Tencent Music to dig deep into the gold mine

Author | Huang Yu

Editor | Zhou Zhiyu

As the dominant force in the Chinese music industry, Tencent Music Entertainment Group (hereinafter referred to as "Tencent Music") seems to have turned its music copyright empire into an endless gold mine, offsetting the performance fluctuations brought by diversified businesses. In the future, digging deeper into this gold mine will be key for Tencent Music to consolidate its leading position.

On August 13th, Tencent Music released its second-quarter financial report for this year, showing that while revenue from social entertainment services and other services decreased by 42.8% year-on-year to 1.74 billion yuan, Tencent Music's total revenue only decreased by 1.7% year-on-year to 7.16 billion yuan, with adjusted net profit reaching 1.99 billion yuan, a year-on-year increase of 25.7%.

The slight drop in total revenue and strong profit growth are mainly attributed to the continued high growth momentum of the online music services business.

According to the financial report, driven by online music subscription revenue and advertising service revenue, Tencent Music's online music service revenue in the second quarter increased by 27.7% year-on-year to 5.42 billion yuan, accounting for 75.7% of total revenue.

Among them, online music subscription revenue reached 3.74 billion yuan, a year-on-year increase of 29.4%; the number of online music paying users reached 117 million, a year-on-year increase of 17.7%, with a net increase of 3.5 million compared to the previous quarter; the average monthly revenue per paying user was 10.7 yuan, a year-on-year increase of 10.3%.

In terms of the important indicator of the number of online music paying users, Tencent Music has seen continuous growth since surpassing the milestone of 100 million users in June last year. By the fourth quarter of last year, the number of online music paying users had increased to 1.067 billion, and in the first half of this year, the cumulative net increase has exceeded 10 million.

Behind the rise in both quantity and price lies the trend of more users willing to pay for music experiences.

QQ Music, under Tencent Music, was the earliest platform in China to embark on the path of music payment, dating back to 2007. However, in the earlier years, music piracy was rampant, and content consumption seemed to have difficulty gaining market value recognition in the domestic market.

Therefore, for a long time, Tencent Music's largest source of revenue was not music services, but social entertainment services. Six years ago, online music service revenue accounted for only 30%.

Over the years, the cultivation of user payment mindset has been a key factor in unlocking the immense copyright value of Tencent Music.

In the second quarter of last year, affected by the rectification of live broadcasts, Tencent Music's online music service revenue exceeded social entertainment service revenue for the first time in a single quarter, increasing by 47.6% year-on-year to 4.25 billion yuan, accounting for 58.3% of total revenue. This was a milestone for Tencent Music.

Tencent Music is moving closer to an ecosystem focused on online music payments, which should be the most reliable revenue and profit model for a streaming platform. It is worth noting that Spotify, the overseas music streaming giant and currently the highest-valued music company, generates over 80% of its revenue from subscription services.

Once, with strong financial resources, Tencent Music monopolized exclusive copyrights and established barriers that competitors found difficult to breach. However, in August 2021, under the iron fist of national anti-monopoly measures, Tencent Music lost its advantage in exclusive copyrights, and the market believes that Tencent has lost its moat, which may impact its performance However, the reality is that in the face of challenges to the development of its social entertainment business, Tencent Music's vast music library has become its safest moat.

On one hand, the slowing industry competition and the company's scale advantage have allowed Tencent Music to still dominate the top-tier copyrights, now occupying around 70% of China's music streaming market; on the other hand, with anti-monopoly requirements for reasonable pricing from copyright holders, Tencent Music, backed by its market share advantage, faces reduced pressure in copyright competition, lower procurement costs, and stronger profitability.

Morgan Stanley previously pointed out that Tencent Music's basic factors remain stable and it is the least affected stock by China's weak macro environment and competition within its coverage. The firm believes that with the drive from subscribers, advertising, other music revenue, and profit margins, Tencent Music still has room for growth.

Furthermore, after experiencing a boom in streaming stocks due to the pandemic, investor preferences have shifted from focusing on growth to focusing on profitability.

The music sector has seen a strong overall performance this year. According to Billboard's "2024 Global Music Index Mid-Year Report," the global music index has surpassed the Nasdaq, S&P 500, FTSE, KOSPI, and Shanghai Composite indices with a growth rate of 18.3%.

Among them, the streaming sector emerged as the biggest winner. The average increase for the six streaming companies - Spotify, Tencent Music, LiveOne, NetEase Cloud Music, Anghami, and Deezer - was 21.8%, exceeding the average increase of all stocks included in the index at 18.3%.

Against this backdrop, Tencent Music's stock price rose by 55.8% in the first half of this year, ranking second among global music index companies, with a total market value second only to Spotify and Universal Music.

However, the capital market seems somewhat dissatisfied with Tencent Music's performance in the second quarter. On August 13th, Tencent Music's US stock price fell by over 15% Eastern Time. As of August 14th Beijing Time, at the time of writing, Tencent Music's Hong Kong stock price fell by over 17%.

Some investors believe that although the revenue fell slightly below expectations of top institutions, the significant drop in Tencent Music's stock price after the financial report still seems to have an element of "riding the wave" to kill the valuation. After all, compared horizontally with other Chinese concept stocks, Tencent Music's valuation is relatively high.

The capital market has higher performance and shareholder return expectations for Tencent Music. Now that the impact of the live streaming rectification has basically bottomed out, Tencent Music faces the challenge of how to convert existing users, explore more new business growth points, as monthly active users are hitting a growth bottleneck.

Music subscriptions are a gold mine and Tencent Music's moat against risks. However, Tencent Music cannot rest on its laurels, otherwise it may face the risk of being eliminated by the market.

Only by continuously improving its content advantage and innovating its business model can Tencent Music truly become the "Chinese Spotify"