Mizuho initiated coverage of Tencent Music Entertainment Group (NYSE:TME) with a Buy rating and set a price target for the stock at $10.00.
The Chinese music entertainment platform is 54% owned by Tencent and is the largest online music ecosystem in China with 567 million monthly active users. The company also has high monetization potential from growth in the paying ratio and ARPU, as more labels put tracks behind the paywall and competition rationalizes.
Analysts wrote in a note, “The audio entertainment industry (including online karaoke, audio livestreaming, advertising, IoT and more) is in the early stages of development, and we conservatively forecast a 5% CAGR, with TAM to expand from US$4.8bn to US$7.8bn in 10 years. TME is transforming from a premium music subscription services platform to an all-things-audio ecosystem, and investing in indie music and long-form audio such as audiobooks and podcasts. As the category leader in audio entertainment with ~35% of market share, TME is well positioned, in our view, to capitalize on this growth in the music and audio entertainment market.”
Only 17% of online music users today are paying members in China, vs 40%+ globally for Spotify (NYSE:SPOT). Mizuho expects that gap to gradually close, primarily driven by labels putting tracks behind the paywall and enhanced user experiences for paid members.
Mizuho also expects the monthly subscription fees to increase, as it is priced at 30% of that for video streaming in China vs average 90% in top global markets. Mizuho analysts expect music platforms in China to raise prices, similar to their video streaming counterparts.
Shares of TME are down 3.74% near end of day trading on Monday.