Q3 financial report reveals three bright spots, TME-SW (01698) continues to show stable growth.

TME-SW(01698) is accelerating the release of growth potential based on the strategic layout of "one body and two wings" of content and platform, which was specifically manifested in its latest financial report. On November 12, Tencent Music announced its unaudited financial performance for the third quarter of 2024. The data showed that Tencent Music's total revenue for the reporting period was 70.2 billion yuan, an increase of 6.8% year-on-year; and the net profit under non-International Financial Reporting Standards was 19.4 billion yuan, an increase of 29.1% year-on-year. The performance of double growth in revenue and net profit is in line with market expectations. A deeper analysis of this performance reveals three major highlights in Tencent Music's stable and positive development trend in this quarter. Firstly, there is a steady growth in revenue. Since the third quarter of 2023 when Tencent Music adjusted its live interaction function and implemented stricter compliance procedures, Tencent Music's total revenue has shown a steady growth trend despite the impact of the social entertainment business. In this quarter, Tencent Music's total revenue was 70.2 billion yuan, a year-on-year increase of 6.8%, highlighting the steady growth and resilience of the group. Secondly, profitability continues to improve. The data shows that since the third quarter of 2023, Tencent Music's gross profit margin and adjusted net profit level have continued to increase quarter by quarter. In this quarter, these two key indicators were 42.6% and 19.4 billion yuan respectively, reaching the highest level in the past five quarters, demonstrating Tencent Music's stable profitability. Thirdly, the online music service demonstrates strong growth momentum, which is the core force driving Tencent Music's stable and positive development. The data shows that the revenue from online music services in the reporting period was 54.8 billion yuan, a year-on-year increase of 20.4%, mainly due to the strong growth in online music subscription revenue. This growth is attributed to the increase in the number of online music paying users and the average revenue per paying user (ARPPU), both of which saw growth. As a result, the revenue from online music subscriptions increased by 20.3% to 38.4 billion yuan in the reporting period. The growth in advertising revenue benefited from a more diversified product portfolio and innovative advertising formats. In fact, since Tencent Music's secondary listing on the Hong Kong stock exchange, its online music services have shown strong growth momentum, which is directly related to the content and platform strategic layout of "one body and two wings" that Tencent Music has been promoting since June 2021. This strategy provides users with a more rich, personalized, and high-quality music experience from both the content and platform perspectives. During the reporting period, Tencent Music continued to deepen its content and platform strategic layout. Specifically, in terms of content, Tencent Music has continuously strengthened its cooperation with record companies, not only renewing contracts with YH ENT group, Da Xiang Music group, and providing new song premieres, but also reaching a strategic cooperation with Galaxy Corporation to further consolidate its content advantage in the Korean pop music field. At the same time, Tencent Music accelerated content co-creation, producing and promoting theme songs for popular games like "League of Legends: Wild Rift" and "Peacekeeper Elite," as well as collaborating with the Deer Mr. Band to sing the theme song "I Want to Be the Wind" for the movie "Claw Doll." By accelerating content exposure in different scenarios, Tencent Music can attract and retain users beyond traditional boundaries. Tencent Music also focused on content promotion and service, successfully hosting the "2024 2nd Zebra Music Festival" in Fuyang, Anhui, continuing to expand its influence in the industry. On the platform side, to meet the diverse needs of users, Tencent Music produced and introduced well-known IPs to further enrich the long audio content, launching the new DTS sound effects on QQ Music for super members to enjoy an immersive music world. Furthermore, Tencent Music utilized its continuously strengthened large language model capabilities to enhance content production and music discovery efficiency, and continuously optimized the music content recommendation algorithm to improve user entertainment experiences. This quarter, the number of music plays recommended to users through platform algorithms reached a historic high. Thanks to the high-quality content and rich benefits provided by Tencent Music to users, as of the end of September 2024, the number of super members exceeded 10 million. This is also a key factor for Tencent Music to further increase its ARPPU. In the medium to long term, online music services remain the core growth engine for Tencent Music. Several securities firms have also given positive evaluations of Tencent Music's stable development. Sealand stated that Tencent Music is a leading online music platform in China and is optimistic about the dual drive of long-term paying users and ARPPU values, which can make Tencent Music's revenue structure healthier and continuously improve its profitability. Based on this, Sealand gave Tencent Music a "buy" rating. From a valuation perspective, the intrinsic value of Tencent Music may not have been fully explored by the market yet. Its valuation could be compared to the streaming music platform Spotify in the US, as their business models are quite similar. Currently, Spotify's dynamic PE is as high as 70 times, and PB is 17.66 times, while Tencent Music's dynamic PE as of the close on November 12 was 20 times, and PB was only 2.29 times. With Tencent Music's continued stable growth, its valuation is expected to catch up with Spotify. Therefore, driven by the dual factors of performance growth and valuation improvement, Tencent Music's share price may experience a "Davis double-click" in the future.