Catalyst Evident in Q2 as Undervalued Tencent Music's Earnings Beat Expectations

Narrow-moat Tencent Music posted second-quarter 2022 results that were ahead of our and Pitchbook's consensus expectations. Strong cost control measures led the firm’s gross margin to expand by almost 200 basis points compared with the previous quarter, reaching 30% in the second quarter of 2022. In addition, music streaming subscription revenue was also better than expected thanks to strong subscription pricing and growth in paying users. We fine-tuned our near-term forecasts, but maintain our fair value estimate at USD 8 per share. With its shares closing at USD 4.70 as of market close on Aug. 14, we view the firm as significantly undervalued. We think investors are underestimating its long-term subscriber base and the potential for more operating leverage as it grows the business.