Cloud Music announced 1H24 financial results: total revenue was up by 4% YoY to RMB4.1bn, in line with consensus estimate; adjusted net income grew by 165% YoY to RMB881mn, well ahead of consensus estimate, primarily attributable to the better-than-expected GPM expansion (+10ppt YoY). For FY24, we forecast total revenue to grow by 1% YoY to RMB7.93bn, driven by solid growth of online music business but partially offset by decline in social entertainment revenue. In view of the better-than-expected GPM expansion, we lift FY24 adjusted net income by 10%. We raise our DCF-derived target price to HK$115.0 (previous: HK$106.5). Maintain BUY.
Strong music subscription and advertising businesses. Online music services revenue grew by 27% YoY to RMB2.56bn in 1H24, driven by strong growth of both membership subscription revenue and advertising revenue. Membership subscription revenue was up by 25% YoY to RMB2.14bn in 1H24, primarily driven by growth in monthly paying users. Social entertainment and others revenue declined by 20% YoY to RMB1.51bn in 1H24, as Cloud music strengthened risk control and prioritized core music business.
Healthy music ecosystem to support long-term growth outlook. Cloud Music continued to see healthy development of its user community, with largely stable total user base YoY and DAU/MAU ratio of above 30%. The company also further enriched its content library via expanding partnership with music label and strengthening its independent artists’ ecosystem, which we expect to support the long-term revenue growth outlook. For 2H24E, we expect online music revenue to grow by 16% YoY to RMB2.70bn, with slight deceleration in YoY growth due to high-base effect for both membership subscription and online advertising businesses. Social entertainment business remains under pressure due to business adjustment, and we estimate social entertainment revenue to decline by 29% YoY to RMB1.16bn in 2H24E.
Solid margin expansion on operating leverage. Overall GPM expanded by 10.3ppt YoY to 35.0% in 1H24, mainly attributable to operating leverage improvement and one-off copyright cost adjustment that boosted GPM by 2.6ppt. We expect its GPM will rise to 32.8% in 2H24E (vs. 32.4% in 1H24 excl. one-off impact), driven by operating leverage but partially offset by continuous investments in content library. For FY24E, we forecast adjusted net income to grow by 73% YoY to RMB1.42bn, with net margin up by 7.5ppt YoY to 17.9%. Cloud Music’s current valuation of 13x FY24E non-IFRS PE offers attractive risk-reward in our view. Maintain BUY.