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What’s Driving TME’s Stellar Q3 Financial Results? A deeper look into the music ecosystem built by TME

The New York Stock Exchange welcomes Tencent Music Entertainment Group (NYSE: TME) on their First Day of Trading. CEO, Director Cussion Kar Shun Pang, joined by Stacey Cunningham, NYSE President, rings The Opening Bell®.
admin 2020-11-30 Collect

On November 10th, after Live Nation and Spotify posted their Q3 results, Tencent Music Entertainment Group also released its unaudited Q3 financial report.

In the third quarter of 2020, TME’s total revenues were RMB 7.58 billion (US$1.12 billion), with online music subscription revenues increased by 55% year-over-year to RMB 1.46 billion (US$215 million). Net profit attributable to the company’s shareholders was RMB 1.13 billion, and non-IFRS net profit attributable to equity holders of the company was RMB 1.35 billion (US$198 million).

As of press, TME’s stock price is $16.48, with a total market cap of $27.65 billion. According to  Bloomberg, TME’s Q3 revenue exceeded expectations, with 23 analysts recommending buy, 5 recommending hold, and 0 recommending sell.

According to the financial data website Insider Monkey, 30 hedge funds have included TME stock in their portfolios at the end of Q2 2020, which increased 20% during the quarter. Among them, Renaissance Technologies held US $164.9 million worth of TME stock as of September 30th.

While the market underwent serious turmoil during the pandemic, TME stock price remained fairly stable and has been on an upward trend recently due to its steady growth. So what is driving TME’s financial performance?

 

01

Consumer’s Willingness to Pay

 

In the first 9 months of 2020, TME online music subscription revenue grew by 55% year-over-year, driven by a 46% year-over-year increase in paying users. At the of the third quarter, TME’s paying users reached 51.7 million. The paying ratio reached 8.0%, which grew by 2.6 percentage points year-over-year and 0.8 percentage points quarter-over-quarter.

Since its IPO, TME’s paying ratio and ARPPU have been growing fast. In the third quarter, TME’s ARPPU was RMB 9.40 yuan, up by 1.1% month-over-month and 5.6% year-over-year, with social entertainment ARPPU as high as RMB 166.70 yuan, an increase of 33% month-on-month and 32% year-on-year. As of now, TME’s MAU has stabilized at over 800 million with paying users becoming the main driver of its growth.

In recent years, the population’s willingness to pay for music-related content has increased dramatically.

According to iResearch’s report, from March 2015 to March 2020, the number of mobile Internet users in China rose from 580 million to 980 million at a compound annual growth rate of 9.3%. With the change in devices, paying becomes more convenient and people become more accustomed to paying for content. Both music streaming and video streaming have gradually become necessities in people’s lives.

Of course, a large part of the paying user growth comes from Gen Z coming of age and becoming a new force in music consumption.

Statistics show that the population of Gen Z in China has reached 149 million. Compared to Millennials, Gen Z cares more about individuality, and they spend the majority of their free time on the internet and they are very willing to pay for good content.  main pastime immersion in online entertainment is their main way of leisure. , I am also used to paying for premium content. In 2020, as Gen Z are getting jobs and gaining financial independence, they will have more autonomy to spend money on their choice of content, which is a great opportunity for streaming platforms.

TME’s Yo! Bang published a research report on the music listening and consumption habits of its Gen Z users (born in 95-00).

tme2

According to the research, Gen Z male users mainly pay for music to meet their needs for more content (42.1%) and Gen Z female users mainly pay to support their favorite musicians or idol (59.1%). In addition, among the paying users, 62.4% of Gen Z men purchase membership/subscription services, and 63.4% of Gen Z women purchase digital albums and singles.

The increase in willingness to pay for good content is the main driver behind TME’s good financial performance. But obviously, there has to be good content for users to pay for.

 

02

Content for Everyone

 

In the third quarter of 2020, TME’s cost of revenue increased 19.1% year-over-year from RMB 4.3 billion yuan in Q3 2019 to RMB 5.12 billion yuan ($754 million), mainly due to increased investment in new products and content offerings.

