key insights
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Tencent Music Entertainment Group's expected fair value is US$11.33 based on two levels of free cash flow into the stock.
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Tencent Music Entertainment Group's stock price of $10.33 indicates it is trading at a level similar to its fair value estimate
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TME's analyst price target is CN„10.07, 11% below our fair value estimate.
How far is Tencent Music Entertainment Group (NYSE:TME) ââfrom its intrinsic value? Using the latest financial data, we can predict future cash flows and discount them to today's value. Check if the price is right. For this purpose, we utilize a discounted cash flow (DCF) model. Don't be put off by the jargon. The math behind it is actually quite simple.
However, keep in mind that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flows, you can read more about the rationale behind this calculation in the Simply Wall St analytical model.
Check out our latest analysis for Tencent Music Entertainment Group.
What is the estimated valuation?
As the name suggests, we use a two-stage DCF model that considers two stages of growth. The first stage is typically a period of higher growth, leveling off towards terminal value, which is captured by a second period of 'steady growth'. The first step is to estimate the cash flow to the business over the next 10 years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will see their rate of shrinkage slow, and companies with growing free cash flow will see their growth rate slow over this period. This reflects the fact that growth tends to be slower in the early years than in later years.
It is generally assumed that a dollar today is worth more than a dollar in the future, so the sum of these future cash flows must be discounted to obtain an estimate of present value.
Estimated 10-year free cash flow (FCF)
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
|
Leverage FCF (CN„, million) |
5.64 billion Canadian dollars |
6.77 billion CN yen |
7.36 billion CN yen |
CN„8.09 billion |
CN„8.5 billion |
CN8.83 billion yen |
9.13 billion Canadian dollars |
9.41 billion Canadian dollars |
9.67 billion CN yen |
9.93 billion Canadian dollars |
Growth rate estimation source |
Analyst x 8 |
Analyst x 7 |
Analyst x3 |
Analyst x2 |
Analyst x2 |
Estimated @ 3.86% |
Estimated @ 3.39% |
Estimated @ 3.06% |
Estimated @ 2.83% |
Estimated @ 2.67% |
Present value (CN„, million) Discounted at 8.4% |
CN„5.2k |
CN„5.8k |
CN„5.8k |
CN„5.9k |
CN„5.7k |
CN„5.4k |
CN„5.2k |
CN„4.9k |
CN„4.7k |
CN„4.4k |
(âEstâ = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) = 53 billion yen
Next, you need to calculate the terminal value, which takes into account all future cash flows over this 10-year period. For various reasons, a very conservative growth rate is used that cannot exceed the country's GDP growth rate. In this case, we used the five-year average of the 10-year Treasury yield (2.3%) to estimate future growth. Similar to the 10-year “growth” period, we use a cost of equity of 8.4% to discount future cash flows to their current value.
Terminal value (TV)=FCF2033 Ă (1 + g) Ă· (r â g) = 9.9 billion yen Ă (1 + 2.3%) Ă· (8.4% â 2.3%) = 167 billion yen
Present Value of Terminal Value (PVTV)= TV / (1 + r)Ten= 167 billion yen Ă· ( 1 + 8.4%)Ten= 75 billion yen
The total value, or capital value, is the sum of the present values ââof future cash flows, which in this case is C$128 billion. The final step is to divide the stock value by the number of shares outstanding. Compared to the current share price of $10.3, the company appears to be at about fair value, representing an 8.9% discount to the current share price. It is best to view this as a rough estimate, not accurate to the last cent, as the assumptions in the calculations have a significant impact on the valuation.
Important prerequisites
The above calculation relies heavily on two assumptions. One is the discount rate and the other is the cash flow. If you disagree with these results, try doing the calculations yourself and test your assumptions. Additionally, DCF does not give a complete picture of a company's potential performance because it does not take into account the cyclicality of the industry or the company's future capital requirements. Because we are considering Tencent Music Entertainment Group as a potential shareholder, the cost of capital is used as the discount rate, rather than the cost of capital taking into account debt (or weighted average cost of capital, WACC). For this calculation, we used 8.4% based on a leverage beta of 1.081. Beta is a measure of a stock's volatility compared to the market as a whole. Beta values ââare derived from industry average beta values ââfor globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.
SWOT analysis of Tencent Music Entertainment Group
strength
Weakness
opportunity
threat
to the next:
Valuation is only one side of the coin in building an investment thesis, and ideally it should never be the only analytical element scrutinized about a company. It is not possible to obtain a reliable valuation with the DCF model. Rather, it should be viewed as a guide to “What assumptions need to hold true for this stock to be undervalued/overvalued?” Outcomes can vary widely if companies grow at different rates or if their cost of equity or risk-free rate changes rapidly. We've summarized three relevant aspects of Tencent Music Entertainment Group that are worth noting.
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financial health: Is TME's balance sheet healthy? Check out our free balance sheet analysis, including 6 quick checks on key factors like leverage and risk.
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future earnings: How does TME's growth rate compare to its peers and the broader market? Dive deeper into analyst consensus numbers for the coming years by interacting with the free Analyst Growth Expectations chart.
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Other high quality alternatives: Do you like good all-rounders? Explore our interactive list of quality stocks to figure out what else you're missing.
PS. The Simply Wall St app provides daily discounted cash flow valuations for all NYSE stocks. If you want to know the calculations for other stocks, please search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.