Key Takeaways:
- China Merchants Securities cut Tencent Music to Neutral from its prior rating.
- Target price lowered to $9.5 from $11.5 on slowing organic growth.
- Shares fell 13 percent after Q2 results beat on Ximalaya but missed organically.
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China Merchants Securities cuts Tencent Music to Neutral, target $9.5
China Merchants Securities downgraded Tencent Music Entertainment Group to Neutral and cut its target price to $9.5 from $11.5, citing slowing organic growth.
The downgrade reflects slower core business growth and higher expense investment, the brokerage said in a note dated Aug. 12.
Tencent Music's second-quarter results beat expectations because of the consolidation of Ximalaya Group, but organic growth fell short, the brokerage said. It cut its fiscal 2026-28 core net profit forecasts by 5 percent to 7 percent, now expecting core net profit of 9.8 billion yuan in 2026 and 10.6 billion yuan in 2027, up 2 percent and 8 percent year on year.
Shares of Tencent Music fell 13 percent after the results announcement, and short-term negative factors have yet to ease, the brokerage said. Morgan Stanley also trimmed its target price to $10.1, saying more clarity is needed on the competitive outlook.
The stock's Hong Kong-listed shares, TME-SW (01698.HK), fell 12.6 percent, with short selling of $73.8 million representing 31.2 percent of turnover. Share buybacks provide downside protection, while the market awaits an inflection point in competitive conditions, China Merchants said.
The downgrade follows a quarter in which Tencent Music's headline numbers were lifted by the Ximalaya deal, masking softer underlying momentum in its core streaming business. The brokerage's reduced forecasts reflect expectations that competitive pressure and higher spending will weigh on margins through 2028. Tencent Music competes with NetEase Cloud Music and ByteDance's music services for users and content in China's crowded streaming market.
The Neutral rating marks a shift from the brokerage's prior more positive stance, which had assumed faster organic expansion and steadier margins. The lower target price reflects a reassessment of the company's growth trajectory as competition intensifies and expense investment rises. Tencent Music's buyback program, which has supported the shares through the recent selloff, offers some cushion but does not address the underlying growth slowdown.
The downgrade adds to a growing list of cautious calls on Tencent Music as competition intensifies in China's online music market. Investors will watch whether the company's buyback program and Ximalaya integration can offset slowing organic growth in coming quarters.
This article is for informational purposes only and does not constitute investment advice.
