Guotai Junan International: Maintains "buy" rating on NETEASE MUSIC (09899) and raises target price to HK$190.

Guotai Junan International released a research report stating that it maintains a "buy" rating on NetEase Music (09899) and has raised its target price to 190 Hong Kong dollars. Taking into account the company's adjustment in social entertainment business and operational efficiency improvement, the bank has adjusted the company's FY25E/FY26E revenue forecasts to RMB 8.08 billion/8.63 billion, and raised adjusted net profit forecasts to RMB 1.62 billion/1.81 billion. The company's cash value is approximately RMB 11.6 billion, accounting for about one-third of the current market value. The bank is bullish on the company's strong user stickiness, with potential for future growth in ARPU. Guotai Junan International's key points are as follows: Profit improvement exceeds expectations In 2H24, the company's revenue reached RMB 38.8 billion, and the gross profit margin continued to improve, up 3.6pp year-on-year to 32.4%, mainly benefiting from the increase in online music service revenue and cost control optimization; adjusted net profit was RMB 8.2 billion, higher than the market expectation of RMB 5.9 billion; adjusted net profit margin increased by 8.8pp year-on-year to 21.1%. Online music services remain strong, with a 19% increase in subscription revenue In 2H24, the company's online music service revenue was RMB 27.9 billion, up 20.0% year-on-year and 7.9% quarter-on-quarter, with strong growth. In terms of users, the company's MAU steadily increased, with DAU/MAU remaining above 30%, and mobile usage time slightly increasing, showing high user stickiness and activity on the platform. In 2H24, subscription revenue grew by 19.3% year-on-year, benefiting from the improvement in membership benefits driving the rapid growth of paid users. Due to the company's continuous exploration of efficient customer acquisition channels, the sales expense ratio has improved. The company currently prioritizes user experience, and the bank expects membership growth to be the main driver in 2025, with ARPU expected to remain relatively stable. Continued strategic contraction of social entertainment services, focusing on core music business In 2H24, the company's social entertainment service revenue was RMB 10.8 billion, mainly due to the company's active strategic contraction of this business. The company recently simplified and revamped the APP, weakening traffic entry points for services such as live streaming, and focusing on core music services. The bank expects social entertainment service revenue to continue to decline year-on-year in 2025, but at the same time, the company is expected to reduce corresponding costs, believing that it will not have a significant impact on the company's overall profit. Investment risks: User growth is lower than expected; increased competition.