Half A Starbucks Cup Worth Of Music? Tencent's Untapped ARPU Potential Revealed

Mizuho analyst Wei Fang reiterated a Buy rating on the shares of Tencent Music Entertainment Group TME, raising the price target to $11 from $10.
The company reported first-quarter revenue growth of 5.4% year-over-year to $1.02 billion, beating the consensus of $985.62 million.
The analyst applauds the company's strong ARPU growth in music subscriptions, indicating improved consumer sentiment post-reopening.
Fang sees ARPU to be the most significant growth driver in the future, as Chinese music users, on average, are paying a monthly fee equivalent to only half a cup of Starbucks vs. ~3 cups in the U.S., as a reference.
As competition remains fierce, the analyst forecasts social entertainment revenue to continue declining for the rest of the year.
The social entertainment revenue should account for less than 50% starting 2Q23, the analyst notes.
Based on the solid performance in Q1, the analyst raised FY23 revenue growth rate estimate by 1 point to 5% Y/Y and FY24 by 1 point to 7%, respectively.
Going ahead, as music revenue growth momentum continues, the analyst expects margins to continue expanding until the revenue-sharing scheme with top labels kicks in.
Price Action: TME shares are trading higher by 8.9% to $8.35 on the last check Wednesday.

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