Tencent Music continues to deliver Superior Value to Users but Politics is a risk! (Q3 2020)

TME reported Q3 2020 results on Nov 10th. Key operational metrics are good. But Chinese politics is targeting the tech sector and its monopolies …

TME’s key operating metrics are developing very well overall

Mobile MAU – online music (mn)646661(2.3%)
Mobile MAU – social entertainment (mn)235251(6.4%)
Paying users – online music (mn)51.735.446.0%
Paying users – social entertainment (mn)10.512.3(14.6%)
Monthly ARPPU – online music (RMB)
Monthly ARPPU – social entertainment (RMB)166.7126.332.0%
extract from results

Revenue is growing strongly with RMB 7,575m Q3 revenue, up +16% yoy, after growing at yoy rates of 27% and 42% in Q1 and Q2.

  • Online music segment revenues grew +26%
    • despite a decrease in sublicensing revenues and sales of digital albums.
    • driven by strong growth in music subscription revenues +55%
      • paying users +46%, pushed by long-form audio
      • ARPPU +5.6%
    • very strong advertising development that should continue,
      • 100%+ growth yoy
      • accounting for about RMB 415m now in Q3
  • social entertainment revenues increased by 12.7%
    • driven by increased revenues from online Karaoke and live streaming
    • ARPPU increased by +32% yoy while paying users decreased by -14.6%
      • 36:30

TME US trades well above my buy price from my Oct analysis, despite feat of harsher politics and regulation targeted at the Chinese tech behemoths.

During the webcast some interesting pieces of their future strategy were revieled. I will list some bullet points only below:

  • Online Music
    • largest sequential net adds of 4.6m surpassing 50m subscribers driven by
      • well executed paywall strategy, on track
        • to exceed the 20% target of content behind the paywall by year end
      • bundling, (temporary) promotion, discounts all good drivers
      • retention rate continues to improve on sequential basis
  • Long-form audio
    • user penetration has actually reached over 11% regarding total user base
    • is well accepted by our users, seeing a very strong and healthy growth trend.
    • focusing on growing our user base and penetration
    • monetization should pick up in coming years (subscription + advertising)
  • Gross Margin
    • subscription revenue and advertisement revenue growth rapidly have a positive impact on gross margin
    • “advertising is going to become one of the significant revenue streams for TME”
  • Social entertainment
    • And then in terms of the question around ARPPU and revenue mix within social entertainment, it is not that the live streaming revenue is outgrowing the karaoke revenue. That’s not the case.
    • In fact, the karaoke revenue continued to grow at a faster pace than the live streaming revenue this quarter.
    • Reason for ARPPU increase primarily a mathematical reason
      • ARPPU (+31%) = social ent. revenue (+13%) / nmbr of paying users (-14%)
    • platform revenue continues to grow. Within that
      • advertising revenue is growing faster than virtual gifting revenue
        • leading a drop in paying users, but
        • resulted in a growth in the overall WeSing revenue.
    • product enhancements within WeSing.
      • launched a new design of recommendation feed on the front page
        • includes a full screen feed making browsing content more immersive.
        • enhanced recommendation algorithm allowing users to see a greater variety of content instead of just content posted by friends.
        • creates more demand for content consumption
          • more opportunity to monetize through advertising
          • opposed to monetize through virtual gifting amongst friends
      • average daily user time spent started to improve. Gives us confidence that social entertainment MAUs will bottom in Q4, start to improve into 2021.
  • Investments into
    • video enrichment across all of our apps (official music videos + user-generated).

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