Strong Q3 2022 for Tencent Music as Top and Bottom Line Beat; Raising FVE to USD 9.00 (HKD 35.30)

Narrow-moat Tencent Music’s earnings for third-quarter 2022 came in above both our and PitchBook's consensus expectations. Revenue was 9% higher than our estimate thanks to music streaming subscriber additions and stronger-than-expected growth in nonsubscription revenue (mainly ads and digital album sales). On top of strong revenue performance, we are also impressed by the 36% year-on-year growth in adjusted net profit following reductions in content and marketing expenses. We expect high profitability to continue into 2023 and beyond. As such, we have raised our fair value estimate to USD 9.00 (HKD 35.30) from USD 8.00 (HKD 31.40) based on rosier assumptions of nonsubscription revenue growth and profit margins, which are not fully priced in by the markets. Despite a 30% price surge during U.S. trading hours, we think Tencent Music’s shares are still very cheap, with more than 50% upside compared with our fair value estimate as at close of trading on Nov. 15.