Tencent Music's Undervaluation and Re-Rating Potential Amid China's Entertainment Sector Recovery

The recent earnings report from Tencent Music Entertainment Group (TME) has sparked a nuanced debate among investors. While the company delivered a 20.6% year-over-year revenue increase to RMB8.46 billion ($1.19 billion) in Q3 2025, driven by robust growth in online music services and subscription revenue according to Seeking Alpha, its stock price plunged by over 8% during regular trading after an initial pre-market rally as reported by NewsBreak. This volatility underscores a critical question: Is the market overcorrecting to near-term margin pressures, or is Tencent Music being unfairly discounted in the context of its long-term strategic investments and the broader recovery of China's entertainment sector?

A Sector on the Mend, A Stock on the Cusp

China's entertainment and media industry is experiencing a multi-year rebound, with total revenue projected to reach $576.2 billion by 2028 at a 5.5% compound annual growth rate (CAGR). Key drivers include the resurgence of cinema up 83% in 2023 to $7.81 billion, the explosive growth of gaming and esports projected to hit $122.8 billion by 2028, and the rapid expansion of AI-driven internet advertising projected to reach $215.8 billion by 2028. Tencent Music, a dominant player in digital music and live entertainment, is uniquely positioned to benefit from these trends. Its Q3 results highlighted a 27.2% YoY surge in online music service revenue and a 17.2% rise in subscription income, with average revenue per paying user (ARPPU) climbing to RMB11.9 from RMB10.8 according to Seeking Alpha.

Valuation Metrics and Analyst Skepticism

Despite these positives, Tencent Music's stock remains undervalued relative to its peers. As of November 2025, the company trades at a price-to-sales (P/S) ratio of 6.96, up from 3.95 in 2023, but still below the sector average for high-growth entertainment firms. Analysts have been divided: Benchmark and CFRA cut price targets to $25 and $21, respectively, citing margin compression from aggressive investments in offline concerts and merchandise. However, Morgan Stanley and Macquarie maintained "Overweight" and "Outperform" ratings, arguing that these investments will pay off as live events rebound post-pandemic.

The stock's post-earnings correction also reflects broader macroeconomic anxieties. While non-GAAP EPS of $0.22 exceeded estimates, its net profit margin contracted slightly compared to Q2 2025, raising concerns about cost discipline as reported by NewsBreak. Yet, the company's cash reserves-RMB36.08 billion ($5.07 billion) according to Yahoo Finance-provide a buffer for strategic reinvestment, a factor Krane Funds Advisors explicitly cited when boosting its stake in TME by 3.9 million shares in Q3 2025 as detailed in a Fool article.

Re-Rating Potential: A Case for Optimism

The disconnect between Tencent Music's fundamentals and its stock price creates a compelling re-rating opportunity. Several factors support this view:
1. ARPPU Expansion: The shift to Super VIP (SVIP) memberships has already lifted ARPPU by 10.2% year-over-year according to Seeking Alpha, suggesting further monetization headroom as user engagement deepens.
2. Live Events Synergy: With China's live entertainment market expected to grow alongside the broader E&M sector, Tencent Music's investments in concerts and merchandise could unlock new revenue streams. Morgan Stanley estimates that live events could contribute up to 15% of revenue by 2026.
3. Sector Multiples: As China's entertainment sector re-rates on the back of AI-driven advertising and gaming growth, Tencent Music's P/S ratio is likely to converge with industry averages. A 2025 PwC report notes that E&M sector valuations have expanded by 40% since 2023, a trend that could extend to Tencent Music as its strategic bets materialize.

Conclusion: A Calculated Bet on Resilience

Tencent Music's post-earnings selloff appears to overstate near-term risks while underappreciating its long-term positioning. The company's financials-20.6% revenue growth, adjusted net income rose 32.6%, and a diversified revenue base-contrast sharply with the pessimism embedded in its stock price. For investors willing to look beyond quarterly margin fluctuations, the stock offers an attractive entry point to capitalize on China's entertainment renaissance. As Macquarie aptly labeled it, Tencent Music remains a "Marquee Buy" as reported by Investing.com, with re-rating potential that could outpace even the sector's most optimistic forecasts.