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Tencent's initial public offering factory has another output of the production line: Tencent Music, owned 58% by the social media giant, seeks to become public in the United States in a list that could value the online music company to more than 25 billion dollars. Investors can, however, find something discordant about this deal.
It is natural to compare Spotify – the Swedish company worth about 32 billion USD after its own registration in April – to Tencent Music: the two companies even share about 9% of each other as a result an exchange of shares last year. But there are important differences.
Most of Tencent Music's revenue does not come from subscriptions to music streaming services, Spotify's daily bread. Despite more than 800 million active users per month, four times more than Spotify, Tencent Music has only 23 million paying subscribers, compared to 83 million users. The vast majority of users listen to free music on Tencent Music apps. Over the years, piracy in China has made customers less willing to pay for music.
Tencent Music generates more than 70% of its revenue from a Chinese-only model: the sale of virtual gifts for its online karaoke services and live streaming.
Photo:
Reuters
Instead, Tencent Music generates more than 70% of its revenues from a Chinese-only model: the sale of virtual gifts for its online karaoke services and live streaming. Customers who buy these virtual gifts – flowers, diamond rings, private jets, etc. – can use them to tip artists who broadcast live performances on Tencent music apps. Performers can convert these gifts into cash.
The problem is that after years of explosive growth, live broadcasting is starting to slow in China. Revenues from the sale of gifts by Tencent Music have also slowed significantly in recent quarters. Competition is growing with other online entertainment options, including streaming video games or apps such as Douyin. Douyin, a short video home owned by the future Unicorn Bytedance Technology, has over 500 million active users per month worldwide.
Despite these difficulties, the valuation of Tencent Music seems to anticipate a strong growth: with 25 billion dollars, it would represent 64 times the profits of the 12 months ended the month of June. Its competitors, YY Inc., listed in the United States, and
Momo
Inc.
are trading at high multiples of their historical earnings.
In addition to all of this, Tencent's halo may not shine as brightly as before. The shares of the technology giant have fallen by 22% this year, because of regulatory problems in China. Several IPOs of companies backed by Tencent have sparked a lot of enthusiasm over the past year, before slipping below their listing price. Yixin's online self-financing company has lost up to two-thirds of its value since its IPO last November.
Investors looking to Tencent's latest market offer should avoid getting caught when the music stops.
Write to Jacky Wong at [email protected]
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