Raising Tencent Music FVE to USD 12.50 (HKD 49.10) on Higher Revenue and Margin Outlook

We are raising our fair value estimate of Tencent Music to USD 12.50 (HKD 49.10) from USD 9.00 (HKD 35.30) after reviewing the firm’s long-term revenue growth and margin prospects. We now expect the firm to generate higher music subscription revenue over the next five years thanks to effective paywall and subscription pricing strategies. Top-line accretion will also translate to better profitability, as the majority of Tencent Music’s operating costs are fixed (in the form of music licensing fees). Our updated fair value estimate implies a 27.4 times price to our 2023 forecast earnings. While Tencent Music’s stock price has more than doubled from the trough in March 2022, the shares are still trading at an undemanding forward price/earnings ratio of 21.4 times as of market close on Jan. 19, 2023. We believe the market is underestimating the firm’s long-term subscriber growth and margin expansion potential.