Minsheng Securities: First Give a "Recommended" Rating to NETEASE MUSIC (09899), Increasing Membership Numbers as the Current Focus.

Minsheng Securities released a research report stating that it first covered NETEASE MUSIC (09899) and gave it a "buy" rating. It is estimated that the company's net profit in 2024/2025/2026 will be 13/15/17 billion yuan respectively. As one of the leading online music platforms, the company's current strategy focuses on increasing the number of paid users. The future growth is expected to be driven by the increase in paid users and ARPPU, with the potential for continuous performance growth. The main points of Minsheng Securities are as follows: The company's online music subscriptions and social entertainment services are the main sources of revenue, and its profitability continues to improve. NETEASE MUSIC was launched in 2013. As of 24H1, the company's largest shareholder is Netease, holding 59.83% of the shares, and the second largest shareholder is Alibaba Group, holding 7% through Taobao China Holdings Limited. Business model: The company's revenue mainly comes from online music service income and social entertainment service income, accounting for 63% and 37% of total revenue in 24H1, respectively. In the online music service sector, music subscription revenue accounts for the majority, representing 84% of total online music service income, with advertising and digital albums accounting for 16%. Financial situation: Overall revenue is on an upward trend, with a significant increase in gross profit margin from -4% in 21Q1 to 33% in 24Q3. The company achieved its first profitable fiscal year in 2023, with a net profit of 7 billion yuan and a net profit margin of 9%; adjusted net profit was 8 billion yuan, with an adjusted net profit margin of 10%. In 24H1, the company's profitability continued to improve, with a net profit of 8 billion yuan and a net profit margin of 20%; adjusted net profit was 9 billion yuan, with an adjusted net profit margin of 22%. China's online music industry has entered the post-copyright era, forming a "one super and one strong" pattern. Industry chain upstream and downstream: The number of upstream copyright suppliers of Chinese online music platforms is large and the market concentration is low, while overseas copyright suppliers have a higher concentration. Downstream are music subscription users. Looking at the global competitive landscape, Spotify is the largest in scale, but in recent years it has faced competition from Apple Music, Amazon, YouTube, etc. According to Business of Apps, in 2023, Spotify was the world's largest streaming music platform with a global market share of about 32.1%, followed by Apple Music with a market share of 15%, and Tencent Music with a market share of 14.1%. Looking at the competitive landscape in China, it has gone from a hundred schools of thought to a large number of integrations to the current "one super and one strong" pattern. Overall, the distribution of paid users overseas is more evenly distributed than in China, and the concentration of upstream copyright suppliers in overseas online music platforms is higher than in China. NETEASE MUSIC is one of China's largest independent musician online incubators, with a strong platform community attribute. With a combination of original and copyright content, the original music ecology is one of the company's highlights. From 2021 to 2023, the number of registered independent musicians on the NetEase Cloud platform has consistently increased, from 400,000 in 2021 to 684,000 in 2023. The number of tracks uploaded by independent musicians has increased from 1.9 million in 2021 to 3.1 million in 2023. Comparing across platforms, by the end of 2023, there were nearly 684,000 registered independent musicians on the NETEASE MUSIC platform, with around 3.1 million music tracks uploaded. During the same period, TME attracted 480,000 independent artists and uploaded over 3 million different types of songs. In addition, the NETEASE MUSIC platform has a young user base, with a high proportion of post-00s users. The platform community has a strong music community centered around its iconic music review feature, continuously optimizing products, operations, and algorithms to expand the platform's comment value. NETEASE MUSIC attracts new users through original content and self-produced content, and maintains user retention through its community.