What happened
Shares of Tencent Music Entertainment Group (TME +5.57%) rose as much as 11.3% in morning trading today, even on no company-specific news. Tencent Music joined a broader swath of Chinese stocks that got some relief after China's central bank loosened monetary conditions to boost growth on Tuesday.
Additionally, this weekend brought further relief to investors in U.S.-listed Chinese companies, as fears of imminent delistings faded.
Image source: Getty Images.
So what
On Tuesday, China's Central Bank moved to lower the reserve requirement for banks from 8.9% to 8.4%, which would make some $200 billion more available for lending into the economy. While other central banks across the world are now looking to tighten, China had already tightened its economy (in a rather severe way) by popping the country's property bubble this past summer. That led to turmoil in its real estate sector, which accounts for a rather high portion of China's GDP and savings.
After a tumultuous summer, yesterday China's top government think tank proposed an economic growth target of 5% for 2022. Given that some are thinking China's property-sector woes could drive the country into recession, that was a breath of fresh air, and today's move by the Central Bank was a nice follow-on.
Additionally, since Tencent Music is listed on the New York Stock Exchange, investors might have been spooked last week when China asked ride-hailing giant DiDi Global (DIDI +3.88%) to delist from the U.S., sparking worries that other U.S.-listed Chinese stocks could follow. Yet DiDi appears to be setting a plan for U.S. holders of its American depositary receipts to exchange them for equivalent shares in Hong Kong, allaying fears of forced selling.
Now what
Tencent Music rose today, but it is still bouncing off all-time lows, after having fallen by two-thirds over the past 12 months. Chinese stocks are pretty beaten-up, but Tencent Music does have leading market share in Chinese music streaming.
However, new regulations have forced Tencent Music to give up some exclusive music rights. That, and difficult comparisons to the pandemic-fueled 2020, are causing some user and revenue segment losses. New regulations especially seemed to have hurt the company's social entertainment services revenue (essentially online karaoke), which decreased last quarter. On the other hand, while monthly active users fell and revenue grew just 3% overall, paying users of standard streaming subscriptions grew 37.7% last quarter.
So it's a decidedly mixed picture for Tencent Music today. Nevertheless, the stock is very cheap, trading at just 14 times next year's earnings estimates. If the recent Chinese economic headwinds reverse, Tencent Music looks rather compelling at this beaten-down valuation.
