Citi’s Bullish Upgrade: Tencent Music’s Growth Potential Shines

Citi has upgraded Tencent Music Entertainment Group stock (NYSE: TME) from Neutral to Buy, citing strong fourth-quarter performance and promising growth prospects. The new price target of $13 represents a notable increase from the previous $9, reflecting confidence in the company’s trajectory.

Tencent Music’s fourth-quarter financial results for 2023 surpassed expectations, with a 7.2% year-over-year decline in total revenue to RMB 6.89 billion, offset by a 12.5% rise in adjusted net profit to RMB 1.68 billion. These figures exceeded both Citi’s and consensus estimates, signaling resilience and efficiency in navigating market challenges.

The standout performance was driven by robust online music revenues, fueled by increased net additions and average revenue per paying user (ARPPU). Additionally, improved advertising revenues, higher gross profit margins, and lower-than-expected general and administrative expenses contributed to the stellar results.

Looking forward, Tencent Music’s management is optimistic about steady growth in music net additions and ARPPU for the first quarter of 2024 and the full fiscal year. Positive projections for advertising revenues and further margin expansion, coupled with stabilization in social entertainment effects, reinforce confidence in sustained growth.

Citi underscores Tencent Music’s resilient subscription music business and its evolving capabilities across the music value chain. Efforts to enhance long-form audio content and broaden usage across various platforms and devices are poised to fuel continued expansion.

With a revised price target of $13, based on a 17 times multiple and a 1.0x price-to-earnings growth (PEG) ratio, Citi anticipates a total return of over 17%. This bullish outlook reflects a positive stance on Tencent Music’s future performance, presenting an opportunity for investors seeking growth potential.