Tencent Music Entertainment Group (TME) is an online music entertainment platform that offers online karaoke, music streaming and live streaming services in China. The company also provides an interactive online platform for performers and users to showcase their talent.

There has been growing adoption of digital music services and a notable shift from traditional broadcast listenership to online content consumption amid the coronavirus pandemic. This is largely because most outdoor leisure activities are on pause, with most music concerts cancelled until further notice.  With this, the music industry has been pushed to adapt to virtual concerts.

Against this backdrop, TME’s businesses, which are mainly online, have fared very well, registering impressive growth in the third quarter. Its online music paying users increased 46%, hitting 51.7 million, during the quarter. It also achieved 55% year-over-year growth in online music subscription revenue.

TME’ robust business strategy and expanded music library have helped the stock gain 61.1% over the past year. This performance, combined with several other factors, has helped TME earn a “Strong Buy” rating in our proprietary rating system.

Here is how our proprietary POWR Ratings system evaluates TME:

Trade Grade: A

TME is currently trading above its 50-day and 200-day moving averages of $16.11 and $14.09, respectively. This indicates that the stock is in an uptrend. Also, the stock has gained 25.5%, over the past three months, reflecting solid short-term bullishness.

TME’s revenue has increased 16.4% year-over-year to $1.12 billion in the third quarter ended September30, 020. This impressive revenue performance was primarily driven by strong growth in music subscription and advertising revenues. Gross profit rose 11.2% from the year-ago value to $362 million, while net profit increased 10.3% year-over-year to $167 million. Its EPS rose 9.7% from the prior-year quarter to $0.34 over this period.

The company recently announced that it has entered into a digital licensing agreement with Peermusic to promote and distribute Peermusic’s catalogue in China. TME also renewed its multi-year licensing and agreement with Merlin Network. We think these key collaborations will enable TME to leverage its unique market experience across China.

Buy & Hold Grade: A

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, TME is well positioned. The stock is currently trading just 4.2% below its 52-week high of $19.63, which it hit on December 9.

The company’s net revenue has grown at a CAGR of 48.3% over the past three years, while its net income increased at a CAGR of 64.2% over this period. Also, its EPS has increased at a CAGR of 52.1% over the past three years. This can be attributed to the company’s   developments, steady growth in online membership, and rapid expansion.

Peer Grade: A

Live Nation Entertainment, Inc. (LYV) is one of TME’s peers. While TME gained 61.1% over the past year, LYV returned 0.9%.

Industry Rank: B

The music streaming industry has been growing at a steady rate as the imposition of lockdowns have increased the demand for online streaming services. These services are becoming the popular choice among consumers worldwide. Covid-19 era consumer behavior shows that there is now a higher acceptance of paid music streaming services, and that more people are using them to listen and to engage with artists in various ways. Online music streaming applications and service providers’ adoption of premium business models are further encouraging users to opt for premium services to access unlimited and uninterrupted content, thereby driving the demand for the industry.

Overall POWR Rating: A (Strong Buy)

TME is rated “Strong Buy” due to its impressive financials, short and long-term bullishness, solid price momentum, and underlying industry strength, as determined by the four components of our overall POWR Rating.

Bottom Line

TME is well positioned to appreciate in the coming months despite gaining 61.1% over the past year. The company has consistently reported an increase in its online music paying users year-over-year and demand for its subscriptions is increasing each quarter.

While the COVID-19 outbreak proved to be negative for most industries, it has improved the potential of the music streaming segment because consumers find themselves with the extra time required to explore these platforms.

The consensus EPS estimate of $0.13 for the quarter ending December 31, 2020 represents an 18.2% improvement year-over-year. The consensus revenue estimate of $1.29 billion for the current quarter represents a 23.3% increase from the same period last year.

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TME shares were trading at $18.86 per share on Tuesday afternoon, up $0.06 (+0.32%). Year-to-date, TME has gained 60.65%, versus a 15.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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