Brief China: Tencent Music Entertainment (TME): Chinese Version of Spotify Shows Strong Growth Prospects and more

In this briefing:

1. Tencent Music Entertainment (TME): Chinese Version of Spotify Shows Strong Growth Prospects

1. Tencent Music Entertainment (TME): Chinese Version of Spotify Shows Strong Growth Prospects

• Tencent Music Entertainment (TME), a subsidiary of Tencent Holdings is China’s largest music streaming services holding a market share of over 70% in the domestic market. In the global market, as of 1H2019, TME trailed global giants Spotify, Apple Music and Amazon Music but held its ground in fourth place with a market share of 10%.
• The company’s apps Kugou, QQ and Kuwo dominate the online music landscape in China capturing a combined market share of 76% as of July 2018. Competitors Netease and Xiaomi had market shares of approx. 11% and 3% respectively over the same period.
• The company’s revenue is comprised of online music services and social entertainment services. Online music services amount to a small portion of revenue (26% in 2QFY2019) while social entertainment services contributed to 74% of consolidated revenue in 2QFY2019.
• TME has grown its top-line at a CAGR of 109% over 2016-18 to reach RMB18,985m from RMB4,361m. TME is at an advantage to peers such as Spotify when making revenue since TME’s service offering is not only restricted to providing music streaming services. Rather, the company operates platforms for music lovers to interact socially as well as offers services such as the sale of concert tickets.
• We expect TME’s revenue to continue growing at a CAGR of 33% over 2018-20. As a result of the continued expansion of content cost, we expect OPM to slow down to approx. 17% in FY2019 and 18% in FY2020.
• On our estimates, TME is trading at a FY2 Price/Sales ratio of 4.4x, at a discount to its historical median of 5x. We believe that the company’s diversified services offering which is tied in with social media services gives it a good advantage against peers such as Spotify. Additionally, and more importantly, the backing provided by Tencent Holdings provides the company with ample opportunities to diversify their service offering further.