Why Tencent Music is a good bet for growth investors

– By Dilantha De Silva

Tencent Music Entertainment Group (NYSE: TME) 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), and the company went public on the New York Stock Exchange in December 2018. The music platform includes online music , karaoke and music-centric concerts. streaming services, allowing music fans to discover, listen, sing, watch, play and socialize while enjoying their favorite music. The company also offers many other entertainment services, including:

  1. Central Music Library, an extensive collection of albums and live music available in audio and video formats.

  2. Tencent Musician Program, an online service for budding musicians to download original music content and monetize it.

  3. Original TME productions.

  4. Liquid State, a joint venture between Tencent and Sony Music Entertainment.

Tencent Music has long outperformed other streaming services, including Spotify Technology SA (NYSE: SPOT) in terms of profitability. However, the stock has fallen sharply since March after Archegos Capital Management, a multibillion-dollar family office, failed to respond to a margin call on its highly leveraged equity portfolio, resulting in a forced liquidation of all of its participation, including a significant participation. in Tencent Music.

The company has also become the target of Chinese antitrust regulators questioning its dominant position. Although continued pressure from regulators makes Tencent Music a risky bet, the company appears well positioned to generate solid profits in the coming years and is priced attractively in the market.

Summary of 1st quarter results

For the first quarter, the company reported total revenue of $ 1.19 billion, up 24% from a year earlier, and net profit of $ 149 million. Online music services revenue grew 34.5% year-over-year to $ 420 million and music subscription revenue reached $ 258 million, up 40% from the previous year. first quarter of 2020. Social entertainment and other service revenues increased 18.9% to $ 775 million, driven by higher live streaming and advertising revenues from social entertainment platforms.

The number of mobile monthly active users for music streaming fell 6.4% to 615 million, while paid online music subscribers rose 43% to 60.9 million in the first quarter, the highest strong 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-life audio business, which was launched in April. Commenting on the long-playing audio market, Tencent Music President Cussion Kar Shun Pang said:

The Chinese long-playing audio market remains extremely underserved compared to the online music and video market and we look forward to continuing to cultivate users’ listening habits, ultimately accelerating the penetration of the market. online audio in China.. “

Tencent also rolled out an ad-based monetization strategy in the first quarter, making it easy for customers to access high-quality audio and other member benefits by watching ads or performing certain tasks.

Commenting on these initiatives and the company’s outlook, Cussion Kar Shun Pang said:

We have pushed the boundaries of the music entertainment ecosystem, committing to explore innovative ways to promote upstream content production. This has resulted in many chart-topping songs coming from our platform alongside our growing artist incubation capabilities and additional distribution and promotion channels.

The company operates in one of the fastest growing areas of the tech industry and appears well positioned to report solid profits in the years to come through its strategic investments.

Industry outlook

According to the International Federation of the Phonographic Industry, the global recorded music market grew 7.4% in 2020 and total sales amounted to $ 21.6 billion. Streaming was the main driver of growth and saw an 18.5% increase in paid subscriptions. Commenting on the dynamics of the industry, Frances Moore, CEO of IFPI, said:

Some things are timeless, like the power of a great song or the bond between artists and fans. But some things have changed. With much of the world locked out and live music closed, in almost every corner of the globe most fans enjoyed streaming music.. “

In addition, an IFPI study highlights that record companies have invested more than $ 5.8 billion in artists in 2020 as well as significant investments in marketing to ensure the growth of the industry in the years to come. . These investments will likely help the expansion of the digital music streaming industry.

Statista predicts that the global music streaming market will reach $ 23 billion in 2021 and grow at a compound annual growth rate of 9.69% through 2025. Average revenue per user is expected to reach $ 36.81 from by 2025. Although North America is expected to be the main region, the Asia-Pacific region is likely to grow at a faster rate due to higher internet penetration rate and increased tilt of the young population to mobile applications.

Risks associated with 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 over the next few years. The outlook for corporate earnings growth is therefore positive.

However, Chinese companies listed on the New York Stock Exchange have come under scrutiny due to lack of investor confidence in the financial statements published by Chinese companies. The US 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 should take this heightened regulatory risk into account when investing in Chinese stocks with a significant portion of their market capitalization listed in the United States.

Carry

Tencent Music has expanded its music library with new partnerships, and the company recently signed a licensing agreement with Sony Music Entertainment. The company appears to have what it takes to outsmart local competition and thrive in the Chinese market for an extended period of time, making Tencent Music a good bet for growing investors.

Disclosure: The author now owns all of the actions mentioned in this article.

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This article first appeared on GuruFocus.


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