Tencent Music (TME) Better Cost Management And Effective Monetization To Watch

The consensus revenue forecast for Q4 2024 is RMB 7.300B while the consensus EPS forecast for Q4 2024 is RMB1.090 or 17 cents.

Consensus estimates may project mid-single-digit YoY revenue growth (e.g., 5-8%), driven by subscriptions offsetting social entertainment softness.

Profitability could improve if margin-enhancing strategies (e.g., cost cuts, subscription mix) materialize.

Tencent Music gave a positive earnings call on 12 Nov 2024 which saw its share price gaining 7.36% since.

The earnings call reflects a strong quarter for Tencent Music Entertainment Group, with significant growth in online music services revenue, subscriber base, and SVIP memberships, alongside robust advertising revenue growth. However, there were challenges, including a decline in social entertainment revenue and an increased effective tax rate. Overall, the highlights significantly outweigh the lowlights.

In the third quarter of 2024, Tencent Music Entertainment Group reported impressive financial performance, with a 35% year-over-year increase in IFRS net profit, reaching RMB 1.7 billion. The company's total revenues grew by 7% year-over-year to RMB 7 billion, driven by a 20% increase in online music services revenue, which amounted to RMB 5.5 billion. The quarter also saw a significant rise in paid subscribers, reaching 119 million—a 16% year-over-year increase—contributing to a 5% increase in ARPU to RMB 10.8. The Super VIP program surpassed 10 million members, further boosting the company's growth prospects.

Additionally, the gross margin improved to 42.6%, reflecting effective monetization strategies and cost management, while operating expenses were kept at 17.4% of total revenues. The management expressed optimism for future growth, with plans to enhance user engagement, expand SVIP memberships, and leverage high-quality content offerings.

Music Subscriptions: TME’s core growth driver. Success hinges on converting free users to paying subscribers (e.g., via exclusive content, improved app features, or bundled offerings with Tencent’s ecosystem partners like WeChat). In Q3, the number of online music paying users reached 119 million, representing a 16% increase year-over-year with quarterly net adds of 2 million users.

In Q3, Tencent Music surpassed 10 million SVIP members, demonstrating strong growth in their premium membership program.

Live streaming and karaoke revenues have faced headwinds due to regulatory scrutiny and competition from short-video platforms (e.g., Douyin/TikTok). Stabilization or innovation in this segment (e.g., virtual concerts, gamification) will be critical.

Online music services revenue grew by 20% year-over-year, contributing to a 29% year-over-year increase in adjusted net profit. IFRS net profit increased by 35% year-over-year to RMB 1.7 billion.

Social entertainment services and other revenues decreased by 24% year-over-year.

Shift toward higher-margin music subscriptions (vs. lower-margin social entertainment) could improve gross margins. Cost discipline in R&D and marketing will also play a role.

Advertising revenues experienced strong year-over-year growth, primarily due to the growth in ad-supported music revenues. Effective tax rate for Q3 was 17.7%, up from 12.2% in the same period of 2023, mainly due to accrual recording tax related to earnings to be remitted by PIC subsidiaries.

Licensing deals with major labels (Sony, Warner, Universal) and exclusive releases (e.g., Chinese idol groups, international artists) drive user retention. AI-driven curation (e.g., personalized playlists) may enhance engagement.

Collaborations with Tencent’s broader ecosystem (games, video content) could unlock cross-promotional opportunities.

China’s ongoing tech sector regulations (antitrust, data privacy, content moderation) may impact operations. Recent relaxation of gaming and tech crackdowns could signal a more favorable environment. Tencent Music published inaugural ESG report and Tencent Musician platform recognized as one of China’s first model cases for the national Copyright Powerhouse strategy.

Rivals like NetEase Cloud Music (with its niche indie focus) and ByteDance’s music ambitions (via TikTok integration) threaten market share. TME’s scale and Tencent’s ecosystem remain key advantages.

Tencent Music ‘s introduction of new product features like AI-generated content and enhanced user engagement experiences contributed to user retention and platform differentiation.

China’s economic recovery and consumer sentiment will influence discretionary spending on entertainment. A rebound in advertising demand could also benefit TME’s ancillary revenue streams.

Based on 5 Wall Street analysts offering 12 month price targets for Tencent Music Entertainment Group in the last 3 months. The average price target is $14.20 with a high forecast of $16.00 and a low forecast of $13.00. The average price target represents a 14.52% change from the last price of $12.40.

TME share price could be affected by these risk factors moving forward. So I think it is important that we continue to monitor how the Chinese economy is doing and whether any economic boost from the government would benefit Tencent Music.

Social Entertainment Decline: Further regulatory tightening or user migration to short-video platforms like Douyin.

Content Costs: Rising licensing fees or competition for exclusive content could pressure margins.

Macro Weakness: A sluggish Chinese economy may reduce consumer spending on non-essentials like music subscriptions.

If we looked at how Tencent Music share price have been performing despite a recovery seen in most of the Chinese ADRs stocks, TME barely stay in between the 50-day and 200-day, and there is no significant strength in momentum seen in RSI.

So if you are planning to look at getting into TME, I would think we need to consider these few factors that could lead to potential upsides.

Only then, we could see a potential long-term growth and TME could sustain its position.

Subscription Growth: If TME achieves a paying ratio closer to 25-30% by late 2024, subscription revenue could outpace expectations.

Innovation: Monetizing AI tools (e.g., AI-generated music, voice synthesis) or NFT-based digital collectibles.

International Expansion: Early-stage moves into Southeast Asia or other markets could diversify revenue.

TME’s Q4 2024 earnings will likely reflect its transition from a social entertainment-heavy model to a more sustainable, subscription-driven business. Success depends on:

Mitigating social entertainment declines via product innovation.

Navigating regulatory and competitive pressures.

If execution aligns with these goals, TME could report stable revenue growth and margin expansion. However, risks around competition and macro headwinds warrant caution.

Appreciate if you could share your thoughts in the comment section whether you think TME could report better cost management which lead to effective monetization.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.