Tencent Music Entertainment is convincing more people in China to pay for music. In the July-to-September period, the company’s online music subscribers topped 100 million on a quarterly basis for the first time since TME listed in the U.S. in late 2018. That’s still just a fraction of the 594 million monthly active users that TME claims. Because of the size of China’s market, it’s more than Spotify ‘s claim of 574 million monthly active users —across 184 countries and territories. TME’s “music value [is] still underappreciated,” Morgan Stanley analysts led by Alex Poon wrote in a late November report. The analysts’ conversations with TME management revealed expectations that music subscribers will grow by more than 3 million a quarter, to an estimated 150 million in the medium term. “We see room for [TME] music revenue to double and profit to triple in the next three years,” the Morgan Stanley analysts wrote, noting “limited risks from macro and competition.” They raised their price target on TME 10% to $11, implying more than 30% upside from Friday’s close in Tencent American Depositary Receipts. TME’s ADRs are up only 2% for the year so far, while rival Spotify shares have surged almost 130%. Now Spotify has a market capitalization about 150% more than Tencent’s. TME SPOT YTD mountain Tencent vs Spotify in 2023. Spotify isn’t available in China, a market notorious for content piracy. But in the past few years, companies have become more vigilant in protecting intellectual property, while consumers are getting in the habit of paying. “The music industry has been the fastest growing entertainment segment in China with 140% revenue growth between 2019 and 2023,” according to Morgan Stanley estimates. That’s far faster than any other entertainment segment the analysts tracked — including video games, which saw revenue grow of 30% since 2019. A live concert craze swept China this year, making tickets tough to get. In the first quarter alone, TME said it hosted 29 online and offline concerts. For listeners at home or on the go, TME’s apps include QQ Music and Kugou Music. JPMorgan is so excited about Tencent it recently upgraded its recommendation to overweight from neutral, with a new price target of $10 a share. TME is “re-emerging as a double-digit earnings compounder,” JPMorgan internet analyst Alex Yao wrote in a mid-November report. Gross profit margin of the online music segment rose to the mid-30% range in the third quarter, versus Spotify’s 25% over the past 12 months, according to JPMorgan estimates. TME is also moving away from its business in social entertainment, such as livestreaming and karaoke. “Online music has overtaken social entertainment as the profit driver in 3Q23, leading to a stronger-than-expected profit growth recovery in 2024,” JPMorgan’s Yao wrote. In the third quarter, TME’s revenue from social entertainment and other services fell by 49% to the equivalent of $276 million from the same period a year ago. Revenue from music subscriptions is estimated to rise 38% in 2023 versus 2022, Morgan Stanley estimates. TME earlier this year also launched a program to help new artists grow their audiences and boost revenue. Tencent said in a first quarter release it had helped 260 musicians reach their first million streams. It did not provide an update in the third quarter. — CNBC’s Michael Bloom contributed to this report.