Bank Of America Expects Tencent Music Group's Margin Expansion To Decelerate

Tencent Music Entertainment Group TME could achieve strong growth in music subscription sales in the 2019-2021 timeframe, its margin expansion is likely to decelerate as the company continues to invest in content, R&D and marketing, according to Bank of America.

The Analyst

BofA’s Eddie Leung maintained a Buy rating on Tencent Music Entertainment Group while reducing the price target from $19.20 to $18.00.

The Thesis

Tencent Music Entertainment Group reported a profit beat for the second quarter, along with acceleration in music subscriptions, Leung said in the note.

The company reported quarterly revenues of RMB5/0.9 billion, broadly in-line with the consensus estimate. Music subscription accelerated to 32% year on year from 26% in the prior quarter.

GAAP EPS came in at RMB0/0.55, significantly higher than the consensus estimate of RMB0/0.48. Management indicated continued pressure in sub-licensing revenue in the back half of 2019.

The analyst expects Tencent Music Entertainment Group to invest in driving user engagement and music subscription growth, given its sizable music and social entertainment user bases.

While user growth could decelerate off the large base, the company’s user interactions and monetization are likely to continue to improve, Leung mentioned. He estimated growth in music subscription sales at an annual rate of 34% in 2019-2021.

Leung added, however, that the company could continue investing in content, R&D and marketing, which would dampen its pace of margin expansion in 2020-2021.

Price Action

Shares of Tencent Music Entertainment Group were up 1.14% to $14.60 at the time of publishing.