On Wednesday, BofA Securities updated its outlook on Tencent Music Entertainment Group (NYSE:TME), raising the price target to $12.30 from the previous $10.50, while reiterating a Buy rating on the stock. The adjustment follows Tencent Music's strong performance in the fourth quarter, which was supported by an increase in music paying users and an improved average revenue per user (ARPU).
Tencent Music's recent financial results surpassed expectations, driven by what BofA Securities describes as a "dual engine" of growth. The firm anticipates this upward trend to persist into 2024, particularly in the first half of the year, thanks to a combination of premium content offerings and effective promotions during the Chinese New Year period. BofA Securities also expects a steady improvement in ARPU, aided by controlled discounting and a diversified pricing strategy.
The company's focus on subscriber revenue growth has been highlighted as a top priority, with a more balanced performance anticipated should the trend in subscriber numbers improve.
BofA Securities also notes the potential for growth in Tencent Music's advertising business through new ad products and an expansion of the ad-supported model. Furthermore, the analyst expects music and group margins to continue their improvement due to the solid music business and increasing ROI per user.
Despite some fluctuations during the off-peak season, Tencent Music has reported a stable trend in monthly active users (MAU). The firm also does not believe that the major price hike implemented last year has significantly affected the core music user base or subscriber numbers.
Looking ahead, Tencent Music has indicated that its share buyback plan is on track and has hinted at the possibility of paying dividends in light of its strong cash flow. A specific plan for dividends is expected to be announced soon.
In conclusion, BofA Securities has increased its earnings forecast for Tencent Music for 2024 and 2025 by 9-12% based on the positive outlook for the music business and margins. The new price target of $12.30 reflects a 20x multiple on the projected 2024 GAAP P/E, which implies an 18x adjusted P/E. The firm's continued endorsement of a Buy rating is based on the robust performance of Tencent Music's business.
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