On Wednesday, Citi upgraded shares of Tencent Music Entertainment Group stock (NYSE:TME) to Buy from Neutral, with a new price target set at $13, a significant increase from the previous $9. The upgrade follows Tencent Music's fourth quarter financial results for 2023, which exceeded expectations.
Tencent Music reported a year-over-year decline in total revenue of 7.2% to RMB 6.89 billion, while adjusted net profit rose by 12.5% to RMB 1.68 billion. These figures surpassed both Citi's and the consensus estimates by 2.4%/2.9% and 8.2%/7.9% respectively.
The better-than-anticipated results were primarily driven by strong performance in online music revenues, which benefited from a slight increase in net additions and average revenue per paying user (ARPPU), improved advertising revenues, higher gross profit margins, and lower general and administrative expenses than expected.
Looking ahead to the first quarter of 2024 and the full fiscal year, Tencent Music's management has expressed optimism about achieving steady growth in music net additions and ARPPU. They also anticipate a positive outlook for advertising revenues and further expansion of gross margins, while effects from social entertainment are expected to stabilize or normalize.
Citi highlighted Tencent Music's resilient subscription music business and its expanding capabilities within the music value chain. The firm also noted the company's efforts to increase long-form audio content and diversify usage across multiple channels and devices, which are seen as supportive of a sustained growth outlook.
Following the revision of estimates, Citi's new price target of $13 is based on a 17 times multiple, applying a 1.0x price-to-earnings growth (PEG) ratio, and rolling forward to the 2025 estimated earnings per share of $0.76. With an expected total return of over 17%, the firm has raised its stance on Tencent Music's stock, reflecting a positive view on its future performance.
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