Tencent Music Earnings Preview: Online Music Business Soars, Paid User Base Continues to Expand

According to Bloomberg consensus estimates, Tencent Music is expected to achieve in 2023:

(1) Full-year revenue declining to 28.3 billion RMB, down 2.47% YoY;

(2) Net profit forecasted to reach 4.8 billion RMB, up 27% YoY;

(3) Q4 net profit anticipated at 1.3 billion RMB, increasing by 10.95% YoY.

In line with recent predictions from major institutions such as UBS International, Tencent Music's 2023 performance is portrayed as follows: (1) Annual revenue decreasing to 28.3 billion RMB, down 2.4% YoY; (2) Adjusted net profit projected to hit 4.8 billion RMB, rising 27% YoY; (3) By year-end 2023, music subscription revenue is estimated to reach 11.9 billion RMB, with a penetration rate of 15%.

Consolidating Bloomberg's data and forecasts from various institutions, both indicate a favorable performance for the company. The main reasons for improved performance are attributed to the growth in music subscription revenue, strong digital album sales, and the recovery of online advertising income, which have partially offset the negative impact on total revenue caused by the persistent weakness in social entertainment income.

Industry insiders view Tencent Music's overall financial situation in 2023 with a steady development attitude, primarily due to:

Tencent's online music business shows robust growth, with expectations of generating 11.9 billion RMB in revenue in 2023, a 37% YoY increase. The primary driver for this growth is the continuous rise in music membership numbers, fostered through initiatives like business partnerships and artist merchandise. It is forecasted that there will be a quarterly net addition of approximately 3 million members in 2024, contributing to a 39% YoY rise in subscription revenue.

In the social entertainment segment, stricter compliance and risk control measures following adjustments to some live streaming interactive features have led to sustained pressure on traditional live interaction services. Although Tencent Music's social entertainment revenue is expected to continue declining in 2023Q4, proactive measures taken during Q4, such as developing Karaoke services, are expected to gradually mitigate this decline starting from Q1 2024.

Tencent's core businesses consist of online music services (69.31%) and social entertainment services (30.6%), with the former accounting for nearly 70% of Tencent Music's total revenue.

Furthermore, effective pricing policy adjustments and optimized member benefits have led to a 14.5% YoY increase in monthly ARPPU to 9.85 RMB in 2023. Tencent Music anticipates reaching 84 million paying users for online music by the end of 2023, up 22.74% YoY. Additionally, the company plans to push for ARPPU growth through measures like reducing ineffective promotions and promoting super memberships, aiming for an ARPPU value close to the list price of 15 RMB in the long term.

Chart:Growth of Tencent Music's Paid Subscription Users (in millions)

Meanwhile, Tencent Music is actively taking steps to alleviate the negative effects on revenue, including developing the Karaoke business. In 2023, the company's social entertainment paid user base is forecasted to reach 7.47 million, down 4.2% YoY, with the downward trend in user numbers showing signs of relief.

Chart:Forecast of Tencent Music's Main Business Growth (in tens of millions)

In terms of industry competition, Tencent Music held a 72.8% share of the domestic music market in 2023, demonstrating a clear advantage over NetEase Cloud Music and other online music platforms in terms of both music content and user base.

Chart: Tencent Music Market Share

Despite the State Administration for Market Regulation's order in July 2021 to terminate exclusive music copyright agreements and high prepaid fees within 30 days, with mutual authorization rates not allowed to drop below 99%, Tencent Music has managed to garner substantial paid user revenue from its 1% exclusive music catalog. For instance, in the Top 100 hottest songs on Apple Music China Mainland in 2023, Jay Chou claimed 62 spots, occupying all of the top 5 and 9 out of the top 10 positions. The exclusive partnership between Jay Chou's management company JVR Music and Tencent Music underscores the continued significance of Tencent Music's exclusive copyright advantages in content superiority.

By Q3 2023, Tencent Music had 594 million monthly active users, compared to 207 million for NetEase Cloud Music. This vast user scale has granted Tencent Music a significant cost advantage in music copyright procurement, with content acquisition costs exceeding NetEase Cloud Music by 10 billion yuan, thereby reinforcing its exclusive music rights edge. [Image]

Overall, Tencent Music's dominant oligopoly position within the industry remains unshakable in the short term, which implies considerable potential for future growth trends within the sector.

We anticipate that Tencent Music's short-term revenue may be impacted by regulatory adjustments; however, the company's relatively strong control over costs and expenses suggests a stable and improving performance outlook. According to earnings conference guidance,the company's gross margin and profit margin are expected to continue rising in 2024. Moreover, Tencent Music boasts a robust cash position. As per data released by J.P. Morgan, as of September 2023, Tencent Music's cash, cash equivalents, time deposits, and short-term investments stood at 30.96 billion yuan, indicating a promising capacity to provide generous returns to shareholders.

(1) The growth of Tencent Music's paying users might not meet expectations.

(2) Increased regulation in live streaming, fan circles, and broader entertainment platforms could exacerbate competition dynamics, potentially leading to further declines in social entertainment revenue.