Tencent Music IPO: These Numbers Show Favorable Signs for IPO

Tencent-Music-IPO
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Tencent Music IPO in U.S.

When marijuana stocks are making double-digit moves every day, other sectors of the market don’t seem that exciting. However, with Tencent Music Entertainment Group filing for its initial public offering (IPO), there could be a major opportunity for growth investors.

Here’s an in-depth look at the upcoming Tencent Music IPO in the U.S., including info such as the Tencent Music IPO date, potential valuations, and how this IPO compares to the Spotify Technology SA (NYSE:SPOT) IPO earlier this year.

Tencent Music Stock

Tencent Music is the music arm of Chinese Internet company Tencent Holdings Ltd (OTCMKTS:TCEHY, HKG:0700). To American investors, the Tencent brand may not be familiar because Tencent Holdings is listed on the Hong Kong Stock Exchange and trades over the counter in the United States.

Baidu Inc (NASDAQ:BIDU), JD.Com Inc (NASDAQ:JD), and Alibaba Group Holding Ltd (NYSE:BABA) are probably more well-known Chinese Internet companies, since their American depositary shares (ADSs) trade on major U.S. stock exchanges.

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Despite its lack of coverage by the financial media, Tencent Holdings is an absolute behemoth in its operating market.

For instance, the company’s messaging and social network platforms “QQ” and “WeChat” are so popular in China that they absolutely dwarf the competition. In the second quarter of 2018, WeChat and “Weixin” had combined monthly active users (MAUs) of more than a billion. For QQ, the number stood at 803.2 million. (Source: “Tencent Announces 2018 Second Quarter And Interim Results,” Cision, August 15, 2018.)

Of course, Tencent Holdings is already public; the company that’s filing for its IPO is its music division. Still, with the parent company’s huge ecosystem of users, Tencent Music Entertainment Group is in a great position to grow.

As it turns out, Tencent Music is already firing on all cylinders. According to the company’s F-1 filing to the U.S. Securities and Exchange Commission (SEC), Tencent Music had more than 800 million total unique MAUs in the second quarter of 2018. (Source: “Form F-1 Registration Statement,” U.S. Securities and Exchange Commission, October 2, 2018.)

To put this in perspective, Spotify finished the same period with only 180 million MAUs. Spotify expects its MAUs to grow to between 199 million and 207 million by the end of this year. (Source: “Shareholder Letter Q2 2018,” Spotify Technology SA, July 26, 2018.)

What Is Tencent Music’s IPO Date?

Tencent Music has not yet announced its IPO date.

What Is the Stock Ticker of Tencent Music?

According to its F-1 filing, Tencent Music Entertainment Group has applied to list its ADSs on either the Nasdaq or the New York Stock Exchange (NYSE) under the ticker symbol “TME.”

Tencent Music Is More Than Just One App

Mind you, unlike some of the other Internet companies, Tencent Music is not just one app. The company owns the four largest music apps in China: “QQ Music,” “Kugou Music,” “Kuwo Music,” and “WeSing,” a karaoke app.

One of the things that make Tencent Music stand out is the interaction between its users. As I mentioned earlier, Tencent Holdings, the parent company, had huge success with messaging and social networking. And that expertise is also seen in Tencent Music’s products.

“On our platform, social interactions such as sharing, liking, commenting, following and virtual gifting, are deeply integrated in our products and highly complementary to the core music experience, thereby enhancing our user experience, engagement and retention,” said Tencent Music in its F-1 filing. (Source: U.S. Securities and Exchange Commission, op cit.)

“As a result, we have built our platform into not just a music streaming platform, but a broad community for music fans to discover, listen, sing, watch, perform and socialize.”

Tencent Music vs. Spotify

There are several interesting things to note in the Tencent Music vs. Spotify comparison.

First, I don’t consider these two companies to be direct competitors just yet. While they both offer music streaming services, Tencent Music’s user base is concentrated in China. Spotify, on the other hand, has not launched its service in that country.

Tencent Music Spotify
Monthly Active Users (Q2 2018) 800 million+ 180 million

Second, the companies actually have a strategic collaboration. Last December, Tencent and Spotify announced that they would swap stakes in their music businesses.

