Cloud Music reported 1H23 financial results: total revenue declined by 8% YoY to RMB3.9bn (in line with consensus estimate), mainly due to the operational adjustment to social entertainment business. Adjusted net income was RMB332mn in 1H23 (1H22: net loss of RMB217mn), beating consensus estimate of RMB96mn, primarily due to the enhanced GPM (+12pct YoY). As social entertainment business continues to face pressure, we lower FY23-25E total revenue forecast by 8-9%; but we raise FY23-FY25E adjusted net income forecast to RMB686/974/1,365mn (previous: RMB194/618/1,065mn) on 1) better content cost saving; 2) optimized live streaming revenue-sharing ratio; 3) enhanced operating efficiency. We fine-tuned our DCF-derived target price to HK$99.5 (previous: HK$103.5). Maintain BUY.
Solid online music business; social entertainment under pressure.Online music revenue grew by 13% YoY to RMB2.0bn in 1H23 (52% of total revenue), mainly driven by growth of subscription business (+17% YoY).Average monthly paying users grew by 11% YoY to 41.8mn in 1H23, with paying ratio reaching 20.2%. For 2H23E, we estimate online music revenue to increase by 18% YoY to RMB2.3bn, driven by the solid net adds of paying users. Social entertainment services revenue declined by 24% YoY to RMB1.9bn in 1H23 (48% of total revenue), as the business adjusted its operating strategy to enhance internal control and optimize certain live streaming functions. We expect social entertainment revenue will remain under pressure and decline by 40% YoY to RMB1.7bn in 2H23E; the live streaming revenue shall stabilize from 4Q23E onwards, in our view.
Nurturing healthy user and content ecosystem. Average MAUs increased by 14% YoY to 206.7mn in 1H23, with DAU/MAU ratio staying above 30%, supported by the enhanced user experience and Cloud Music’s more active approach to acquire new users. Cloud Music further enriched its content library in 1H23 through: 1) deepening partnership with top-tier music labels such as B’in Music and Rock Record; 2) supporting healthy development of its independent artist ecosystem, in which the total number of registered independent artists was up 22% YoY to 646k in June 2023.
Profitability improvement remains on track. GPM improved from 12.6% in 1H22 to 24.7% in 1H23, primarily driven by optimized licensed content cost and live streaming revenue-sharing ratio. We expect its GPM to further expand to 28.2% in 2H23E. For full-year FY23, we forecast adjusted net income of RMB686mn, with net margin up by 10pct YoY to 8.7% on enhanced GPM. Cloud Music’s monetization and profitability improvement remain on track. Its current valuation of 1.7x FY23E PS also offers attractive risk-reward versus its peer (3.0x). Maintain BUY.