Spencer Pratt
elevator pitch
evaluate Tencent Music Entertainment Group (New York Stock Exchange: TME) (1698:HK) as a hold on shares. In his last January 31, 2023 article, he touched on TME’s efforts to optimize its topline mix and improve profitability.
In this latest The latest information explains that TME’s share price outperformance after its Q1 2023 earnings results was unsustainable due to its profitability outlook and unattractive valuation. For now, I’m going to sit on the sidelines on TME until TME shares suffer a significant writedown or a new catalyst emerges. Therefore, the hold rating for Tencent Music Entertainment is justified.
Post-earnings share price rise does not last
On May 16, 2023, Tencent Music Entertainment reported better-than-expected first quarter 2023 financial results in its financial results press release, and gave a positive outlook during its first quarter financial results briefing.
TME’s revenue grew +5.4% year-on-year from RMB 6.644 billion Sales in Q1 2023 reached RMB 7.04 billion in Q1 2023. This was the first quarter of positive year-on-year revenue growth for Tencent Music Entertainment after five consecutive quarters of declines from Q4 2021 to Q4 2022. Tencent Music Entertainment’s actual Q1 2023 topline exceeded sell-side analysts’ consensus revenue forecast of RMB 6.905 billion +1.4% (Source: S&P Capital IQ). His total net profit attributable to shareholders of TME in the first quarter of 2023 was up +88.5% year-on-year to his RMB 1,148 million, outperforming earnings by +17.1%. S&P Capital IQ data.
In terms of its financial outlook, TME said in its Q1 2023 earnings call that it expects 2023 to be a “year of positive growth in both revenue and net profit.”
Tencent Music Entertainment’s share price rose +8.3% from $7.67 on May 16 to $7.67 on May 17, on the back of better-than-expected financial results in the first quarter and a promising full-year outlook. The trading day closed at $8.31. A May 17, 2023 looking for alpha news The article also cites several Wall Street analyst upgrades as a key factor supporting the May 17 surge in TME stock.
But the good times for Tencent Music Entertainment’s shareholders didn’t last long. After that, TME stock price fell -3.7%, -2.4%, -2.2%, -3.5% on May 18, 19, 22 and 23, respectively. Tencent Music Entertainment’s share price is trading at $7.78 as of June 9, 2023, slightly above TME’s May 16 share price of $7.67.
In my view, looking beyond the headline earnings beat, as detailed in the next section, the fall in TME’s share price over the period May 18, 2023 to May 23, 2023 is I think there is a good reason.
TME’s further earnings improvement may be limited
Tencent Music Entertainment’s current sell-side analyst consensus for normalized net profit margin estimates suggests that the company is unlikely to significantly improve its future profitability going forward.
According to the source data S&P Capital IQConsensus TME normalized net profit margins for Q2 2023, Q3 2023 and Q4 2023 are 21.5%, 21.4% and 21.0%, respectively. Apart from this, the market expects Tencent Music Entertainment to record normalized net profit margins of 20.9%, 20.6%, 21.4% and 21.2% in his fiscal years 2023, 2024, 2025 and 2026 respectively. TME profitability is expected to peak in 2023, with future margins expected to remain in the range.
Tencent Music Entertainment’s consensus forecast for profitability is consistent with management’s comments on TME’s latest quarterly earnings call.
At its first quarter financial results conference, TME said it expects “sales promotion and general administrative expenses to be stable compared to the first quarter.” It is reasonable to assume that Tencent Music Entertainment’s cost optimization efforts have reached a stage where they can maximize their profits.
Tencent Music Entertainment also announced at its financial results briefing for the first quarter of 2023 that the company’s “revenue from online music services” is expected to “overtake social entertainment services and become a major revenue source.” . While this is positive from a revenue diversification perspective, the increased revenue contribution from music is negative for his TME’s future profitability. Previously, in an article at the end of January, I said that “the online music service business has lower profit margins than the social entertainment business.”
TME’s valuation is unattractive based on peer comparison
The market currently values Tencent Music Entertainment at a relatively higher future enterprise value earnings multiple than Spotify (SPOT), despite Spotify (SPOT) having better revenue growth prospects.
Comparison of Tencent Music Entertainment and Spotify
| stock | Consensus predicts enterprise value-to-earnings multiple over the next 12 months | Consensus forward FY2023-2027 earnings CAGR forecast |
| tencent music entertainment | 2.57 | +6.5% |
| Spotify technology | 1.86 | +12.4% |
sauce: S&P Capital IQ
Tencent Music Entertainment failed to sustain its +8.3% share price gain at its earnings call on May 17, 2023, but the company’s share price is up around +75% over the past year.
Considering both TME’s valuation and one-year stock performance, it’s understandable that Tencent Music Entertainment’s stock has limited upside at this point.
summary
It is only fair to give awards to Tencent Music Entertainment Group. possession evaluation. On the other hand, TME’s first quarter 2023 results exceeded expectations and the company provided favorable guidance for his fiscal year 2023. On the other hand, there is limited room for TME to significantly expand its profit margins, and its current valuation is less attractive.