The U.S.-listed shares of Tencent Music Entertainment Group TME, +3.60% 1698, 1.15% surged 3.6% in afternoon trading Tuesday, after J.P. Morgan recommended investors buy into the China-based streaming music and audio entertainment company, as the online music business has evolved from being a cost center to a profit driver.
Analyst Alex Yao raised his rating to overweight, after being at neutral for the past 15 months, while boosting his stock price target to $7.70 from $4.80. As Tencent’s online music business has grown from 32% of total revenue with gross profit margin (GPM) in the low-teens percentage range in 2020, to 47% of revenue at mid-20s GPM in the third quarter, “we believe online music has finally become a key financial driver for the group, thanks to a multi-dimensional monetization model and efficiency improvement,” Yao wrote in a note to clients. “In addition, we expect the segment will increasingly become a profit driver for the group in the next few years.” The stock has soared 29.2% over the past three months, while the Invesco Golden Dragon China ETF PGJ, -1.45% has tumbled 19.2% and the S&P 500 SPX, +1.36% has slipped 3.5%.