NetEase Cloud Music reported FY24 financial results: total revenue increased by 1% YoY to RMB7.95bn in FY24, in line with consensus estimates; adjusted net profit grew by 108% YoY to RMB1.70bn, 20% ahead of consensus estimates, mainly thanks to the improved profitability of online music business and effective opex control. Looking into FY25E, the company will continue to focus on improving user experience to unlock long-term growth opportunities. Given the disciplined expense control and solid GPM expansion, we raise FY25- 26E earnings forecast by 8-13%. We changed our valuation methodology from DCF to PE valuation in view of the better earnings visibility. Our target price of HK$202.5 is based on 21x FY25E PE (previous: HK$115.0). Maintain BUY.
　　Online music business maintained solid momentum. Online music services revenue increased by 20% YoY to RMB2.8bn in 2H24 (1H24: +27% YoY). Revenue from membership subscription grew by 19% YoY to RMB2.3bn in 2H24 (1H24: +25% YoY), mainly driven by growth of subscriber base, but partially offset by dilution in monthly ARPPU. Non- subscription online music services revenue was up by 23% YoY in 2H24, primarily attributable to the increase in digital album sales and incentive ads revenue. Social entertainment and others revenue was down by 33% YoY to RMB1.1bn in 2H24 (1H24: -20% YoY), as the company adopted a more prudent operational approach for the live streaming services, and optimized the product design of its main app to focus on the core music business.
　　Focus on improving user experience to drive long-term growth. Total MAUs grew steadily in 2024, with higher user engagement and longer time spent on the mobile app, thanks to the company’s distinctive content ecosystem and improved personalised recommendations. For 2025, the company will focus on several key initiatives: 1) enriching content library with higher efficiency; 2) fostering healthy development of community; 3) driving paying willingness of users through enhanced experienced; 4) improving operating efficiency. We expect online music services revenue to maintain solid growth of 15% YoY in FY25E, mainly driven by the subscriber growth.
　　Strong margin expansion in FY24. Overall GPM rose by 3.6ppts YoY to 32.4% in 2H24, primarily due to the improved monetization and prudent cost control. We forecast GPM will further rise to 35.4% in FY25. The company also adopted a more prudent marketing strategy and acquired users through more efficient channels like collaboration with NetEase Games. Selling and marketing expenses declined by 38% YoY in 2H24. Adjusted net margin improved by 8.8ppts YoY to 21.1% in 2H24.