In a joint statement last year, the two companies said the following:

TME and Spotify will acquire new shares representing a minority equity stake in each other for cash. In addition, Tencent will invest in Spotify through secondary purchases. Following these transactions, Spotify will hold a minority stake in TME, and both Tencent and TME will hold minority stakes in Spotify.

(Source: “Spotify, Tencent and Tencent Music Entertainment Announce Equity Investments,” Tencent Holdings Ltd, December 8, 2017.)

Third, while Tencent Music has a much larger user base than Spotify in terms of MAUs, most of those users are non-paying subscribers. In the second quarter of 2018, Tencent Music had 32.8 million paying users, which was a very small fraction of its 800 million+ user base.

Spotify, on the other hand, had 83 million paid subscribers during this period, representing 46% of its MAU. (Source: Spotify Technology SA, op cit.)

Another thing to note is that Spotify did not take the usual route when it went public.

In this day and age, most companies hire one or several investment banks as underwriters when they want to go public. Spotify, however, chose to do a direct listing. That is, the company offered its shares directly to the public without any Wall Street banks underwriting them.

How did that go?

Quite well from an investor’s perspective. The New York Stock Exchange had set the reference price of Spotify at $132.00. On its first day of trading, SPOT stock opened at $165.90, which was 25.7% above the reference price.

Nevertheless, Tencent Music is going public the conventional way. The company has hired several investment banks, with Bank of America Corp (NYSE:BAC) and Morgan Stanley (NYSE:MS) among the lead underwriters.

Growth Prospects After the Tencent Music IPO 

As mentioned earlier, Tencent Music has more than 800 million users. Since China has a population of approximately 1.4 billion, I’d say that the company has already done the bulk of the work when it comes to customer acquisition.

What Tencent Music could do, and where the real growth opportunity lies, is expanding its paid subscriber base.

The good news is, despite its relatively small portion of paying users, that number has been growing rapidly.

The chart below shows the paying ratio for TME’s online music services and social entertainment services over the last several quarters.

Tencent Music’s Paying Ratio

(Source: U.S. Securities and Exchange Commission, op cit.)

As you can see, more and more people have been paying for TME’s services. In the company’s online music services apps, the paying ratio went from 2.1% in the third quarter of 2016 to 3.6% in the second quarter of 2018.

In the social entertainment services segment—the karaoke app—the paying ratio more than doubled from 2.0% to 4.2% during this period.

The best part is, while Tencent Music has a long way to go in terms of monetization, the company is already turning a profit. In the first six months of 2018, TME generated ¥1.9 billion in operating profit, which quadrupled the ¥479.0 million earned in the first half of 2017.

This is particularly impressive, given the fact that even with a much larger proportion of paying users, Spotify reported an operating loss during that period.

The top-line number improved as well. Tencent Music revenue totaled ¥8.6 billion in the first half of 2018, marking a 92.2% increase year-over-year.

Normally, when a company has established a dominant market position and has reached most of its target customers, growth will slow down. But at Tencent Music, business is still growing rapidly, despite being undeniably the leading player in the Chinese music streaming market.

At the same time, while the company has a low-single-digit paying ratio, it is already profitable. In the fast-changing Internet industry, being profitable is a major sign of strength.

Thanks to Tencent Music’s impressive growth, Wall Street expects the company to float at a valuation of between $29.0 billion and $31.0 billion.

Analyst Take

No doubt, with a hefty valuation and fast-growing financials, the Tencent Music IPO will be one of the most highly-anticipated ones.

However, given the current stock market environment and sentiment toward Chinese Internet companies, there will be some uncertainties. For instance, Chinese e-commerce giant Alibaba has seen its ADS value decline by 20% since the beginning of 2018. Baidu, which runs the most widely-used search engine in China, dropped 17%.

It doesn’t help that China’s own stock market is struggling. The Shanghai Composite Index, for example, has tumbled more than 18% in 2018. The Hang Seng Index (of which Tencent Music’s parent company, Tencent Holdings, is a component) has slipped 14% this year.

Still, a user base of more than 800 million is nothing to sneeze at. Furthermore, with a booming middle class in China that’s ready to pay for subscription-based services, Tencent Music could have plenty of monetizing opportunities.

Therefore, the TME stock IPO should be taken seriously, to say the least.