Company background

Tencent Music Entertainment (TME) is China’s trailblazer in online music entertainment services, offering both online music and music-centric social entertainment services. The company boasts an extensive user base and operates four leading mobile music products in the domestic market: QQ Music, Kugou Music, Kuwo Music, and WeSing. TME provides users with diversified music social entertainment products, creating an all-scenario music experience that includes "discover, listen, sing, watch, perform, and socialize." This empowers users to engage in music creation, appreciation, sharing, and interaction.

Financial performance

In the first quarter of 2025, the company generated total revenue of RMB 7.4 billion, representing a year-over-year increase of 8.7%. By segment, online music service revenue reached RMB 5.8 billion, up 15.9% year-over-year, primarily driven by growth in subscription service revenue and advertising service revenue. Social entertainment service and other service revenue amounted to RMB 1.6 billion, down 11.9% year-over-year, mainly due to impacts from compliance procedures and adjustments to live-streaming features. In terms of profitability, the company’s gross profit margin rose to 44.1% in Q1 2025, largely attributable to an optimized membership mix and increased proprietary content. Operating profit surged to RMB 4.8 billion, a 146.9% year-over-year increase, primarily fueled by a one-time gain from equity obtained through an associate company. Adjusted net profit grew to RMB 2.2 billion, up 22.8% year-over-year. Concurrently, the company announced an annual dividend of USD 0.09 per ordinary share for 2024.

Online Music Services: ARPPU as the Core Growth Engine

In the first quarter of 2025, online music subscription revenue reached RMB 4.2 billion, up 16.6% year-over-year, primarily driven by Super Digital Music Package (SDIP) growth and reduced promotional discounts. Advertising service revenue totaled RMB 1.6 billion, increasing 13.7% year-over-year, mainly attributable to diversified product offerings. Operationally, the number of online music paying users grew 8.3% YoY to 123 million, with the paying ratio further rising to 22.1%. Narrower promotional discounts lifted Average Revenue Per Paying User (ARPPU) by 7.5% YoY from RMB 10.6 to RMB 11.4 monthly, while Monthly Active Users (MAU) contracted 4.0% YoY to 555 million.

The company stimulates deeper and broader music consumption through enriched content services, diversified membership privileges, and precision operations, driving high-quality growth in both standard and premium memberships. For non-paying users: on one front, incentive-based advertisements and interactive tasks maintain engagement while generating ad revenue; on another front, fan economy models – including digital albums, merchandise, and song rewards – create additional monetization touchpoints to enhance overall user monetization efficiency. We expect ARPPU elevation to remain the primary growth driver.

Company valuation

According to management, the company will continue optimizing its membership system, enriching exclusive benefits, and implementing precision operation strategies to drive dual growth in both SDIP scale and ARPPU. Consequently, we forecast 2025-2027 online music service revenue at RMB25.4/28.5/31.3 billion, representing YoY growth of 17%/12%/10%. Simultaneously, considering tightening regulations and plateauing traffic in the livestreaming industry, we project social entertainment service and other service revenue at RMB5.7/5.1/4.7 billion, reflecting YoY declines of 15%/10%/7%.

For the full-year outlook, the dual engines of SVIP subscriptions and advertising revenue – coupled with optimized content cost control and deepened partnerships with copyright holders – will sustain momentum. Management anticipates accelerated full-year revenue growth and continued gross margin expansion. While sales expenses will increase moderately but at a slower pace than revenue growth, administrative expenses will remain stable. This will drive significant YoY improvement in net profit margin. Therefore, we project 2025-2027 total operating revenue at RMB31.1/33.6/36.1 billion, with net profit attributable to shareholders at RMB9.0/8.8/9.6 billion, translating to EPS of RMB2.89/2.85/3.11. Given the company’s high-growth profile, we select NetEase Cloud Music and Spotify as comparable companies. Applying a 30x 2025 forecasted P/E multiple yields a target price of HKD 95. Current share price implies 2025-2027 P/E multiples of 26/27/25x. We initiate coverage with a "Accumulate" rating.

Risk factors

1) Intensifying competition;
2) Slower-than-expected user growth;
3) Copyright risks.

Financials

Current Price as of: Jul 21
Exchange rate: HKD/RMB = 0.91
Source: PSHK Est.

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