Company Reports

Narrow-moat Tencent Music’s fourth-quarter 2023 earnings were broadly in line with our expectations. We roll forward our model and modestly lift our fair value estimate to USD 13 per ADR (HKD 51 per share) from USD 12.50 (HKD 49.10). We also lower our Morningstar Uncertainty Rating to High from Very High, reflecting increased clarity in the competitive environment and the company's ongoing improvements in profitability.. We view the music streaming company’s shares as undervalued, trading at a 13% discount to our fair value estimate. We believe the market continues to underestimate the size of Tencent’s Music long-term subscriber base and the opportunity to lift subscription prices further.

With around 600 million monthly active users Tencent Music Entertainment is the largest music streaming platform in China. The firm monetizes its services mainly through monthly subscriptions, livestreaming, and advertising.

Narrow-moat Tencent Music’s third-quarter earnings mildly exceed our expectations, while management’s 2024 guidance is largely in line with our estimates. After fine-tuning our near-term forecasts, we keep our $12.50 fair value estimate unchanged. Based on its last closing price of $7.66 as of Nov. 14, we view the firm as significantly undervalued. We believe that investors are currently underestimating the potentials of long-term subscriber growth and margin expansion as the firm continues to grow its revenue.

With around 600 million monthly active users Tencent Music Entertainment is the largest music streaming platform in China. The firm monetizes its services mainly through monthly subscriptions, livestreaming, and advertising.

Narrow-moat Tencent Music's second-quarter earnings were in line with our and Refinitiv’s consensus expectations. Management lowered revenue guidance on continued livestreaming weakness but remains optimistic about margin expansion for the rest of this year. Overall, we are maintaining our $12.50 fair value estimate, and we continue to believe shares are undervalued. We think investors are underestimating the size of its long-term subscriber base and further margin expansion opportunities as the firm grows the top line.

Narrow-moat Tencent Music's first-quarter results slightly exceeded Refinitiv consensus expectations, and management is optimistic about margin expansion for the rest of 2023. Overall, we maintain our USD 12.50 fair value estimate, and we continue to view shares as undervalued. We think investors underestimate the size of Tencent Music's long-term subscriber base and overlook margin expansion opportunities as revenue grows.

Narrow-moat Tencent Music Entertainment reported in-line results in the fourth quarter of 2022, but management provided upbeat guidance for 2023. Better subscription pricing and continued cost-cutting measures led the firm’s gross margin to expand by 420 basis points year over year and by 40 basis points sequentially. We fine-tuned our near-term forecasts, but maintained our fair value estimate at USD 12.50 (HKD 49.10) per share. With its shares ending at USD 7.14 as of the market close on March 21, we view the firm as significantly undervalued. We think investors are underestimating its long-term subscriber base and margin expansion opportunities as the firm grows the top line.

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.

With around 600 million monthly active users Tencent Music Entertainment is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 50% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making.

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.

With around 600 million monthly active users Tencent Music Entertainment is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 50% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making.

With around 600 million monthly active users Tencent Music Entertainment is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 50% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making.

We initiate coverage of Tencent Music’s Hong Kong shares following its secondary listing on Sept. 21. No new shares were issued by Tencent Music as the listing was completed by way of introduction. We maintain our valuation for the firm, which translates into a fair value estimate of HKD 31.40 for the Hong Kong listing and $8.00 for the U.S. listing. The company's ADR will remain its primary listing and continue to trade on the New York Stock Exchange. We think the Hong Kong secondary listing will help in case of a forced delisting of Chinese ADRs, though the risk has significantly diminished following the audit agreement between the Public Company Accounting Oversight Board and Chinese authorities.

With around 600 million monthly active users Tencent Music Entertainment is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 50% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making.

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.

On June 22, China’s National Radio and Television Administration and Ministry of Culture and Tourism released new regulations governing livestreaming, with guidelines that amount to a code of conduct for online livestreamers covering matters such as the qualifications required to livestream certain professional topics, for example medical and livestreamers’ tax liabilities. We believe there will be more specific responsibilities for internet audiovisual platforms, which could increase compliance costs. However, the regulations do not contain specific penalties if platforms are found to be negligent by the government, and we think performers face much greater risk. Article 15 and 16 of the regulations indicate the government will strengthen supervision and inspection as well as enforcement of rules for internet audiovisual platforms, agencies, and livestreaming hosts. If content and livestreamers violate these rules, platforms will need to deal with violations properly and quickly. Article 17 stipulates that internet performance, platforms, and agencies need to strictly adhere to statutory duties and obligations, enhance training and education, daily management, and guidance of standards for livestreamers. For example, internet hosts who commit serious or repetitive misconduct should be stopped and not allowed to conduct internet performance on another platform or use another account. We think that further regulations will be created if misconduct continues. At this stage, we expect the regulations will have an immaterial impact on the Chinese internet companies under our coverage. We maintain our fair value estimate, earnings estimates, moat and uncertainty ratings for Tencent Music, NetEase Cloud Music, Bilibili, Alibaba Health, JD Health, Alibaba, JD.com, and Pinduoduo.

Narrow-moat Tencent Music reported weak numbers for the first quarter of 2022, and management blamed the year-over-year revenue decline on macroeconomic headwinds in China. Even if macroeconomic activities were to improve in the second half, recent regulatory crackdowns on live streaming would still weigh on the group's social entertainment services segment (generating 60% of revenue). We lowered our fair value estimate to USD 8.00 from USD 8.60 to account for a permanent loss in live streaming earnings. While the market has already priced in further downsides to live streaming revenue, it has not priced in potential upsides to subscription revenue growth. We see company shares as undervalued, trading at more than a 50% discount to our fair value estimate.

With over 600 million monthly active users, or MAU, Tencent Music Entertainment, or TME, is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 60% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making.

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.

With over 600 million monthly active users, or MAU, Tencent Music Entertainment, or TME, is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 60% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making.