Key Insights

• The projected truthful worth for Tencent Music Entertainment Group is US$11.33 primarily based on 2 Stage Free Cash Flow to Equity

• Tencent Music Entertainment Group’s US$10.33 share value signifies it’s buying and selling at related ranges as its truthful worth estimate

• Analyst price target for TME is CN¥10.07 which is 11% beneath our truthful worth estimate

How far off is Tencent Music Entertainment Group (NYSE:TME) from its intrinsic worth? Using the latest monetary information, we’ll check out whether or not the inventory is pretty priced by projecting its future money flows after which discounting them to at the moment’s worth. We will benefit from the Discounted Cash Flow (DCF) mannequin for this function. Don’t get delay by the jargon, the mathematics behind it’s really fairly simple.

Remember although, that there are various methods to estimate an organization’s worth, and a DCF is only one technique. If you need to study extra about discounted money movement, the rationale behind this calculation may be learn intimately within the Simply Wall St analysis model.

View our latest analysis for Tencent Music Entertainment Group

What’s The Estimated Valuation?

We are going to make use of a two-stage DCF mannequin, which, because the title states, takes into consideration two levels of development. The first stage is mostly a better development interval which ranges off heading in the direction of the terminal worth, captured within the second ‘regular development’ interval. In the primary stage we have to estimate the money flows to the enterprise over the following ten years. Where attainable we use analyst estimates, however when these aren’t accessible we extrapolate the earlier free money movement (FCF) from the final estimate or reported worth. We assume corporations with shrinking free money movement will gradual their fee of shrinkage, and that corporations with rising free money movement will see their development fee gradual, over this era. We do that to replicate that development tends to gradual extra within the early years than it does in later years.

Generally we assume {that a} greenback at the moment is extra priceless than a greenback sooner or later, so we have to low cost the sum of those future money flows to reach at a gift worth estimate:

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10-year free money movement (FCF) estimate

(“Est” = FCF development fee estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥53b

We now have to calculate the Terminal Value, which accounts for all the long run money flows after this ten yr interval. For plenty of causes a really conservative development fee is used that can’t exceed that of a rustic’s GDP development. In this case we’ve used the 5-year common of the 10-year authorities bond yield (2.3%) to estimate future development. In the identical approach as with the 10-year ‘development’ interval, we low cost future money flows to at the moment’s worth, utilizing a price of fairness of 8.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥9.9b× (1 + 2.3%) ÷ (8.4%– 2.3%) = CN¥167b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥167b÷ ( 1 + 8.4%)¹⁰= CN¥75b

The whole worth, or fairness worth, is then the sum of the current worth of the long run money flows, which on this case is CN¥128b. The final step is to then divide the fairness worth by the variety of shares excellent. Relative to the present share value of US$10.3, the corporate seems about truthful worth at a 8.9% low cost to the place the inventory value trades presently. The assumptions in any calculation have a big effect on the valuation, so it’s higher to view this as a tough estimate, not exact right down to the final cent.

Important Assumptions

The calculation above could be very depending on two assumptions. The first is the low cost fee and the opposite is the money flows. If you do not agree with these outcome, have a go on the calculation your self and play with the assumptions. The DCF additionally doesn’t take into account the attainable cyclicality of an business, or an organization’s future capital necessities, so it doesn’t give a full image of an organization’s potential efficiency. Given that we’re Tencent Music Entertainment Group as potential shareholders, the price of fairness is used because the low cost fee, somewhat than the price of capital (or weighted common value of capital, WACC) which accounts for debt. In this calculation we have used 8.4%, which relies on a levered beta of 1.081. Beta is a measure of a inventory’s volatility, in comparison with the market as a complete. We get our beta from the business common beta of worldwide comparable corporations, with an imposed restrict between 0.8 and a pair of.0, which is an inexpensive vary for a steady enterprise.

SWOT Analysis for Tencent Music Entertainment Group

Strength

Weakness

Opportunity

Threat

Moving On:

Valuation is just one facet of the coin when it comes to constructing your funding thesis, and it ideally will not be the only real piece of study you scrutinize for a corporation. It’s not attainable to acquire a foolproof valuation with a DCF mannequin. Rather it ought to be seen as a information to “what assumptions need to be true for this stock to be under/overvalued?” If an organization grows at a unique fee, or if its value of fairness or threat free fee adjustments sharply, the output can look very completely different. For Tencent Music Entertainment Group, we have compiled three pertinent features you need to take a look at:

1. Financial Health: Does TME have a wholesome stability sheet? Take a take a look at our free balance sheet analysis with six simple checks on key components like leverage and threat.

2. Future Earnings: How does TME’s development fee evaluate to its friends and the broader market? Dig deeper into the analyst consensus quantity for the upcoming years by interacting with our free analyst growth expectation chart.

3. Other High Quality Alternatives: Do you want a very good all-rounder? Explore our interactive list of high quality stocks to get an thought of what else is on the market chances are you’ll be lacking!

PS. The Simply Wall St app conducts a reduced money movement valuation for each inventory on the NYSE daily. If you need to discover the calculation for different shares simply search here.

Have suggestions on this text? Concerned concerning the content material? Get in touch with us straight. Alternatively, electronic mail editorial-team (at) simplywallst.com.

This article by Simply Wall St is normal in nature. We present commentary primarily based on historic information and analyst forecasts solely utilizing an unbiased methodology and our articles usually are not meant to be monetary recommendation. It doesn’t represent a suggestion to purchase or promote any inventory, and doesn’t take account of your targets, or your monetary scenario. We intention to deliver you long-term targeted evaluation pushed by elementary information. Note that our evaluation might not issue within the newest price-sensitive firm bulletins or qualitative materials. Simply Wall St has no place in any shares talked about.