Tencent Music's Average Revenue Per User Focus Signals Potential Profit Growth, Says Analyst

BofA Securities analyst Lei Zhang reiterated a Buy rating on Tencent Music Entertainment Group – ADR TME with a price target of $15, down from $18.

Tencent Music reported a fiscal second-quarter 2024 revenue of $985.00 million (7.16 billion Chinese yuan), missing the analyst estimate of $996.68 million (7.12 billion Chinese yuan). The EPS of 16 cents (1.19 Chinese yuan) aligned with the consensus estimate. 

Tencent Music delivered a broadly inline second-quarter result, Zhang noted. At the same time, the company indicates it is time to focus more on ARPU (average revenue per user) growth from the second half, given the company’s belief that quality growth is more sustainable and that it can offer premium services to engaged users.

Zhang also highlighted that retaining long-tail users with a pure low-price strategy might be better than expected. The analyst flagged better first-half subscriber net-add growth, offering more room for it to optimize pricing strategy and user segmentation since the second half.

Zhang also added there should be no change to the long-term paying user target of 150 million, and better ARPU growth is likely to drive higher profitability growth amid operating leverage.  

Tencent Music indicates the Super VIP upgrade will be the key ARPU driver, ongoing with some good initial feedback.

Zhang said expanding service offerings and user penetration takes some time. The price target cut reflects a lowered average fiscal 2025 P/E of 20x (from 23x) of major peers amid a weak market and lowered fiscal 2025-2026 earnings by 3%- 5% due to the uncertainties associated with the new ARPU growth strategy.

Zhang still liked Tencent Music, with on-track profitability and solid music revenue growth (more from ARPU).

The price target is based on 2025 EPS of 75 cents and 2025 adjusted P/E 20x, which aligns with the average P/E of major digital domestic and global digital entertainment peers with subscription models.

Zhang projected fiscal 2024 revenue of $3,975,512,970 (28.38 billion Chinese yuan) and EPS of 59 cents (4.18 Chinese yuan).

TME Price Action: Tencent Music stock is trading higher by 0.31% at $11.16 at the last check Wednesday.

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