Tencent Music (NYSE: TME) went public on Dec. 12 at $13 per share, at the bottom of its $13 to $15 range, and raised $1.1 billion. The stock finished the first trading day at $14, giving it market valuation of $21 billion — which was well below the $25 billion to $30 billion valuation it previously targeted. The company originally planned to go public in October, but it postponed its IPO due to unfavorable market conditions.
Tencent Music’s market debut was stable, but Chinese stocks are still on shaky ground due to unresolved trade issues and a weak yuan. Can Tencent Music win over investors in this hostile environment? Let’s take a closer look at the company to find out.
What does Tencent Music do?
Tencent Music is China’s largest online music-streaming platform with over 800 million monthly active users (MAUs). Its ecosystem merged the music apps QQ Music, Kugou, and Kuwo with the karaoke platform WeSing — which together control about 75% of China’s streaming music market.
Its daily active users (DAUs) spend over 70 minutes per day on the platform, which has access to over 20 million songs from over 200 domestic and international music labels. Unlike its smaller rivals, Tencent Music holds exclusive deals with many Western artists.
How does Tencent Music make money?
Tencent Music’s revenue nearly doubled year over year to $2 billion during the first nine months of 2018, and its net income more than tripled to $394 million.
Seventy percent of its revenue comes from its social entertainment services, which include virtual gifts on WeSing (where fans purchase for their favorite singers) and premium memberships — which grants them access to live-streaming concerts. The social platform’s paying users grew 24% annually to 9.9 million during the third quarter, giving it a paid ratio of 4.4%, while generating 118.5 yuan ($17.22) in average revenue per paid user.
The remaining 30% of its revenue came from its online music services, which include paid subscriptions to its ad-free platform, a la carte music sales, and ads for free listeners. The unit’s paid users rose 36% annually to 24.9 million during the third quarter, giving it a paid ratio of 3.8% — which Tencent Music admits is “very low compared to online games and video services in China and online music services globally.” The unit brought in only 8.5 yuan ($1.24) in average revenue per paid user during the third quarter.
Simply put, Tencent Music generates most of its revenue from a small (but growing) sliver of paid users instead of free ad-supported tiers. The addition of WeSing’s social platform makes it more profitable than Spotify (NYSE: SPOT), which rigidly generates all of its revenue from premium subscriptions and ad sales.