NetEase Cloud Music reported 1H25 results: total revenue declined by 6% YoY to RMB3.83bn; adjusted operating profit grew by 35% YoY to RMB905mn, which is equivalent to 57% of our full-year earnings estimates, mainly thanks to the improved music monetization, solid GPM expansioand S&M expenses control. We expect GPM expansioand efficiency gains to continue i2H25/FY26. The company’s GPM/S&M expense ratio (36%/4% i1H25) still have room to improve, compared to that of TME (44%/3%), especially ia stable competitive environment like China’s online music sector. We lift our FY25-27 operating profit forecast from RMB1.4/1.8/2.0bto RMB1.7/1.9/2.1bn, mainly to reflect the opex control and GPM expansion. We roll forward our valuatiowindow to FY26E, and raise our target price to HK$330.0 o32x FY26E PE, which is opar with global peers (previous: HK$202.5 o21x FY25E PE).
　　MaintaiBUY othe strong earnings prospect and southbound fund inflow.
　　Strong music business driveby subscriber growth. Online music
　　services revenue was up by 16% YoY to RMB2.97bi1H25, withiwhich membership subscriptiorevenue grew by 15% YoY to RMB2.47bn. MAUs and number of subscribers maintained healthy YoY growth, while monthly ARPPU declined slightly YoY i1H25, mainly due to the change isubscriber mix. Non-subscriptiomusic revenue grew by 20% YoY to RMB498mi1H25, primarily driveby the solid growth of digital album sales. Social entertainment and others revenue declined by 43% YoY to RMB860mi1H25, as the company optimized operational strategy and product desigto focus othe core music business. Looking ahead, the company will continue to focus odiversifying content offerings, optimizing music listening experience, nurturing community, cultivating paying willingness and improving profitability.
　　Solid margiexpansiooimproved monetizatioand opex control.
　　GPM expanded to 36.4% i1H25, up from 32.4%/35.0% i2H24/1H24, mainly attributable to the improved monetizatioof online music business and cost optimization. S&M expenses were dowby 56% YoY to RMB163mi1H25 and better thaour expectation, as the company adopted ROI-oriented marketing strategy. Leveraging content marketing and user traffic from NetEase, the company caacquire users at a more cost-effective way. Adjusted OPM rose by 7.2ppts YoY to 23.7% i1H25. 2H25 revenue and margioutlook. Looking into 2H25E, we forecast total revenue will recover to positive growth of 4% YoY, mainly fuelled by the solid online music business and stabilizing social entertainment business.
　　We also expect continuous margiexpansiooimproved monetizatioof music business and disciplined expenses control, with GPM/adjusted OPM up by 5/6ppts YoY i2H25E.