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Analysis

Look Inside: What Does Tencent Music’s SEC Filing Tell about The Company?

Tencent Music Entertainment (腾讯音乐) or TME, the music subsidiary of Chinese tech giant Tencent Group (腾讯), filed for a US IPO last week, seeking funds to develop its content services.

Oct 10, 2018 by Yun Nie
Look Inside: What Does Tencent Music’s SEC Filing Tell about The Company?

Tencent Music Entertainment (腾讯音乐) or TME, the music subsidiary of Chinese tech giant Tencent Group (腾讯), filed for a US IPO last week, seeking funds to develop its content services.

According to its SEC filing released on October 2, the company set an initial target of USD 1 billion, but the amount was subject to change. Bank of America, Deutsche Bank, Goldman Sachs, JPMorgan, and Morgan Stanley were the lead sponsors. The specific number of shares to be sold and potential share value was not revealed.

The US IPO would value Tencent Music between USD 25 billion and USD 30 billion, making it “the biggest Chinese music streaming venture listing in the United States,” information aggregator 36kr.com (36氪) reported.

The company’s SEC filing offered a peek into its business operation, financial status, share allocation, and internal organisational changes.

Boost in business and revenue

TME boasted a fast-growing business. The SEC document noted that the venture dominates the music streaming market in China by accommodating four top music streaming services - QQ Music (QQ音乐), Kugou Music (酷狗音乐), Kuwo Music (酷我音乐), and WeSing (全民k歌), which were developed and operated by Tencent Music. Those services helped Tencent Music become the largest Chinese online music platform, with more than 800 million monthly active users (MAU).

The company has also been reaping high revenue. The prospectus discloses that the company earned CNY 11 billion (USD 1.66 billion) worth of revenue and a profit of CNY 1.3 billion (USD 199 million) in 2017. This represented a sharp increase compared to the CNY 4.3 billion (USD 626 million) revenue and CNY 85 million (USD 13 million) profit in 2016.

By comparing the two monetization businesses Online Music and Social Entertainment, the company reported that the latter reported a CNY 6 billion (USD 917 million) profit, which accounted for 70.4% of the revenue the company made in H1 2018.

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Interestingly, despite the larger MAU for online music, users of social entertainment were willing to spend more money. According to the filing, online music boasted 644 million MAU by the end of June 2018, but the average revenue paying user (ARPPU) was only CNY 8.7 (USD 1.27). In contrast, social entertainment saw a MAU of 228 million, but its ARPPU exceeded CNY 111.8 (USD 16.28). (See details in Table-2).

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Tencent Group held 58.1% stakes while Spotify owned 9.1%

The prospectus showed that Tencent, which owned 58.1% stakes in the music firm, was the largest shareholder. Asia's largest alternative investment management firm PAG Asia (太盟投资)and Swedish music streaming platform Spotify held 9.8% and 9.1% shares respectively.

Synergies among Tencent and Spotify have existed since last year. In December 2017, the two companies agreed a share swap acquired Tencent took 7.5% stakes in Spotify, including the 2.5% shares held through Tencent Music. Meanwhile, Spotify acquired 9% stakes in Tencent Music for USD 1.1 billion, which led to cooperation between both sides.

The deal was actually an inlet that allowed both sides to enter each other’s market, the news enterprise Financial Times commented.

From internal adjustments to overseas IPO

Tencent Music’s IPO was nothing out of the blue. It launched several internal overhauls as preparation before going public.

As early as January 2017, Tencent officially declared to establish Tencent Music Entertainment by merging its music service with China Music Corporation (中国音乐集团).

In July 2018, Tencent submitted a proposal to the Hong Kong Stock Exchange to spin off Tencent Music Entertainment Group and put US listing on the agenda.

The latest internal shift occurred 3 days before the IPO when the 20-year-old Tencent released its organisational structure adjustment announcement on September 30. This adjustment retained the existing business groups, such as corporate development group (CDG), interactive entertainment group(IEG), technology engineering group (TEG), and WeChat business group (WXG). Two new groups - cloud and smart industry group (CSIG) and platform and content group (PCG) – were proposed to be set up.

In addition, developing a middle-end data platform was highlighted by the company. According to the announcement, data would be sorted and analyzed through the platform to identify users more accurately, including population attributes, geographical distribution, media contacts, hobbies, lifestyles and etc. It thus would provide strong support for the front-end optimization.

“The adjustment is an active innovation and a new starting point of Tencent. Staying alert and forward-looking will lead our company into the next era.” The co-founder and chief executive officer Pony Ma explained.

Yun Nie

Yun Nie is a New York-based tech reporter. She focuses on India-China financial market, global IT giants and technology-centric market trends. She can be reached at Yunnie@thepassage.cc.

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