Tencent Music Entertainment Group said revenues rose almost 18% in the second quarter as China’s online music entertainment platform saw a 52% increase in the number of paid users.
Shares advanced 2.4% to $16.06 in extended market trading on Monday after Tencent Music (TME) reported second-quarter revenue rose to 6.93 billion yuan ($997 million) exceeding analysts’ estimates of 6.85 billion yuan. During the quarter ended June 30, paid users of TME’s online music service grew 52% to 47.1 million. Net income attributable to shareholders rose 1.3% to 939 million yuan ($135 million) from 927 million yuan in the year-ago period.
“Our efforts include continuous advocation of the pay-for-streaming model, deeper cultivation of indie musicians, promotion of digital albums and our innovative online concert TME Live,” said Tencent Music CEO Cussion Pang. “In addition, our social entertainment services performed steadily in the second quarter, registering sequential growth as the COVID-19 situation continued to improve in China. We also carried on with upgrading our products and introducing new features to provide interactive, engaging, and visually stimulating experience, which will strengthen our long-term competitiveness.”
Pang added that the company has a strong financial position and cash flow generation, which will help support continued investment in long-form audio services to achieve significant synergies across all aspects of the businesses and further boost long-term sustainable growth.
TME, which is controlled by Chinese tech giant Tencent Holdings (TCEHY), said online music revenues in the reported quarter increased by 42% year-over-year, accelerating from 27.4% in the first quarter, which was mainly attributable to nearly 65% year-over-year growth in music subscription revenues as well as strong performance from digital album sales. The company’s online music paying ratio improved to 7.2%, up from 4.8% in the same quarter of last year mainly due to its “well-executed paywall strategy”.
Separately, TME announced the signing of a multi-year contract renewal with Universal Music Group (UMG). As part of the new contract, the company said that it will form a music label with UMG to drive the “tremendous growth potential” of digital music commercialization in China.
TME shares have appreciated 34% so far this year and analysts still have a cautiously optimistic outlook on the stock with a Moderate Buy consensus. Meanwhile, the $18.06 average price target implies 15% upside potential to current levels.
Ahead of 2Q financial results, Stifel Nicolaus analyst John Egbert reiterated a Hold rating with a $14 price target, saying that he sees “risk / reward as balanced at current levels”. (See TME stock analysis on TipRanks)
“We believe the company continues to recover gradually from the trough of the pandemic, but several key metrics (including monthly active users (MAUs) are likely still below pre-COVID estimates,” Egbert wrote in a note to investors. “We are optimistic on TME’s long-term outlook though we remain Hold-rated at current levels as we await signs of stability in the company’s growth and operating margins, as momentum in the faster growing (albeit less profitable) Online Music Services segment has been held back by decelerating growth in Social Entertainment Services.”
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