AI Integration And SVIP Expansion Will Drive User Engagement And Platform Efficiency

Key Takeaways

• Dual-engine strategy focusing on content and platform innovation aims to boost subscriber conversions and lifetime value, potentially enhancing revenue growth.
  
• Strategic partnerships and use of AI technology are set to increase user engagement, boosting revenue from subscriptions, advertising, and improved net margins.
  
• Reliance on strategic contracts and increased competition, alongside risky investments and exchange rate fluctuations, pose potential challenges to revenue and margins.

Catalysts

Operates online music entertainment platforms to provide music streaming, online karaoke, and live streaming services in the People’s Republic of China.

• Tencent Music Entertainment Group's dual-engine strategy, combining rich content and platform innovation, is expected to drive subscriber conversion efficiencies and increase lifetime value, potentially impacting future revenue growth.
  
• Renewed strategic contracts with major international labels and partnerships with Chinese artists expand Tencent Music's content library, likely enhancing user engagement and boosting revenue from subscriptions and advertising.
  
• The introduction and expansion of SVIP memberships, which offer enhanced user privileges, are anticipated to drive ARPPU growth and improve net margins, given the higher spending by these premium users.
  
• The use of AI technology for personalized user experiences and novel features aims to increase user engagement and streamline operational efficiencies, which could improve both revenue and net margins.
  
• Announced a USD 1 billion share repurchase program and ongoing dividend strategy, which are expected to bolster earnings per share via reduced share count and distribute excess cash to shareholders, reflecting confidence in future earnings growth.

Tencent Music Entertainment Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tencent Music Entertainment Group's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.4% today to 28.4% in 3 years time.
• Analysts expect earnings to reach CN¥10.7 billion (and earnings per share of CN¥6.94) by about March 2028, up from CN¥6.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥9.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.6x on those 2028 earnings, down from 26.0x today. This future PE is lower than the current PE for the US Entertainment industry at 26.0x.
• Analysts expect the number of shares outstanding to decline by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.03%, as per the Simply Wall St company report.

Tencent Music Entertainment Group Future Earnings Per Share Growth

Risks

• The reliance on continued renewal of strategic contracts with international labels poses a risk. If TME is unable to renew these contracts or if the terms become less favorable, it could negatively impact the breadth and quality of available music, affecting revenue from subscriptions.
  
• Increasing competition in the music streaming market, including potential new entrants or existing players enhancing their offerings, could pressure TME's subscriber growth and ARPPU, impacting overall revenue.
  
• Heavy investment in AI and content production could strain the company’s resources. If these investments do not result in anticipated efficiencies or revenue growth, it could negatively affect net margins.
  
• There is a risk that diversification efforts, such as expansion into new business opportunities like IoT and international markets, may not yield the expected returns, potentially impacting revenue and operating margins.
  
• Fluctuations in exchange rates between RMB and USD can affect financial performance and reported net profit, impacting earnings consistency and potentially affecting foreign investors' perceptions.

Valuation

• The analysts have a consensus price target of $14.969 for Tencent Music Entertainment Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.02, and the most bearish reporting a price target of just $13.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥37.6 billion, earnings will come to CN¥10.7 billion, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $15.09, the analyst price target of $14.97 is 0.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.