China’s version of Spotify, Tencent Music Entertainment (TME), is gaining momentum in the Chinese market, surpassing 100 million online music subscribers in the third quarter of 2023. According to a report by Morgan Stanley, TME’s growth potential is underappreciated, with expectations that music subscribers will continue to increase by more than 3 million each quarter, reaching an estimated 150 million in the medium term. The analysts predict that TME’s music revenue could double and profit could triple over the next three years.
Unlike Spotify, which is unavailable in China, TME has benefited from the country’s efforts to combat content piracy and an increasing number of consumers willing to pay for music. According to Morgan Stanley estimates, the music industry in China has experienced a remarkable 140% revenue growth between 2019 and 2023, outpacing other entertainment segments such as video games. TME itself has contributed to this growth by hosting numerous online and offline concerts throughout the year, capitalizing on the live concert craze in China.
In terms of market performance, TME’s American Depositary Receipts (ADRs) have seen only a 2% increase in value so far this year, while Spotify shares have surged by almost 130%. However, Morgan Stanley analysts believe there is room for TME’s stock to grow further, as they raised their price target by 10% to $11, implying a potential upside of more than 30% from the closing price on Friday. This is in line with JPMorgan’s recent upgrade of its recommendation on TME, with an overweight rating and a new price target of $10 per share.
JPMorgan also highlighted TME’s sound financial performance, particularly in its online music segment. TME’s gross profit margin in this segment rose to the mid-30% range in the third quarter, compared to Spotify’s 25% over the past 12 months. TME’s focus on online music has proved to be profitable, leading to higher-than-expected profit growth recovery in previous quarters.
TME’s transition away from social entertainment, such as livestreaming and karaoke, has contributed to its stronger financial performance in recent quarters. In the third quarter, revenue from social entertainment and other services fell by 49% from the same period a year ago, while revenue from music subscriptions is expected to rise by 38% in 2023 compared to 2022.
TME’s commitment to supporting new artists has also been noted, with the company launching a program earlier this year to help artists grow their audiences and increase revenue. So far, TME has helped 260 musicians reach their first million streams.
Overall, as TME continues to attract more paying subscribers and demonstrates strong growth potential, analysts and investors are optimistic about the company’s future prospects. With China’s booming music industry and a growing number of consumers willing to pay for music, TME is well-positioned to capture further market share and increase its revenue and profit in the years to come.
