x P/E TTM reflects "solid but mediocre" expectations, if Q2 payment rate and ARPPU continue to improve, it may open up room for revaluation.