Coverage was initiated Monday on China’s largest streaming music provider, Tencent Music Entertainment (TME), which a Wall Street firm said has strong profit potential and a massive market opportunity for fast revenue growth.
KeyBanc Capital Markets analyst Hans Chung gave Tencent Music stock a rating of overweight and a price target of 19.
Tencent Music, which fell 3% Monday, on Tuesday rose 1.5% to close at 13 on the stock market today. The company held its initial public offering on Dec. 11, pricing shares at 13 and raising $1.1 billion. The stock rose 8% on its first day of trading. It’s a spinoff of China messaging and gaming giant Tencent Holdings(TCEHY).
Tencent Holdings formed the company in mid-2016 after it bought a controlling stake in China Music Corp. It then combined that with Tencent’s streaming business. It operates the top four music mobile apps in terms of mobile monthly active users. Tencent Music says it’s the largest online music entertainment platform in China, with more than 800 million monthly average users.
Significant Runway Ahead
“The Chinese music market is a massive opportunity just beginning to open up,” Chung wrote in a report to clients. “We see a significant runway ahead.”
He estimates Tencent Music will achieve a 36% compound annual growth in revenue from 2018 through 2020, with “potential upside on gross margin in 2021 and beyond as investment in content begins to moderate afterwards.”
For its third quarter, the company reported adjusted earnings of 10 cents per share, up 100% from the year-ago period. That was the seventh quarter in a row of triple-digit gains. Revenue rose 65% to $722.2 million. Tencent Music has shown double- and triple-digit revenue growth over the past seven quarters. In the latest reported year, earnings increased 377% to 18 cents per share year over year.
Tencent Music has multiple moneymaking models, including subscriptions, advertising, music sales, virtual gifts and premium memberships, Chung wrote.
The company was recently selected as an IBD Stock Of The Day, due in part to its strong growth in sales and earnings for a new issue.
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