We deem Co. has already built a healthy virtuous cycle leveraging itscomprehensive content, extensive partners and strong operationalexpertise. We expect Co. will accelerate its investments in multi-areasalong the music value chain to further unleash monetisation potentialswith sustainable core subs momentum driven by ARPPU-prioritisedexecutions and diversified non-subs commercialisation channels.
　　Along with 30%+ annual dividend policy and buyback executions,maintain BUY and raise our TP to US$18.8/HK$73.8.
　　Key Factors for Rating
　　Core subs model generates sustainable growth. We deem Co. continuesto treat subs monetisation as its first priority for long-term sustainable growthwith committed ARPPU prioritised strategy in the near to medium-term. Weexpect Co. will achieve its midterm RMB15 monthly ARPPU in 2H28 driven by itsnarrowed discount and increasing SVIP penetration on enriched content formatsespecially long form audio and various non-content privileges including soundquality and various novel fan-based benefits. We still expect 150m paying subscould be achievable, but in a much longer phase (early 2030 per our estimation).
　　Diversified and enhanced music non-subs monetisations beingspotlights. Leveraging comprehensive content ecosystem, extensive anddeepened collaborations with global partners and solidified operationalexpertise, Co. has great non-subs monetisation opportunities. We deem ad(50%+ music non-subs revenue contribution per our estimates) maintains solidgrowth momentum with various ad products and formats (ad-supported, splashad, reward-based, sponsor ads, etc.). Other complementary monetisationmodels which are more project-oriented in our view include digital album,sublicensing and various fan-based channels such as offline /online concerts andmerchandise sales. Furthermore, Co. will further expand overseas markets overthe long term but in a ROI-disciplined manner.
　　Accelerated investments for solidified leading position. Co. has recentlyacquired c.2.2m shares of K-pop agency SM Entertainment from another agencyHYBE for around US$180m, making it the 2nd largest shareholder with c.9.7%stake. Also, the Co. will expand and deepen its strategic collaboration scope withSM beyond music distribution, including co-production of new Chinese idolgroups, localised performance in China and IP businesses in the future. Weexpect Co. will accelerate its investments in multi-areas including content (longform audio and original), partners, offline performances and M&A in globalmarkets with its strong cash generation capabilities and healthy cash positions.
　　Forecasts change: We keep our FY2025-27E music subs revenue forecastsunchanged while raising music non-subs revenue forecasts by 2-6%, leading to1% increase of total revenue forecasts. We slightly nudge up our FY2025-27Eadj. EPADS by 2-3% based on unchanged GPM and decreased opex assumptionsto reflect more organic growth nature due to increased synergies with enrichedcontent and expanded partners.
　　Key Risks for Rating
　　Downside risks: 1) underperformed music paying subs; 2) key labelcollaboration; 3) fierce competition; 4) regulation; 5) ineffective monetisation.
　　Valuation
　　Maintain BUY and raise our TP to US$18.8/HK$73.8, derived from 22.0x blended2025E adj. PER by assuming 80% profit from music (25.0x adj. PER) and 20%from social (8.0x adj. PER) and uplifted US$0.85 (from US$0.83 previously)2025E adj. EPADS.