Highlights

• TME delivered solid 2Q26 results that were slightly above our expectation. Revenue rose 5.8% yoy to Rmb8.9b, while music-related services revenue increased 11.0% yoy to Rmb7.6b. Membership revenue grew 8.1% yoy to Rmb4.79b, supported by continued SVIP expansion and the consolidation of Ximalaya. Non-GAAP net profit rose 4.4% yoy to Rmb2.7b, 7% ahead of our and consensus expectations, with net margin remaining solid at 31%.  
   
• Maintain BUY with a higher target price of HK$53.00 (US$14.00). 

Analysis

• Resilient music-related services growth. Tencent Music Entertainment Group’s (TME) music related services revenue rose 11.0% yoy to Rmb7.6b in
  2Q26 (vs 1Q26: 12.2%) to Rmb7.1b, supported by solid growth in advertising revenues. Subscription revenue grew 8.1% yoy (vs 1Q26: 6.7%) to Rmb4.79b.
  Revenues from marketing and consumption grew 16.2% yoy (vs 1Q26: 28.0%) to Rmb2.81b. Revenues from offline performances related services achieved
  robust yoy growth.   
   
• Social entertainment services and other revenue declined 16% yoy (vs 1Q26: -11%) to Rmb1.33b, due to the adjustments to certain live-streaming
  interactive functions.

• Margin improvement. Gross profit grew 5.3% yoy to Rmb3.9b, with gross margin shrinking 0.2ppt yoy to 44.2% in 2Q26, with the consolidation of
  Ximalaya having a positive impact on its gross margin this quarter; this was however offset by the decrease in social entertainment revenue. Non-GAAP
  operating profit rose 4% yoy to Rmb3.3b, with operating margin remaining flattish at 37%.   
   
• Ximalaya adds scale and broadens TME's audio ecosystem. Ximalaya contributed Rmb407m of revenue following its consolidation from 18 May 26.
  Management highlighted its extensive audio content library and expects backend integration to support operational efficiency over time, while also
  strengthening TME's SVIP offering. 
   
• AI emerging as an incremental engagement and monetisation driver. TME is increasingly integrating AI agents across its music ecosystem to
  enhance personalised discovery, playlist generation and user interaction. Management noted that early adoption has improved retention, particularly
  among high-value users, while also supporting recommendation engagement and operating efficiency. Generative-AI music features have already delivered positive commercial returns, and management sees further opportunities for AI to support subscription growth and become an incremental revenue contributor over time. 
   
• Margin outlook remains resilient despite higher Ximalaya investment. Management expects 2H26 gross margin to increase slightly yoy, supported
  by a favourable contribution from Ximalaya. From July, TME resumed ROI disciplined marketing investment in Ximalaya, which should drive a slight
  increase in 2026 S&M and operating expenses. As a result, 2026 net margin is expected to decline slightly, while adjusted EBITDA should still edge up
  slightly, supported by continued gross profit growth and cost discipline.  
   
• Strong cash position supports continued shareholder returns. TME ended 2Q26 with Rmb44.2b in cash, cash equivalents, term deposits and
  short-term investments, providing ample liquidity to sustain shareholder returns. Under its existing US$1b share repurchase programme, the company
  completed US$400m of share buybacks in 2Q26 alone and remains committed to completing the remaining programme. Management also indicated that it is preparing for another round of share repurchases, highlighting continued confidence in the company’s outlook and potential for further capital returns.