Guotai Junan International: Online music becomes an important driver of growth in the music market, and the bargaining power of platforms is gradually increasing.

Ping An International released a research report stating that the global online music industry is experiencing rapid growth, becoming an important driver of growth in the music market. The relatively stable competitive landscape of the industry and the gradually increasing bargaining power of platforms provide profit growth opportunities for music streaming, while increasing penetration rates, subscription fee increases, and expansion of music-related content in other areas will drive long-term growth for music streaming platforms in the future. They initiated "buy" ratings for Spotify (SPOT.US), Tencent Music Entertainment Group Sponsored ADR Class A (01698, TME.US), and NETEASE MUSIC (09899). Ping An International's main points are as follows: Vibrant Development of Music Streaming The music streaming market is experiencing rapid growth, with a 10% year-on-year increase in global market size by 2023, and a 33% growth rate in the online music market in China. Music streaming has become a major component of the music market, accounting for 67% of overall recorded music industry revenue in 2023, becoming an important driver of growth in the music industry. Competitive landscape becoming stable, platform bargaining power gradually increasing The overall competitive landscape of the music streaming industry is relatively stable, with Spotify, YouTube, Apple, and Amazon holding over 85% market share outside of China; Tencent Music Entertainment Group Sponsored ADR Class A and NETEASE MUSIC are expected to hold over 90% market share in China. Due to the high costs of content copyrights, the profitability of music streaming platforms depends on economies of scale, creating certain barriers to entry for the industry, and the future competitive landscape is expected to remain relatively stable. As the proportion of top record label content playing on streaming platforms decreases, and the market share of streaming platforms in the music industry increases, there is further room for optimization of royalty sharing ratios in the future. Future growth drivers for the industry Penetration rate increase: Despite experiencing rapid growth, the industry has not reached a saturation point in terms of paid user penetration. The global music subscription user penetration rate is only 12.5%, compared to over 50% in mature markets, indicating there is still a significant long-term growth potential for the industry. Subscription fee increases: Music streaming platforms are steadily increasing subscription fees, with music memberships priced at around 70%-80% of video memberships, and music subscriptions typically have a high level of content completeness, making music a cost-effective form of entertainment. The repeatable consumption nature of music content also helps maintain user stickiness. Content expansion: In addition to music subscriptions, streaming platforms are continuously exploring new forms of content and monetization methods, such as advertisements, podcasts, audiobooks, fan economy, live streaming, social, and other businesses, striving to find new sources of growth contribution. Targets Initial coverage of Spotify (SPOT.US): Global layout, exploring the potential of emerging markets; long audio layout is expected to open up long-term space; given a "buy" rating with a target price of $555. Initial coverage of Tencent Music Entertainment Group Sponsored ADR Class A (01698, TME.US): Possessing rich copyright advantages and benefiting from the Tencent ecosystem; user conversion driven by payment walls increases, SVIP drives ARPU growth; given a "buy" rating with a target price of $14.5/56 Hong Kong dollars. Initial coverage of NETEASE MUSIC (09899): Differentiated positioning, capturing young users; still has great commercial potential; given a "buy" rating with a target price of 145 Hong Kong dollars. Considering the competitive landscape, performance growth certainty, and valuation levels, Tencent Music Entertainment Group Sponsored ADR Class A is the preferred choice in the industry. Investment risks Slow user growth; copyright royalty risks; intensified industry competition; competition from other forms of entertainment.