We initiate with a "Buy" rating and a TP of HK$40.77. We adopt relative valuation based on PE ratio. We primarily referenced two peer groups, HK listed companies that provide internet content and information services, and US listed companies related to music streaming. Currently, we value Tencent Music (“TME”, or the “Company”) at 24.0x PE for 2024, and estimate a market capitalization of around HK$139.9 bn. Based on the latest number of issued shares, we calculate the corresponding target price to be HK$40.77/share.
　　In the online music industry, TME has cultivated an internet ecosystem for aspiring artists to monetize their works through non-subscription payment models. We estimate that this will allow TME to increase their revenue through increasing their average revenue per user by covering niche markets that are typically not supplied with enough music. TME will also be able to lower their costs by acquiring music from potential star musicians in their infancy.
　　We project TME's innovative copyright value from Aspiring Artists, alongside expansion into new markets through non-subscription services, to exceed market expectations and deliver significant value. Traditionally, online music platforms expand their copyright content by continuously acquiring the rights to works from professional musicians, monetizing through subscription models or by attracting advertisers for in-platform services. However, based on Tencent Music's multi-year layout of the music ecosystem, it is capable of leveraging Tencent's extensive data, user base, and the experience accumulated in the music industry. Tencent Music has the capability to cultivate music content within the platform that aligns with current trends. This content is proprietary to the platform, and as the paying mentality in internet music matures, online music users are increasingly willing to pay for these original creations. The copyright value, self-nurtured within the platform, is poised to continually create new value for the company in the future.
　　Catalysts: Realization of Tencent Music’s capabilities as a platform for generating aspiring artists through 1) the release of a company strategy update; 2) separate release of specific data that quantifies the growth of the aspiring artists, or 3) the release of a success story of an artist that owes its success through Tencent music’s unique ecosystem.
　　Risks: 1) AICG may compete with aspiring artists for this common market; 2) enthusiasm for non-subscription related payments may be lower than expected.