This Chinese Entertainment Stock Just Doubled in The Last Month - And Its Run May Be Just Starting
“A leader is one who knows the way, goes the way, and shows the way.” – John C. Maxwell
When targeting stocks for our portfolio, we want to focus on the cream of the crop that are leading the pack and displaying signs of outperformance. Many Chinese stocks appear to have bottomed out all the way back in March, and these companies are leading the charge as this recent equity rally marches on. And as China eases up on their stringent COVID policies and continues to lift lockdown restrictions, there’s plenty of reasons to believe the run-up in these stocks may be just getting started.
One company that is showing relative strength is Tencent Music Entertainment Group TME, a Zacks Rank #2 (Buy) stock. TME fell victim to the broad decline in Chinese equities over the past year. This has presented a unique opportunity, as shares have become relatively undervalued and underappreciated. TME is ranked favorably by our Zacks Style Scores, including best-possible ‘A’ ratings in each of our Growth and Momentum categories. This indicates a strong likelihood that the stock propels higher on the powerful combination of favorable growth metrics and stock price performance.
TME is a component of the Zacks Internet – Content industry group, which currently ranks in the top 23% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform the market over the next 3 to 6 months. Historical research studies suggest that approximately half of a stock’s future price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.
By targeting stocks contained within the top industry groups, we can dramatically improve our odds of success. Also note the promising characteristics for this industry below:
Image Source: Zacks Investment Research
Company Description
A subsidiary of Tencent Holdings Limited, Tencent Music Entertainment Group operates online music entertainment platforms to provide music streaming, online karaoke, and live streaming services in China. Its services enable users to discover and listen to personalized music. TME also offers the opportunity for its users to interact and share songs and performances with friends through an online stage. In addition, through a strategic partnership with China Literature, TME provides various audio content, including audio books, cross-talks, radio dramas, and other entertainment.
Over the past few years, there have been talks that Chinese firms would be delisted from U.S. stock exchanges due to a lack of transparency regarding Chinese accounting practices. But back in August, American and Chinese regulators reached an agreement to allow accounting firms in China to share more information about the companies listed on U.S. exchanges. The agreement marked a turning point in resolving a major conflict that had originally pointed to a departure of China’s largest companies from domestic exchanges.
Earnings Trends and Future Estimates
TME has built up an impressive earnings history, surpassing earnings estimates in each of the past four quarters – delivering an average earnings surprise of 8.52% over this timeframe. The online music provider most recently reported Q3 EPS last month of $0.12/share, a 9.09% beat over consensus estimates. Consistently beating earnings estimates by a wide margin is a recipe for future success.
Analysts are in agreement and have raised future estimates across the board. For the fourth quarter, analysts have raised EPS estimates by 18.18% over the past 60 days. The Zacks Consensus Estimate now stands at $0.13/share, reflecting growth of 62.5% relative to the same quarter last year. Clearly, momentum is building for TME investors.
Image Source: Zacks Investment Research
Stock Price Movement and Valuation
TME shares bottomed out at $2.95 all the way back in March – well before the major indices. The stock has more than doubled in the past month and is showing no signs of slowing down. Also note how both the 50-day and 200-day moving averages have turned up:
Image Source: StockCharts
Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, TME has recently witnessed positive revisions. As long as this trend remains intact (and TME continues to deliver earnings beats), the stock will likely continue its bullish run into next year.
Despite the recent price move, TME shares are relatively undervalued, irrespective of the metric used:
Image Source: Zacks Investment Research
Bottom Line
TME is rated a best-possible ‘A’ for our Zacks overall VGM score, and it’s easy to understand why that’s the case. Robust fundamentals combined with a strong technical trend certainly justify adding shares to the mix. Backed by a leading industry group and a history of earnings beats, it’s not difficult to see why this company is a compelling investment.
Make sure to keep an eye on TME as we head into the new year.
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Tencent Music Entertainment Group Sponsored ADR (TME) : Free Stock Analysis Report
