DFZQ has released a research report, projecting that TME-SW will achieve net profits attributable to shareholders of RMB 9.2 billion, RMB 10.2 billion, and RMB 11.3 billion for the years 2026 to 2028, respectively. Based on a 2027 comparable company valuation, the firm assigns a 14x P/E ratio, resulting in a target price of HK$52.39 (RMB 45.79), and maintains a "Buy" rating. The formal completion of the Himalaya acquisition is expected to have a positive synergistic impact on content, traffic, and membership matrix integration. Additionally, the linking of QQ Music audio sources to Video Channels, which commenced in April this year, is anticipated to gradually scale up and contribute positively.
The report outlines the following key points based on TME-SW's Q1 2026 results: The company reported Q1 2026 revenue of RMB 7.9 billion, a year-on-year increase of 7%, slightly exceeding institutional expectations by 0.1%. This outperformance was primarily driven by stronger-than-expected growth in membership service revenue. The gross margin stood at 44.9%, up 0.8 percentage points year-on-year, benefiting from the membership revenue growth and a reduction in channel costs. Adjusted net profit attributable to shareholders for Q1 was RMB 2.27 billion, a 7% year-on-year increase, surpassing institutional forecasts by 1.3%.
Looking ahead to stronger performance from Q2 onwards: Online music revenue for Q1 2026 reached RMB 6.5 billion, a 12% year-on-year increase. Within this, membership revenue was RMB 4.6 billion, up 7% year-on-year and 1.9% above institutional expectations. The deceleration in growth rate is attributed to price-sensitive members on the KuGou platform being affected by competitive pricing and AI-powered piracy from rivals. However, the revenue growth still exceeded expectations. For the second half of 2026, the anticipated completion and consolidation of the Himalaya acquisition is expected to mitigate the slowdown in membership business growth. Content synergy for traffic guidance and the integrated membership matrix are likely to support the recovery of traffic and Average Revenue Per User (ARPU). Furthermore, the traffic diversion from linking QQ Music audio sources to Video Channels starting in April is projected to gradually increase and have a positive impact. Non-membership revenue for Q1 2026 was RMB 1.9 billion, a significant 28% year-on-year increase. This is largely judged to be because major concert tours typically begin in March, suggesting potentially stronger performance starting in Q2.
Social entertainment business shows signs of stabilization: Social entertainment revenue for Q1 2026 was RMB 1.38 billion. It is expected that there may be continued traffic impacts in Q2 2026, with social entertainment revenue potentially reaching RMB 1.4 billion, representing an 11% year-on-year increase.
Risk factors highlighted include the potential industry reshuffle risk following the launch of the Douyin Music platform, regulatory risks in the live-streaming sector, and intensifying competition within the live-streaming industry.
Comments