Tencent Music Delivers Double-Digit Subscriber Growth Despite Price Hike

Narrow-moat Tencent Music Entertainment TME reported in-line results in the fourth quarter of 2022, but management provided upbeat guidance for 2023. Better subscription pricing and continued cost-cutting measures led the firm’s gross margin to expand by 420 basis points year over year and 40 basis points sequentially. We fine-tuned our near-term forecasts but maintain our fair value estimate at USD 12.50/HKD 49.10 per share. With its shares ending at USD 7.14 as of the market close on March 21, we view the firm as significantly undervalued. We think investors are underestimating its long-term subscriber base and margin expansion opportunities as the firm grows the top line.

During the fourth quarter, Tencent Music’s year-over-year revenue decline narrowed to just 2%, compared with the 6% decline recorded in the third quarter. The decline in sales stemmed from reduced users for its social entertainment products (that is, livestreaming)—a segment that saw an 18% decline in revenue during the quarter. But this weakness was mostly offset by music subscription, advertising, and digital album sales growth.

For 2023, management guided revenue growth of a mid-single-digit percentage and adjusted net income growth in the low teens. These numbers are slightly ahead of Refinitiv’s consensus estimates before this earnings release. Our forecasts for 2023 are in line with management guidance.