$TME-SW(01698.HK) first take: The third-quarter performance basically meets the adjusted low expectations. From the actual performance:

(1) The growth of subscription users is under pressure, with a net increase of 2 million quarter-on-quarter, significantly slowing compared to the previous two quarters.

(2) Social entertainment is slowly moving past the adjustment gloom, slightly better than market expectations. However, Tencent Music's core logic has long switched to music subscriptions, so the beat from social entertainment is unlikely to bring much positive feedback to the market. Therefore, the key lies in how the management guides for next year, especially after changes in the policy environment. If there is some unexpected growth in subscription users, it will quickly react positively to the stock price in the short term.

(3) Under revenue pressure, profit margins are improved through strict cost control, with the growth rate of core operating profit maintaining at 65%. It is worth mentioning that although the overall profitability level is inline, combined with the situation of social music revenue exceeding expectations with low gross margins, it implies that the profit margin level of online music should continue to improve quarter-on-quarter, although the increase is not large, but the direction still reflects the logic previously mentioned by Dolphin, that Tencent Music can utilize its bargaining power in the industry chain to steadily optimize upstream costs.

The user guidance from the last quarter collapsed the valuation, pulling Tencent Music down from the "altar" of Forward P/E above 20x, essentially due to the market's doubts about the management's growth strategy of "increasing ARPU" against the adverse environment. In the third quarter, we did not see much "unexpected" boost in ARPU. The company disclosed that as of the end of September, SVIP users reached 10 million, accounting for 8% of the total subscription number. The current penetration rate is not high, but how to continue the conversion and the pace of conversion will need to see what the management says, so it is recommended to pay attention to the conference call. $Tencent Music(TME.US)