Tencent Music Earnings: A Melody of Margin Expansion and Shareholder Returns

We are raising Tencent Music Entertainment’s fair value estimate by 32% to USD 17.20 (HKD 67 for H-shares) following its strong first-quarter earnings. A gross margin of 40.9% was comfortably ahead of our and PitchBook's consensus expectations. Management expects a continued expansion in margins as its high-margin original content continues to gain traction. Tencent Music’s share price is reacting positively to the results and the first-ever dividend of USD 0.14 per share. Coupled with the remaining share buyback authorization of USD 265 million, the company is on track to return at least USD 475 million to shareholders this year. We remain buyers of Tencent Music despite the run-up in share price, as we believe the market has yet to fully appreciate the potential for significant growth in its subscriber base and the opportunities for margin expansion through operating leverage.