We expect TME to report 4Q23 results in end March. We model 4Q23 will be another consistent quarter with -8% YoY total revenue of RMB6.8bn contributed by strong music (+38% YoY) but adjusted weak social (-50% YoY). GPM expands YoY/ QoQ to 37.5%, leading to 22.4% Non-GAAP NPM. We deem Co. will execute committed ROI-oriented strategies down the road to progressively deepen, explore and enrich monetisations on their comprehensive music ecosystems. Weixin integration, iOT devices, ads, merchandise sales and AI applications will unleash monetisation potentials. Maintain BUY and raise our TP to US$9.7/ HK$38.0 on 16.0x blended 2024E adj. PER.
　　Key Factors for Rating
　　Diversified and enhanced monetisations on healthy music ecosystems. We deem Co.’s key strategy remains crystal clear, i.e. to deepen monetisation capabilities and explore monetisation channels on comprehensive music ecosystems to solidify their dominant position in music industry. We expect Co. will progressively penetrate and enhance monetisations on both music subs and non-subs segments without dampening user experiences. Deepened integrations with Weixin infrastructures and ecosystems will bring N-T incremental traffic and unlock L-T monetisation imaginations. iOT services especially in-car devices, ads, merchandise sales and AI applications will be main catalysts to unleash L-T monetisation ceilings, in our view. Thus, we maintain our 2023-2025E music revenue estimations unchanged while cutting 2024- 2025E social revenue forecasts by 4% to reflect Co.’s risk-resistances on regulations. We slightly nudge up 2024-2025E GPM forecasts to mainly reflect music Op leverage and ROI-oriented strategies on new initiatives such as long form audio. Our 2024-2025E bottom line estimations are estimated to be slightly lower due to more opex assumptions in exchange for L-T monetisations.
　　4Q23 preview: consistently strong music. We model total revenue to decrease by -8% YoY to RMB6.8bn, 2% above consensus. We forecast strong music to deliver accelerated 38% YoY to RMB4.9bn, supported by both solid music subs and non-subs segments. Both paying users and monthly ARPPU will display healthy positive QoQ to support 42% YoY music subs revenue. Ad and merchandise sales will continue contribute to music non-subs growth. Social revenue is estimated to plummet -50% YoY to RMB1.9bn mainly due to Co.’s proactive streaming adjustments since June 2023. GPM expands 4.5ppts YoY/ 1.8ppts QoQ to 37.5%, primarily leading to 22.4% Non-GAAP NPM.
　　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
　　Maintain BUY and raise our PE based TP to US$9.7/ HK$38.0, derived from 16.0x blended 2024E Non-GAAP PER by assuming 55% profit contribution from music (25.0x adj. PER) and 45% from social (4.0x adj. PER) in 2024E and US$0.60 2024E Non-GAAP EPADS on our latest FX assumption.