Initiating on Tencent Music Entertainment, USD 8.60 FVE; Cloud Music, HKD 130 FVE; TME Our Top Pick

We initiate coverage of the Chinese music streaming sector with a favorable long-term view. We assign Tencent Music Entertainment, or TME, a narrow moat rating and a fair value estimate of USD 8.60; and assign Cloud Music a no-moat rating and fair value estimate of HKD 130. Both firms look undervalued to us, and of the two, we prefer TME for its strong network effect and proven track record of profitability. We think the share prices of TME and Cloud Music are overshadowed by the recent selloff of Chinese internet firms listed overseas, but the outlook on the fundamentals of both firms is intact. Also, we believe the near-term decline in TME's live streaming revenue and Cloud Music's sharp downturn for average spending per user have been priced in, but the upside of music streaming revenue is not fully reflected in current prices. In our view, the current prices of TME and Cloud present good opportunities to tap into the long-term growth in music streaming in China.