Tencent Music Entertainment Group (TME, Financial) is China's most popular online music entertainment company. The company has over 800 million active users and 60 million paying subscribers through four apps: QQ Music, Kugou Music, Kuwo Music and WeSing.
Tencent Music was established in July 2016 after the acquisition of China Music Corporation by Tencent Holdings Limited (TCEHY, Financial), and the company went public on the New York Stock Exchange in December 2018. The music platform includes online music, karaoke and music-centric live streaming services, enabling music fans to discover, listen to, sing, watch, perform and socialize while enjoying their favorite music. The company also provides many other entertainment services, including:
- Central Music Library, a vast collection of albums and live music available in both audio and video formats.
- Tencent Musician Program, an online service for aspiring musicians to upload original music content and monetize them.
- TME original Productions.
- Liquid State, a joint venture between Tencent and Sony Music Entertainment.
Tencent Music has long outperformed other streaming services including Spotify Technology S.A. (SPOT, Financial) in terms of profitability. However, the stock has dropped sharply since March after Archegos Capital Management, a multibillion-dollar family office, failed to respond to a margin call on its highly-leveraged stock portfolio, resulting in a forced liquidation of its entire holding, including a significant stake in Tencent Music.
The company also became the target of Chinese antitrust regulators questioning its dominant position. Although the continued pressure from regulators makes Tencent Music a risky bet, the company seems well-positioned to deliver strong earnings in the coming years and is attractively priced in the market.
1st-quarter earnings recap
For the first quarter, the company reported total revenue of $1.19 billion, up 24% from the previous year, and net profit was $149 million. Online music service revenue grew 34.5% year-over-year to $420 million and revenue from music subscriptions was $258 million, up 40% in comparison to the first quarter of 2020. Revenue from social entertainment services and other services rose 18.9% to $775 million, aided by higher live streaming and advertisement income from social entertainment platforms.
The number of mobile monthly active users for streaming music fell by 6.4% to 615 million whereas online music paying subscribers increased by 43% to 60.9 million in the first quarter, which was the highest quarterly net increase since 2016.
In March, the company completed the acquisition of Lazy Audio and combined Kuwo Changting with Lazy Audio to form Lanren Changting, a new brand for its long-form audio business, which was launched in April. Commenting on the long-form audio market, Tencent Music Chairman Cussion Kar Shun Pang said:
"China's long-form audio market remains extremely underserved as compared to the online music and video market and we are eager to continue cultivating users' listening habits, to ultimately accelerate the penetration of online audio in China."
Tencent also deployed an ad-based monetization strategy in the first quarter enabling customers to easily access high-quality audio content and other membership benefits by watching advertisements or performing certain tasks.
Commenting on these initiatives and the outlook for the company, Cussion Kar Shun Pang said:
"We have been pushing the boundaries of the music entertainment ecosystem, committing to explore innovative ways to promote upstream content production. This has resulted in numerous chart-topping songs, originating from our platform, alongside our growing capabilities in artists incubation and additional channels for distribution and promotion."
The company is operating in one of the fastest-growing sectors in the technology industry and seems well-positioned to report strong earnings in the coming years as a result of its strategic investments.
Industry outlook
According to the International Federation of the Phonographic Industry, the global recorded music market grew by 7.4% in 2020 and total revenue came in at $21.6 billion. Streaming was the main driver of growth and reported an 18.5% increase in paid subscriptions. Commenting on industry dynamics, IFPI CEO Frances Moore said:
"Some things are timeless, like the power of a great song or the connection between artists and fans. But some things have changed. With so much of the world in lockdown and live music shut down, in nearly every corner of the globe most fans enjoyed music via streaming."
Furthermore, an IFPI study highlights that record labels invested over $5.8 billion in artists in 2020 along with significant investments in marketing to ensure the growth of the industry in the coming years. These investments are likely to help the expansion of the digital music streaming industry.
Statista projects the global streaming music market to reach $23 billion in 2021 and grow at a compounded annual growth rate of 9.69% through 2025. The average revenue per user is expected to grow to $36.81 by 2025. Although North America is projected to be the dominant region, the Asia-Pacific region is likely to grow at a faster rate due to a higher internet penetration rate and an increased inclination of the young population toward mobile apps.
Risks of investing in Chinese companies
China was one of the first countries to curb the spread of the Covid-19 pandemic, and the country's economy is likely to grow at a much faster rate than other developed regions in the next few years. The outlook for corporate earnings growth, therefore, is positive.
However, Chinese companies listed on the New York Stock Exchange have come under scrutiny because of investors' lack of trust in the financial statements published by Chinese companies. The U.S. government has already launched a campaign to delist some Chinese companies, including a few telecom giants, due to differences in accounting rules, and many other Chinese companies could come under pressure in the future. Investors need to account for this heightened regulatory risk when investing in Chinese stocks that have a significant portion of their market cap in U.S. listings.
Takeaway
Tencent Music has been expanding its music library with new partnerships and the company recently signed a licensing agreement with Sony Music Entertainment. The company seems to have what it takes to thwart the local competition and thrive in the Chinese market for an extended period of time, which makes Tencent Music a good bet for growth investors.
Disclosure: The author does now own any shares mentioned in this article.
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