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Tencent Music Analysts See Livestream Regulation Hurting Revenue

Andres Guerra Luz

(Bloomberg) -- Tencent Music Entertainment Group received a string of rating downgrades recently as analysts see a stricter regulatory environment hurting the Chinese music entertainment service.

“We believe regulatory headwinds and competition will continue to weigh on TME’s (social entertainment) and see risk to the new model despite a material reset,” KeyBanc Capital analyst Hans Chung said.

KeyBanc and two other firms, BOCOM International and CCB International Securities, issued downgrades. Analysts anticipate that a government restriction on the use of “lucky draws” -- a popular marketing strategy -- will hurt revenue in the social entertainment division next year. The company is slated to post fourth-quarter results next month.

Tencent Music ADRs fell as much as 3%, and are poised to extend their losing streak to three days and further pare this year’s gains.

Here’s what analysts are saying:

KeyBanc, Hans Chung

The Chinese government’s recently imposed ban on lucky draw activities on livestreaming platforms could result in “materially lower 1Q20 revenue,” as it was “one of the most popular and monetizable features” for the company’s social entertainment platforms.

The firm sees continued risk “given uncertainty around the re-introduction of the lucky draw type of features and ongoing competition from short video, which has impacted user growth and engagement.”

“Given structurally lower growth prospects and ongoing challenges in the near to mid-term, we think our prior targeted valuation is difficult to justify.”

Cut rating to sector weight from overweight.

Jefferies, Thomas Chong

Sees the first-quarter social entertainment revenue growth hurt by the removal of lucky draw features toward end of January to the middle of February. Some features are back online after product adjustments.

However, TME is “on track” in music subscriptions with paying users targeting to reach 50 million in the fourth quarter of 2020. The firm estimates subscription revenue under online music services to grow 49% year-over-year, driven by the “continued acceleration in paying subscribers.”

The firm sees monetization models through QQ livestreaming and advertising becoming the next drivers.

Morgan Stanley, Alex Poon

The firm cut its 2020 and 2021 earnings estimates “because of the weak livestreaming outlook.”

Removal of the lucky draw feature will hurt livestreaming platforms, including Tencent Music’s. Meanwhile, Tencent Music doesn’t have an aggressive target for its QQ Music livestreaming business ramp, so “we don’t think this will be very meaningful.”

Rates the stock equal weight. Cut price target by 6% to $15.

To contact the reporter on this story: Andres Guerra Luz in New York at aluz8@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Will Daley

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