On Wednesday, Morgan Stanley demonstrated confidence in Tencent Music Entertainment Group (NYSE:TME) by increasing its shares price target to $13.50, up from the previous $11.00, while maintaining an Overweight rating on the stock. This adjustment reflects the firm's positive outlook on the company's performance and growth strategy.
The firm's analysis indicates that Tencent Music is on track to meet its medium-term goals of growing both its subscriber base and average revenue per paying user (ARPPU) by 50% over the next three to five years, starting from 2023. The first quarter of 2024 showed a promising trend with music subscription net additions accelerating and matching the high run-rate from the first quarter of 2023, which saw 5.9 million new users. This growth is partly attributed to successful Chinese New Year promotions.
Revenue from music is projected to grow by over 40% year-over-year in the first quarter of 2024. Morgan Stanley has revised its net addition outlook for 2024 to 17 million, aligning with the 2023 level and suggesting a 17% growth in the total paying user base. The ARPPU increased by 16% year-over-year in 2023, reaching a record high of RMB 10.7 per month in the fourth quarter while maintaining a strong user retention rate.
The firm sees significant growth potential for Tencent Music, citing several factors. The blended ARPPU is still lower than the auto-renewal price of RMB 15-18 per month, primarily due to first-month promotional discounts. Additionally, the potential for upselling higher-priced membership plans such as Super VIP (RMB 40), in-car (RMB 25), and TV (RMB 18) memberships has not yet been fully realized.
Moreover, the ARPPU for Tencent Music is currently below that of many other entertainment formats in China. Lastly, the paying ratio stood at 18.5% in the fourth quarter of 2023, which is lower than the approximately 25% seen in the long-video segment, indicating room for growth in this industry duopoly.
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