Cloud Music Ended 2022 With Strong Top-Line Growth

No-moat Cloud Music 09899 closed 2022 with robust revenue growth and significantly improved profitability on the back of subscriber addition and better cost control. While full-year revenue of CNY 9 billion is in line with what we expected, gross profit margin of 14.4% came in above our previous prediction of 12%, thanks to more rationalized music content cost. We are also impressed that Cloud Music managed to cut net losses by CNY 1.8 billion, a larger magnitude than our expectation, given increasing cost initiatives. Looking forward, we believe Cloud Music will retain high mindshare among the young generation of music listeners, and maintain our fair value estimate of HKD 130. Despite the recent run-up in valuation, we still view shares as undervalued, as the persisting subscriber growth and margin uplift have not been fully appreciated by the market.

The highlight of Cloud Music’s full-year result is the 30% year-on-year growth in online music subscription revenue, which is underpinned by continuing inflow of paying users. We think this is partially attributable to the return of previously inaccessible music labels in the second half of 2022. As some of the newly available songs are still offered to users for free, we expect more meaningful contribution to subscription revenue starting in the second quarter of 2023. We also like the building up of its music listening communities, which will likely enhance the stickiness of loyal users. With more songs and membership benefits behind the paywall, we foresee Cloud Music’s subscriber/user ratio rising to 24.5% in 2026 from 20% in 2022, in line with that of close peer Tencent Music.