Tencent Music jumps in New York debut as investors pour in despite global tech wobbles

  • Tencent Music’s IPO is latest in a series of Chinese companies going to market this year
  • This is despite gathering storm clouds and volatility related to US-China trade war
PUBLISHED : Thursday, 13 December, 2018, 10:14am
UPDATED : Thursday, 13 December, 2018, 10:04pm

Tencent Music Entertainment Group, the music streaming spin-off of China’s biggest social network operator Tencent Holdings, rose in its trading debut on the New York Stock Exchange on Wednesday, as investors shrugged off a recent wobble for global tech stocks amid a US-China trade war and slowing growth.

Shares of the Chinese music streaming service traded as high as US$14.75 in first 10 minutes of trading, before easing slightly to close up 7.7 per cent at US$14 as investors grabbed the opportunity to take a slice of the fast-growing music streaming industry.

The market close gave Tencent Music a market capitalisation of about US$22.9 billion, on par with Swedish peer Spotify Technology’s current valuation of US$23.1 billion. Spotify is an investor in the Chinese company.

Tencent Music’s IPO is the latest in a series of Chinese companies going to market this year despite gathering storm clouds and volatility related to the US-China trade spat. Chinese smartphone maker Xiaomi, touted as one of this year’s hottest Hong Kong IPOs, had a bumpy ride and fell below its initial price while Chinese food delivery giant Meituan, which went public in September, is currently a quarter lower than its debut price.

Despite the uncertain macro environment, many analysts are positive on Tencent Music's diversified monetisation model compared with the concentration of revenue at Spotify from subscription and ads.

Tencent Music operates music streaming app Kugou Music, Kuwo Music and QQ Music, which works more like Spotify, and WeSing, a karaoke music app. Social entertainment services, which include virtual gifting revenues from online karaoke and live-streaming services, accounted for 70 per cent of total revenue in the first half of 2018 at Tencent Music. Music streaming revenue accounted for the rest.

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“In China, virtual gift sales are considerably more efficient than ads or paid subscriptions, thereby prompting [Tencent Music] to pursue a path different from its global peers,” Charlie Chai, analyst at 86 Research wrote in a note earlier this week.

In contrast to Spotify, which is still unprofitable, Tencent Music posted a profit of 2.7 billion yuan (US$394 million) for the nine months ended September 2018, compared with 785 million yuan in the same period a year ago, the company reported earlier this month.

Tencent Music reported a total of more than 800 million monthly active users, four times of that of the Swedish app, but the pay ratio – the proportion of users who pay for content – is only a tenth of that at Spotify, with 3.8 per cent paying for online music and 4.4 per cent for social entertainment on Tencent Music platforms.

“The number of paying users on Tencent Music Entertainment's platforms should continue to climb steadily as the company improves its efficiency in monetisation,” Vey-Sern Ling wrote in a note earlier this week. “Over time, more users will likely pay subscriptions for streaming music, with the stricter enforcement of copyright protection in China increasing their propensity to spend on premium content.”

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While the average pay ratio for China online music platforms at 5 per cent is still well behind global peers at 20 to 30 per cent, the younger generation — who are more accustomed to paying online for content — are expected to boost both the pay ratio and overall spending, according to a CLSA report in September.

China’s online music market was worth about 17.5 billion yuan in 2017, with growth of 22 per cent compared to the previous year, according to April data from China’s National Copyright Administration. The number of online music users in China reached 555 million in June, accounting for 70 per cent of all internet users in the country, according to an August report by state agency China Internet Network Information Centre.