Down More Than 75% in the Past Year, is Now a Good Time to Scoop Up Shares of Tencent Music Entertainment Group?

Headquartered in Shenzhen, China, Tencent Music Entertainment Group (TME) operates online music entertainment platforms that provide music streaming, online karaoke, and live streaming services in the People’s Republic of China. TME’s shares have slumped 76.1% in price over the past year and 8.2% year-to-date to close yesterday’s trading session at $6.29. Also, the stock is currently trading below its 50-day and 200-day moving averages.

Investors’ worries rose with the United States’ tightening of regulations for Chinese companies listed on U.S. exchanges. Last December, the U.S. Securities and Exchange Commission finalized rules to that would ban foreign companies listed in the U.S. from trading if their auditors do not comply with requests for information from U.S. regulators.

“I just don’t think China’s government is going to allow U.S. regulators to have unfettered access to internal auditing documents of Chinese companies,” observed David Loevinger, managing director for emerging markets sovereign research at TCW Group. He predicted that most of the listed Chinese companies would leave U.S. exchanges by 2024. With the U.S-China relationship unlikely to improve anytime soon, TME could face delisting procedures if it fails to comply with the SEC’s regulations.

Here is what could shape TME’s performance in the near term:

Chinese Government’s Crackdowns Squeezed Profits

TME’s profit declined 30.6% year-over-year to RMB788 million ($122 million) in its fiscal third quarter, ended Sept. 30, 2021. Also, its earnings per ADS declined 34.3% from its year-ago value to RMB0.44 ($0.07). TME’s gross profit came in at RMB2.31 billion ($358 million), indicating a 6.1% decline from the prior-year quarter. The company noted the impact of regulation and increased competition on its performance for the quarter.

The company’s revenues increased 3% year-over-year to RMB7.81 billion ($1.21 billion). But its social entertainment services and others revenue decreased 6.4% year-over-year to RMB4.92 billion ($763 million). “The decrease was mainly due to the impact from new regulations as well as increased competition from other pan-entertainment platforms, despite a strong revenue growth in audio live streaming,” the company said.

In addition, China’s crackdowns have curbed collection and usage of user data, mergers and acquisitions, and overseas share listings. And regulators instructed TMC to cease its content deals with major music labels and loosen the terms and conditions of its local supply deals with other Chinese platforms.

Lean Profit Margins

TME’s 30.99% gross profit margin is 40.8% lower than the 52.35% industry average. Its 14.35% EBITDA margin is 31.3% lower than the 20.88% industry average.

Furthermore, TME’s 7.43% and 4.28% respective ROE and ROTC compare with the 9.36% and 4.42% industry averages.

Unfavorable Analysts’ Expectations

Analysts expect a 5.1% year-over-year decline in the company’s revenue in its fiscal fourth quarter, ended Dec. 31, 2021, and 1.3% in the current quarter. Also, its EPS is expected to decrease 37.6% in the quarter ended Dec. 31, 2021, and 23.5% in the current quarter. And although TME’s revenue is expected to increase 10.1% in its fiscal period ended Dec. 31,  2021, the Street expects a 14.2% decrease in EPS over the period.

POWR Ratings Reflect This Bleak Prospects

TME has an overall D rating, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Quality, which is consistent with its lean profit margins.

TME also has a D grade for Sentiments. Unfavorable analysts’ sentiments around the stock justify this grade.

Among the 18 stocks in the F-rated Entertainment - Media Producers industry, TME is ranked #14.

Beyond what I have stated above, one can also view TME’s grades for Value, Growth, Momentum, and Stability here.

View the top-rated stocks in the Entertainment - Media Producers industry here.

Bottom Line

TME has faced several regulatory crackdowns over the past months, which have made investors anxious. Furthermore, the company recently reported declines in its monthly active users (MAU) in its music and social entertainment segments. In addition, analysts expect a decline in EPS in its about to be reported quarter, ended December 31, 2021. Therefore, I think it would be wise to avoid the stock now.

How Does Tencent Music Entertainment Group (TME) Stack Up Against its Peers?

While TME has an overall POWR Rating of D, one might want to consider investing in the Entertainment - Media Producers stock with a B (Buy) rating: News Corporation (NWSA).

TME shares were unchanged in premarket trading Friday. Year-to-date, TME has declined -8.18%, versus a -5.40% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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