Tencent Music – Money matters.

TME is different. It makes money. 

• Tencent Music Entertainment is no Spotify or Apple Music but it has many more users than both of these put together and critically, it makes money.
• Tencent Music has filed for an IPO on the NYSE at a mooted valuation of $30bn which works out at about 11.5x 2018 sales and 57.0x 2018 2018.
• This looks punchy, but bearing in mind that the company is growing at 150% YoY and is profitable makes this warrant more than just a passing glance.
• Tencent Music is not a single service like Apple or Spotify but 4 separate services that are all slightly different.
• These are QQ music, Kugau, Kuwo and WeSing which between them offer a range of online music, Karaoke, and live performance streaming.
• The services have 800m MaU combined meaning that almost every smartphone user in China has an account with one or more of these services.
• Tencent Music has not disclosed how many of these users use these services daily, but those that do notch up a substantial 70mins of daily usage.
• Given the figures from other digital services of this nature, I would estimate this figure to be somewhere between 100m and 200m.
• Tencent Music is very different from Spotify and Apple Music in that the vast majority of its revenues comes from social activities and advertising rather than selling streaming music.
• As a result, it pays out a much smaller proportion of its total revenues (32.9%) as royalties to artists compared to Spotify and Apple who pay over 50%.
• This is the main reason for the difference in profitability further underlining that it is the labels that are the main beneficiaries from music streaming rather than Spotify, Apple or even the artists.
• This further supports my long-term opinion that labels’ desire for profit now is preventing from perceiving that they are incentivising Apple, Spotify and any other streaming music company to put them out of business.
• This is exactly what I think will happen once the streaming services become so large that they make up the vast majority of all music revenues (see here) as the labels will then be obsolete.
• Tencent Music’s profitability and its higher growth allow me to be comfortable with the company trading at a premium to Spotify but just how much remains to be seen.
• Tencent Music is raising a further $1bn to accelerate the acquisition of content as well as the development and enhancement of services.
• User growth is going to be a problem but given that revenue per user is very low and that most users who have the service don’t use it every day, there is plenty of opportunity to upsell.
• Depending on the valuation, this could be another interesting one to consider alongside Meituan (see here).