Tencent Music Reports Strong Quarter Before Regulator Crackdown

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While Chinese regulators were placing strict control upon the country’s tech sector this spring, its local music streaming giant Tencent Music Entertainment improved revenue and subscriber numbers substantially. In the period from April 1 to June 30, the parent company to steaming services QQ, Kuguo and Kuwo saw music revenues climb 32.8% to 1.79 billion RMB ($277 million) and subscribers jump 40.6% to 66.2 million, compared to the prior quarter, according to the company’s second-quarter earnings report released Monday (Aug. 16). For a company with a 77% market share in the country, it’s a testament to the rapid pace of growth in China’s hot music market. (That’s far greater gains on both accounts, in percentage terms, than Spotify achieved in same time span — 17% and 19.6%, respectively — for example.) TME’s total revenue, which includes social entertainment, grew 15.5% to 8.01 billion RMB ($1.24 billion).

Those encouraging numbers are from a different era, however. They’re from before TME’s ensnarement in the Chinese government’s scrutiny of some foreign-listed companies — Tencent Music trades on the U.S. New York Stock Exchange — and key areas such as technology, healthcare and education. In April, regulators made international headlines by handing out harsh penalties to major tech companies, such as an 18.2 billion RMB ($2.8 billion) antitrust fine levied against Chinese e-commerce giant Ali Baba. Then in July, the Cyberspace Administration of China opened an investigation into ride-hailing app Didi, just days after its initial public offering raised $4.4 billion, and ordered app stores in China to remove Didi’s app. So far, the Chinese government has unleashed at least 50 regulatory actions — mostly affecting tech companies — in recent months, according to The Economist.

In July, Chinese regulators demanded that Tencent Music end its exclusive licensing agreements with record labels. It could have been worse: The company was spared any massive fine, app store ban or forced sales of any of individual streaming service. Still, TME’s statement on Monday was quick to address regulators’ concerts about its market dominance by saying it “sincerely accepts the decision issued in July by the regulator pertaining to exclusive music licensing arrangements. We are committed to fully complying with all requirements in a timely manner … [and] promoting the long-term, healthy development of the digital music industry.”

Ironically, the government’s claim about Tencent Music’s market power had the unintended consequence of hurting the company’s main competitor. Amid the regulatory uncertainty and the resulting weakening of the Hong Kong IPO market, Netease, the maker of China’s second-most popular streaming service, Netease Cloud Music, dropped its plans to spin off the music service and raise up to $1 billion, according to reports.

It is unclear how the regulations will impact Tencent Music’s fast-growing business and the country’s streaming marketplace. The company would only state the regulations will have “some impact” to business operations. The earnings call on Wednesday (Aug. 16) at 8 a.m. EST will give Tencent Music an opportunity to expand on Monday’s statement and provide details into the regulator’s requests.

In the meantime, however, investors appear wary. Shares of Tencent Music fell 9% on Monday after dropping 6.3% the previous week. Tencent Music’s stock price has fallen 43.5% since July 26 when Chinese regulators ordered an end to the company’s exclusive licensing agreements.

Financial metrics (Q2 2021 vs. Q2 2020)

Revenue: 8.01 billion RMG ($1.24 billion), up 15.5%
Online services revenue: 2.2 billion RMB ($343 million), up 32.8%
Music subscription revenues: 1.79 billion RMG ($277 million), up 36.3%
Gross margin: 32%
Net profit: $135 million

User metrics (Q2 2021 vs. Q2 2020)

Subscribers: 66.2 million, up 40.6% (up 5.3 million from Q1)
Music mobile monthly average users: 623 million, down 4.3%
Average revenue per music user: 9.0 RMG, down 3.2%
Social mobile monthly average users: 209 million, down 13.3%

Stock market

Share price change in August: -15.6%
Change since all-time high on March 23: -83.8%

Key events in Q3 2021

China regulator orders Tencent Music to end exclusive licensing deals with labels (July 26)
Tencent Music spared from forced sales in China regulatory crackdown (July 9)
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