Stock Watch: Can Tencent Music Entertainment (TME) survive short-term setbacks?

The sharp increase in the consumption of online content during the pandemic, after people lost access to public places and outdoor events, came as a boon for streaming service providers. Tencent Music Entertainment Group (NYSE: TME) ended the first half on a high note as its advertising business made a modest recovery and the subscriber base continued to grow.  

Mixed View

While shares of the China-based online music streaming platform performed well at the New York Stock Exchange during the crisis period, underlying challenges are a cause for concern. The advertising business, which accounts for around 60% of total revenues, remains vulnerable to the growing competition and virus-related headwinds.

---

Read management/analysts’ comments on quarterly reports

---

The company’s market value expanded almost three-fold since the early days of the pandemic last year and peaked in March 2021. However, the stock changed course since then and entered a downward spiral after Chinese regulators asked the company to drop its exclusive licensing rights for online music.

Investing in TME

Currently trading below the pre-crisis levels, and losing further after the earnings release, TME is a risky bet. However, the cheap valuation offers a buying opportunity some long-term investors have been looking for. Experts’ consensus rating on the stock is moderate-buy as they see a strong upside going forward.

During an interaction with analysts this week, the management shrugged off concerns of the country’s new copyright rules impacting online subscriptions, rather the regulation would promote the industry’s growth. Earlier, TME’s parent organization Tencent Holdings had come under scrutiny and was asked to pay a fine and divest some of its music assets for alleged anti-trust behavior. The regulatory action is expected to have an impact on the company, which owns popular music apps QQ Music, Kugou Music, and Kuwo Music.

Resilience

Tencent has remained largely unaffected by the pandemic leveraging its expanded content library, thanks to new licensing agreements with big labels like Sony Music and Universal Music Group. Meanwhile, efforts are on to enhance user experience by investing in product innovation and content, under the growth strategy laid down by Ross Lian who became the CEO in April.

We continue to expand our footprint and work together with different industry partners, especially on the content creation side not just upstream for the content production, but we are also doing the downstream, which are organizing more and more like the online and offline music concerts. And this is not just regular concerts, but we also have some creativities and new videos for the online interaction with the users.

Ross Liang, chief executive officer of Tencent

In the June quarter, revenues jumped about 16% annually to US$1.24 billion but fell short of expectations. Reflecting the positive top-line performance, supported by a 7% growth in the core social entertainment services business, earnings rose to 10 cents and beat analysts’ forecast. The number of paying users rose 41% from last year and reached 66.2 million.

At the Bourses

The lackluster response to the earnings report indicates the market was not impressed by the positive numbers. The stock has dipped around 10% since the announcement and continued to lose in the early hours of Tuesday. It is down 54% since the beginning of the year.