3Q26 Preview: organic subs growth under pressure, though non-subs remains healthy; Shareholder return protects downside; Buy

Into TME's upcoming 3Q26 print in mid-Nov, we believe key investor debates center around competition/AI music impact, Ximalaya's synergy post consolidation and any growth inflection signs after the market factors in the significant organic subs slowdown into 2H26. We see near-term organic subscription growth and margin pressure from competition and TME's active promotion on membership plans impacting ARPU; however recent datasets started to show Soda Music DAU growth gradually flattening out and a potentially more stabilized competition landscape. That said, we still expect healthy non-subs growth fueled by strong offline events offsetting advertising slowdown. We see limited Ximalaya profit contribution for rest of year but margin expansion potential over the longer term as cost synergy from the Ximalaya acquisition realizes. Meanwhile, we expect continued strong FCF generation from 2027E onwards post one-off cash outflow related to Ximalaya acquisition in 2026, and view its sufficien