TME will report 3Q23 results on 14 Nov before U.S. market opens. We model 3Q23 total revenue to dip -14% YoY to RMB6.4bn with music remaining solid at 33% YoY growth to RMB4.6bn while social experiencing full quarter negative impact from proactive streaming adjustments since June 2023 at -54% YoY to RMB1.8bn. We see Co.’s strong music growth and music margin expansion will be sustainable along the road with diversified multi catalysts. We expect social revenue to bottom out in 4Q23 and be stable in the following quarters assuming gradual macro recovery and rational competition. Maintain BUY and TP of US$8.30/HK$33.00 on 16.0x blended 2023E adj. PER.
　　Key Factors for Rating
　　Clear story ahead. We remain optimistic on Co.’s solid music prospectus along the road with both music subs and non-subs growing nicely with multi catalysts. We deem Co. will patiently educate music users and progressively unleash music monetisation potentials despite N-T negative social impact by prioritising healthy music content ecosystems, smooth cooperations with diversified partners especially key label partners, Tencent and automakers (in-car devices), friendly user experience, innovative monetisation channels, refined operations and optimised technologies. For social segment, we expect social revenue to bottom out in 4Q23 and estimate quarterly social revenue in the following quarters to fluctuate around RMB1.6bn assuming gradual macro recovery and rational competition. In summary, we see Co.’s future story is clear and largely keep our 2023-2025E revenue and margin estimations unchanged. iOT especially in-car services monetisation, Wexin cooperation, innovative novel ad products, original music contribution will unlock L-T monetisation imaginations and valuations.
　　3Q23 preview: solid music albeit full quarter social impact. We model total revenue to dip -14% YoY to RMB6.4bn, in line with consensus. Music continues to perform solid with revenue delivering 33% YoY to RMB4.6bn, supported by both strong music subs (39% YoY to RMB3.1bn) and non-subs. Core music subs ARPPU and paying users maintain healthy momentum. Ad and merchandise sales will primarily contribute to music non-subs growth. Social revenue is estimated to plummet -54% YoY to RMB1.8bn mainly on full quarter impact due to Co.’s proactive streaming adjustments since June 2023. GPM of 35.7%. Non-GAAP NPM increase by 3.0ppts YoY/ 0.7ppts QoQ to 21.7%.
　　Key Risks for Rating
Downside risks: 1) weak macro; 2) traditional social streaming competition; 3) regulation; 4) ineffective monetisation; 5) ADR delisting; 6) destructive M&A.
　　Valuation
We maintain BUY rating and PE based TP of US$8.30/ HK$33.00 on unchanged 16.0x blended 2023E Non-GAAP PER (in line with 2022-25E Non-GAAP net profit CAGR) by assuming equally profit contribution from music (25.0x adj. PER) and social (7.0x adj. PER) in 2023E and US$0.52 2023E Non-GAAP EPADS.