This year, TME extended copyright licensing agreements with Universal Music Group and launched a joint venture label with UMG in China. It has also reached strategic cooperation agreements with many copyright providers such as Kobalt Music, Being, Forward Music, peermusic, and Merlin.

screen-shot-2020-11-29-at-5-45-24-pm

It is particularly worth noting that this year, TME has extended its collaboration in the music publishing field. At present, TME has covered over 80% of the world’s music publishing companies and has reached in-depth strategic cooperation with most top publishing companies.

Unlike master rights, publishing rights helps to cultivate UGC content and user engagement. Data shows a substantial increase in UGC content across QQ Music, Kugou Music, and Kuwo Music, which benefits the interactive experience on WeSing too.

According to MIDiA Research, global music-related UGC revenue will reach US $ billion in 2020. Seeing this opportunity, Warner/Chappell Music set up an office in Shanghai, and Universal Music Publishing Group entered China for the first time this year.

In terms of variety show music content, TME collaborated with popular variety show Sisters Who Make Waves. According to Yo! Bang music chart, its theme song “Priceless Sisters” stayed on the chart for a total of 6 weeks and remained within top 7 while it was on the chart. The song was the most popular among variety show music and helped the show draw in more audience for a longer period of time.

In addition, TME has obtained the exclusive music rights to 80% of all music variety shows, among which are CHUANG 2020, Youth With You 2, The Big Band 2, and Crossover Singer 5. TME also covers many non-musical variety shows, such as Ace VS Ace. In addition to music copyrights, TME also hosted interactive online events, bringing fans more ways to engage with their favorite musicians and celebrities.

Independent musicians are also contributing greatly to the content pool on TME platforms. On Tencent Musician Platform, both the number of participating indie musicians and the number of original songs uploaded to the platform see triple-digit year-over-year growth. The number of musicians exclusively on TME platforms increased by more than 20 times compared to a year ago due to increased financial incentives and technology-based support services.

TME’s increased ability to promote songs and musicians helped Ren Ran(任然)’s exclusively licensed song “Bird and Cicada” hit the 500 million view mark in Q3.

TME Live, the concert arm of TME is also growing stronger. Since its launch in March 2020, TME Live has held more than 30 online concerts, attracting high-profile sponsors globally and locally. In the third quarter, TME Live collaborated with famous musicians such as Andy Lau(刘德华), Charlie zhou(周深), Jessie J, etc.

Furthermore, TME has been exploring new ways to monetize live content. With the development of membership-only content such as Richie Jen(任贤齐)’s 2020 online concert, the paying user base continues to grow.

 

03

Community Building

 

In July, the updated 10.0 version of QQ Music launched a new social function Putong Community. The new function was well-received among younger users and became one of the biggest news in the music streaming industry.

Soon after its launch, Taylor Swift posed in the “Taylor Swift Group” in Putong Community to announce the release of her 8th studio album folklore, causing quite some excitement among fans.

screen-shot-2020-11-29-at-5-47-21-pm

Gen Z has more personalized and diversified consumption needs and a greater propensity for interactivity and participation. That’s why community building is very important for capturing Gen Z users.

In addition, TME has continued to invest in long-form audio content. During the third quarter, the number of licensed titles quadrupled year-over-year, driving  MAU penetration from 4.7% in Q3 last year to 11.7% this quarter. Long-form audio content helps to further engage users and make headway for both standalone high-value plans and cross-sale packages.

Take Kuwo Changting, which launched in April, as an example. The platform now hosts more than 10,000 long-form audio in 19 popular categories including comics, children’s books, audiobooks, Xiangsheng, etc.

In conclusion, the main factors supporting the market value of TME are:

First, the paying rate continues to increase, resulting in robust financial performance. Second, TME’s content competitiveness is strong. Third, Gen Z’s willingness to pay for good content promises future growth in the industry. Fourth, the development of long-form audio brings a lot of MAU and subscription potential. Fifth, continuous optimization of user experience and community building increases customer stickiness. We look forward to future performance of the company.

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