The “Spotify of China” Just Had Its IPO; Should Investors Consider It?

Tencent Music Entertainment Group
iStock.com/Tero Vesalainen

Tencent Music Entertainment Group IPO

It’s no secret that investing in initial public offerings (IPOs) can be very profitable. But not every IPO is going to be a slam dunk, even if the company is solid. Just take a look at Tencent Music Entertainment Group (NYSE:TME), known as “the Spotify of China.”

Tencent Music Entertainment Group went public on December 12. The company priced its shares at $13.00 apiece, which was at the bottom of its stated range of $13.00–$15.00.

On its first day of trading, TME stock surged 9.2% to $14.19, which was a pretty good start. However, the stock was not able to maintain that momentum.

This morning, shares of Tencent Music Entertainment Group tumbled to around $12.10 apiece, which was below the company’s IPO price.

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Still, before you throw Tencent Music stock out the window, I want to point out that, despite its lackluster share price performance so far, the company actually has a solid business in place.

And that business has been booming.

TME Stock: The Spotify of China

The best way to understand TME’s business is to think of it as “the Spotify of China.” Tencent Music is the owner of all top four mobile music apps in China:  “Kugou Music,” “Kuwo Music,” “QQ Music,” and “WeSing,” a karaoke app.

As is the case with most Internet companies, we can get an idea of Tencent Music’s presence by looking at the number of its active users.

According to a recent filing to the Securities and Exchange Commission (SEC), Tencent Music had more than 800 million unique monthly active users (MAUs) in the third quarter of 2018, making it by far the largest online music entertainment platform in China. (Source: “Tencent Music Entertainment Group,” U.S. Securities and Exchange Commission, last accessed December 17, 2018.)

Worth noting is that the company has a solid backer. Tencent Music is the music division of Tencent Holdings Ltd (OTCMKTS:TCEHY, HKG:0700), one of the biggest Internet companies in China.

Tencent Holdings’ messaging and social network platforms, “Weixin” and “WeChat,”  have more than a billion monthly active users.

The Tencent brand has long been a household name for China’s Internet users. The parent company’s giant platform can provide a convenient way for Tencent Music to further expand its business.

Moreover, “the Spotify of China” actually has a strategic collaboration with the real Spotify. Through a share exchange last year, Spotify Technology SA (NYSE:SPOT) got a nine percent stake in Tencent Music.

Still, you might be wondering how these two companies compare to each other. So let’s take a look at the numbers.

As I mentioned, Tencent Music had more than 800 million MAUs. Spotify, on the other hand, reported that it had 191 million MAUs at the end of the third quarter of 2018. (Source: “Spotify Technology S.A. Announces Financial Results for Third Quarter 2018,” BusinessWire, November 1, 2018.)

Therefore, TME’s user base was quite a bit larger. What Spotify excels at, though, is monetization. In its third quarter, Spotify had 87 million paying subscribers, which is more than 45% of its MAUs.

Tencent Music, on the other hand, had 24.9 million paying users of its online music services (out of 655.0 million users) and 9.9 million paying users (out of 255.0 million users) of its social entertainment services, translating to paying ratios of 3.8% and 4.4% for the respective segments.

Tencent Music Stock: Growing Financials

Online music streaming is a fast-growing business, which is why Spotify has been delivering some impressive growth in its financials. As it turns out, the “Spotify of China” does not disappoint on that front, either.

According to Tencent Music’s SEC filing, the company generated RMB13.6 billion (almost $2.0 billion) of revenue in the first nine months of 2018. This was an 84% increase from the RMB7.4 billion the company earned in the year-ago period.

At the same time, “the Spotify of China” is also profitable. Tencent earned an adjusted profit of RMB3.3 billion ($474.0 million) in the first three quarters of 2018, marking a staggering 163% increase year-over-year.

Analyst Take

There you have it, Tencent Music Entertainment Group is operating the most dominant online music platform in China. And because Spotify is yet to enter the Chinese market, Tencent Music stock represents a great opportunity for investors who want to get some exposure to the booming Chinese music streaming industry.

Nevertheless, the company got unlucky due to the timing of its IPO. The U.S. stock market just had a huge sell-off. And the ongoing trade tension between the U.S. and China has made investors cautious about buying shares of a newly listed Chinese company. None of this is Tencent Music’s fault, but investors should take note of these factors before putting their money in TME stock.