Tencent Music Leisure is convincing extra individuals in China to pay for music. Within the July-to-September interval, the corporate’s on-line music subscribers topped 100 million on a quarterly foundation for the primary time since TME listed within the U.S. in late 2018. That is nonetheless only a fraction of the 594 million month-to-month lively customers that TME claims. Due to the scale of China’s market, it is greater than Spotify ‘s declare of 574 million month-to-month lively customers —throughout 184 nations and territories. TME’s “music worth [is] nonetheless underappreciated,” Morgan Stanley analysts led by Alex Poon wrote in a late November report. The analysts’ conversations with TME administration revealed expectations that music subscribers will develop by greater than 3 million 1 / 4, to an estimated 150 million within the medium time period. “We see room for [TME] music income to double and revenue to triple within the subsequent three years,” the Morgan Stanley analysts wrote, noting “restricted dangers from macro and competitors.” They raised their worth goal on TME 10% to $11, implying greater than 30% upside from Friday’s shut in Tencent American Depositary Receipts. TME’s ADRs are up solely 2% for the yr up to now, whereas rival Spotify shares have surged nearly 130%. Now Spotify has a market capitalization about 150% greater than Tencent’s. TME SPOT YTD mountain Tencent vs Spotify in 2023. Spotify is not obtainable in China, a market infamous for content material piracy. However prior to now few years, corporations have grow to be extra vigilant in defending mental property, whereas shoppers are getting within the behavior of paying. “The music business has been the quickest rising leisure section in China with 140% income progress between 2019 and 2023,” in accordance with Morgan Stanley estimates. That is far quicker than some other leisure section the analysts tracked — together with video video games, which noticed income develop of 30% since 2019. A stay live performance craze swept China this yr, making tickets powerful to get. Within the first quarter alone, TME mentioned it hosted 29 on-line and offline live shows. For listeners at dwelling or on the go, TME’s apps embody QQ Music and Kugou Music. JPMorgan is so enthusiastic about Tencent it lately upgraded its advice to chubby from impartial, with a brand new worth goal of $10 a share. TME is “re-emerging as a double-digit earnings compounder,” JPMorgan web analyst Alex Yao wrote in a mid-November report. Gross revenue margin of the net music section rose to the mid-30% vary within the third quarter, versus Spotify’s 25% over the previous 12 months, in accordance with JPMorgan estimates. TME can be shifting away from its enterprise in social leisure, similar to livestreaming and karaoke. “On-line music has overtaken social leisure because the revenue driver in 3Q23, resulting in a stronger-than-expected revenue progress restoration in 2024,” JPMorgan’s Yao wrote. Within the third quarter, TME’s income from social leisure and different companies fell by 49% to the equal of $276 million from the identical interval a yr in the past. Income from music subscriptions is estimated to rise 38% in 2023 versus 2022, Morgan Stanley estimates. TME earlier this yr additionally launched a program to assist new artists develop their audiences and increase income. Tencent mentioned in a primary quarter launch it had helped 260 musicians attain their first million streams. It didn’t present an replace within the third quarter. — CNBC’s Michael Bloom contributed to this report.
