Northeast: TME-SW (01698) initiates "buy" rating with profit recovery driven by pay-per-view penetration.

Northeast released a research report, first covering TME-SW (01698), giving it a "buy" rating, and forecasting the company's EPS for 2025-2027 to be 3.57/3.47/3.96 yuan. As a leading company in the industry, Tencent Music is expected to see moderate revenue growth in the future, as well as continued improvement in profitability, with ROE expected to maintain historical highs. Key points from Northeast: Steady development after high growth, continuous improvement in profitability Tencent Music Entertainment Group started with QQ Music in 2003, integrated Kugou and Kuwo in 2016 to establish the group, listed on the US stock market in 2018, and completed a secondary listing in Hong Kong in 2022. Leveraging the Tencent ecosystem, the company has a first-mover advantage in copyrights, users, and traffic, and has expanded its brand influence through events like the TMEA Festival and TME live. By 2023, online music paid users exceeded 100 million, establishing a leading position in the industry. In terms of equity, Min River Investment Limited holds 52.96%, Spotify holds 9.13%, TENCENT holds 0.60%, with a high ownership concentration and stable governance structure. In 2024, the company's revenue reached 28.401 billion yuan, a year-on-year increase of 2.34%; net profit attributable to shareholders was 6.644 billion yuan, a year-on-year increase of 35.04%, with profit growth significantly higher than revenue. Gross profit margin rose to 42.34%, with ROE expected to rise to 14.0% in 2025, and profit quality continuously improving. Industry enters a stage of competition in existing capacity, with payment penetration and content upgrades becoming growth engines China's online music market has expanded from 93.8 billion yuan in 2018 to 239.8 billion yuan in 2023, with total user numbers stabilizing at around 700 million, limited room for growth, but continuous improvement in payment penetration, with young groups as the core driver. Regarding industry competition, Tencent Music and NETEASE MUSIC have formed a duopoly in the middle ground. Upstream copyright content continues to expand, with new technologies such as AI composition and copyright confirmation accelerating implementation; downstream consumer habits are fragmented, with an increase in demand for multi-scene, multi-terminal use. Tencent Music, relying on its library volume, social entertainment services, and ecosystem synergy, firmly holds the industry lead. Strategic focus on music ecosystem construction, diverse product matrix and profit models Online music services have become the core business, accounting for over 70%. The company deepens ties with musicians, supports original works, expands long audio and entertainment content, enriches user time and payment scenarios. By leveraging national K songs, live broadcasts, and social entertainment, they enhance user stickiness and commercialization capabilities. At the same time, TME live and virtual concerts expand the online performance model, exploring incremental space for the industry. In terms of overseas cooperation, resources such as Spotify and Universal Music support its international development. Investment highlights for Tencent Music 1) Increased payment penetration, strengthened copyright resources and original ecosystem, maintaining growth in core business. 2) The synergistic effect of social entertainment is evident, live broadcasts and K songs build a moat. 3) Strong financial structure, continuous improvement in net profit margin and ROE, sufficient profit elasticity. 4) Deepening international cooperation, with promising long-term growth prospects.