SVIP Expansion And New Features Will Attract Premium Users And Boost Engagement

Key Takeaways

• Expansion of SVIP memberships and exclusive content offerings could boost ARPPU and subscription revenue growth.
  
• Strategic partnerships and product innovations enhance engagement, expand revenue streams, and support sustainable earnings growth.
  
• Intense competition, regulatory scrutiny, currency fluctuations, and reliance on specific revenue streams pose risks to Tencent Music's growth and profitability.

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 ongoing expansion of SVIP memberships and exclusive content offerings could significantly increase its average revenue per paying user (ARPPU) and drive subscription revenue growth.
  
• Strategic partnerships with domestic and international record labels, such as the multiyear partnership with G-Dragon, are likely to enhance music content and diversify revenue streams, potentially boosting revenue from digital album sales and online music subscriptions.
  
• Innovations in product features, like the real-time interactive comments and improvements in AI-supported content production, could enhance user engagement and retention, supporting long-term sustainable revenue growth.
  
• Collaborations within Tencent's ecosystem, such as cross-promotions with Tencent Games, can leverage synergies to increase user engagement across different platforms. This is expected to positively impact advertising revenue and user subscription growth.
  
• Investments in high-quality content production, original content, and ESG initiatives may attract more premium users and enhance brand value, leading to improved net margins and overall 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 21.5% today to 27.4% in 3 years time.
• Analysts expect earnings to reach CN¥10.1 billion (and earnings per share of CN¥6.47) by about December 2027, up from CN¥6.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 2.9x on those 2027 earnings, down from 22.6x today. This future PE is lower than the current PE for the US Entertainment industry at 16.1x.
• Analysts expect the number of shares outstanding to decline by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.36%, as per the Simply Wall St company report.

Tencent Music Entertainment Group Future Earnings Per Share Growth

Risks

• Intense competition in the music streaming market could hinder Tencent Music's ability to continue expanding its subscriber base and ARPPU, thus affecting revenue growth projections.
  
• The company's reliance on premium and SVIP memberships for ARPPU growth poses risks if these programs fail to expand significantly, potentially impacting future earnings.
  
• Regulatory changes and increased scrutiny in China's tech sector could impose higher operational costs or restrictions, negatively impacting net margins.
  
• The decline in social entertainment revenues, particularly from live streaming, highlights potential vulnerabilities in diversified income streams that could affect overall profitability.
  
• Currency fluctuations between RMB and USD have already led to unrealized foreign exchange losses, which may continue to adversely impact net profit reported in financials.

Valuation

• The analysts have a consensus price target of CN¥14.54 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 CN¥17.13, and the most bearish reporting a price target of just CN¥11.97.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥36.9 billion, earnings will come to CN¥10.1 billion, and it would be trading on a PE ratio of 2.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of CN¥11.78, the analyst's price target of CN¥14.54 is 19.0% higher.
• 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.