Tencent Music: Singing To Its Strengths While Social Entertainment Hits A Sour Note

seekingalpha11-21 12:31

Tencent Music's online music services show strong growth, but social entertainment faces structural decline due to competition and regulatory factors.Valuation should focus on the online music segment...

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DCF analysis values TME at $9.50/share, a 15% downside.Online music revenue grew 20% y/y, driven by increased paying users and higher ARPU; social entertainment stagnates due to user churn and competition.Avoid TME stock due to diverging fundamentals and declining social entertainment segment—wait for stabilization in social entertainment metrics before considering investment.AsiaVision  Tencent Music's (NYSE:TME) consolidated financial result remains a mixed bag with online music services continuing to deliver one of the best growth profiles given China's consumption downgrade backdrop, underscoring the platform's stickiness and lower consumer sensitivity on discretionary spending, while the social entertainment service continues its structural decline due to a combination of competitive and regulatory factors. Given the structural divergence in both businesses, we believe the strength in online music will continue to be offset by the weakness in social entertainment. In the long run, TME should be valued on just the streaming music business alone, and this would imply a much lower valuation from the current level. The stock is currently trading at 14.6x 2025E consensus earnings, which is largely in line with its domestic peer NetEase Cloud (NTES) but is at a significant discount to that of its global peer Spotify (SPOT) which is trading close to 49x. Company Report, Astrada Advisors Our DCF analysis values TME at $9.50/share, implying a 15% downside from the current level as we assume online music to deliver 20% revenue CAGR in the next four years as social entertainment gradually loses its relevance in TME's P&L with a 36% annual decline. (See Valuation Section below) Ongoing structural divergence of the core businesses TME's two key businesses have been undergoing a period of fundamental divergence over the past years in which online music has consistently delivered solid operating and financial metrics while social entertainment that houses the K-Sing unit has been suffering from user churn and declining popularity due to increasing competition and lack of product innovation. Online music revenue delivered a solid 20% y/y growth, driven by a 15% increase in paying users on the back of a growing monthly active user base. Company Report, Astrada Advisors Company Report, Astrada Advisors The 4% increase in pricing brought ARPU to RMB 10.8 per paying user, and this underscores online music's stickiness among its users and that the price elasticity of streaming music is minimal despite China's soft consumption environment. We can attribute QQ Music's platform stickiness to TME's effort in strengthening its partnership with domestic and international records that drove content diversification and higher user engagement on its platform. The recent renewal of contracts with top Chinese labels like YH Entertainment Group and Image Music Group partially contributed to the user stickiness and users' willingness to subscribe to premium monthly membership that drove the higher ARPU. Company Report, Astrada Advisors On the other hand, social entertainment continues to experience ongoing user churn due to growing competition from alternative platforms such as short-form videos and social media platforms that also have streaming and gifting features for influencers. In addition, K-Sing app features have not undergone significant feature upgrades given its focus on karaoke and is difficult to justify its membership fee when there are alternative free apps available. Company Report, Astrada Advisors Paying users for the social entertainment business has largely been stagnant and is likely to remain so given the pullback on consumer spending on discretionary items in which virtual gifting for music entertainment is heavily discretionary. Company Report, Astrada Advisors The divergence in fundamentals is evident in the paying user growth in online music and social entertainment over the past four years. We note that while online music paying users have more than doubled, the paying users for social entertainment almost halved in the same period. Company Report, Astrada Advisors Heading forward, we do not expect this dynamic to change and in the long term, there is more risk to the social entertainment user base due to the growing competition from Douyin/TikTok and Kuaishou (Chinese language source). TME could be better off just focusing on online music streaming, which plays into its strength and relationship with Tencent. As for the social entertainment side, competing against the larger and more established platforms in a hypercompetitive market may not be the optimal decision in the long run given that the other platforms are willing to invest in a more attractive revenue split with the streamers. Valuation is largely based on the Online Music segment Given the competitive nature of social entertainment, we expect this segment to gradually wind down or lose its relevance, making Online Music the only significant business under TME. We are modelling a 4% paying user CAGR for online music and an 8% CAGR for ARPU, which translates to a 12% revenue CAGR for the online music segment. On the other hand, we expect paying users in social entertainment to decline at a 14% annualized rate as MAU declines at a 12% annualized rate. We note that our MAU decline assumption could be conservative given that our churn is only at a low double-digit, while MAU churn has been around a 30m run-rate over the past two years. Put it all together, our consolidated revenue is forecasted to grow at 6% CAGR in the next four years with 12% online music revenue growth CAGR offset by the 33% social entertainment decline. Company Report, Astrada AdvisorsCompany Report, Astrada Advisors Our DCF analysis places a heavier emphasis on the online music segment to derive an implied value of $9.50/share or a 15% downside from the current level.  All things considered, we would avoid TME given the diverging fundamentals in its businesses and that the declining social entertainment segment will likely continue to weigh on the overall growth trajectory. We would be more positive on the stock when we see signs of stabilization in operating metrics within the social entertainment segment. Until then, this stock is best avoided, given it is heavily traded by fast money and may not be suitable for long-only investors.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485448797"}