Actions of Tencent Musical Entertainment Group (NYSE: TME) rose to 11.3% in morning trading today, even in the absence of company-specific news. Tencent Music joined a wider range of Chinese stocks that got some relief after China’s central bank eased monetary conditions to boost growth on Tuesday.
Moreover, this weekend brought further relief to investors in Chinese companies listed in the United States, as fears of impending write-offs faded.
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On Tuesday, the Central Bank of China decided to lower bank reserve requirements from 8.9% to 8.4%, which would make some additional $ 200 billion available for lending to the economy. While other central banks around the world are now looking to tighten up, China had already tightened its economy (rather severely) by bursting the country’s real estate bubble last summer. This has led to unrest in its real estate sector, which accounts for a fairly high share of China’s GDP and savings.
After a tumultuous summer, the Chinese government’s top think-tank yesterday proposed a 5% economic growth target for 2022. As some believe that China’s real estate sector problems could drive the country into recession, it was a breath of fresh air, and today’s decision by the Central Bank was a nice sequel.
Additionally, since Tencent Music is listed on the New York Stock Exchange, investors may have been frightened last week when China asked the transport giant DiDi Global (NYSE: DIDI) to delist from the United States, raising concerns that other Chinese stocks listed in the United States may follow. Yet DiDi seems to be making a plan for US holders of its US certificates of deposit to exchange them for equivalent shares in Hong Kong, allaying fears of a forced sale.
Tencent Music rose today, but is still rebounding from all-time lows, having fallen by two-thirds in the past 12 months. Chinese stocks are pretty rough, but Tencent Music has a leading market share in Chinese music streaming.
However, new regulations have forced Tencent Music to relinquish certain exclusive music rights. That, and difficult comparisons to 2020 fueled by the pandemic, results in losses of users and revenue segments. The new regulations appeared to have particularly hurt revenues for the company’s social entertainment services (primarily online karaoke), which declined in the last quarter. On the flip side, as monthly active users fell and revenue grew only 3% overall, paying users of standard streaming subscriptions rose 37.7% in the last quarter. .
It is therefore a decidedly mixed image for Tencent Music today. Nonetheless, the stock is very cheap, trading at just 14 times next year’s earnings estimates. If the recent headwinds in the Chinese economy reverse, Tencent Music seems rather convincing about it battered assessment.
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