PE-backed Tencent Music gains on US debut

A total of 82 million American Depository Shares (ADS) were sold at $13 apiece – the bottom end of the indicative range – giving the company a market capitalization of around $22 billion. An additional 2.28 million ADS could be sold if the overallotment option is fully exercised, according to a filing. When the process was launched two months ago, TME was said to be targeting a $2 billion raise at a valuation of $25-30 billion.

The stock then opened at $14.10 on its first day of trading on the New York Stock Exchange on December 12 and closed at $14.

TME is majority-owned by Tencent Holdings, which subscribed to $32 million in additional shares alongside the IPO. The offering included 40.1 million ADS held by existing shareholders, including PAG Asia Capital, China Investment Corporation (CIC), and Shenzhen Capital Group. PAG and CIC sold very small portions of their overall holdings. PAG’s share of the proceeds is approximately $57 million and it still has an equity interest of about 9.3%, valued at $2 billion.

The private equity firm previously acquired China Music Corporation (CMC), owner of the largest library of music broadcasting rights in the country. In 2016, Tencent purchased a majority stake in the company at a reported valuation of $2.7 billion, far higher than that PAG paid on entry. The deal brought together China’s three leading mobile music apps – Tencent’s QQ Music and CMC’s Kugou and Kuwo. PAG swapped its shares in CMC for a stake in the new entity.

TME has adopted a dual-class share structure, giving Tencent 61.5% of the voting power, with PAG and CIC holding 11% and 7.4%, respectively. Spotify, a European music streaming platform that acquired a 9% stake in TME last December through a share swap, has a class of shares that offer negligible voting rights, a prospectus indicates.

Unlike many Chinese technology businesses that list in New York, TME is a profitable enterprise. Revenue reached RMB10.9 billion ($1.66 billion) last year, up from RMB4.36 billion in 2016, while net profit rose from RMB85 million to RMB1.32 billion.

The company’s main products are: online music streaming services QQ Music, Kugou Music, and Kuwo Music; live streaming services Kugou Live and Kuwo Live; and WeSing, which connects to Tencent-owned social networking assets like WeChat. It also has a library of over 20 million tracks licensed from 200 domestic and international music labels.

TME makes its money through subscriptions, virtual gifting sales, and sub-licensing to other online platforms that want to stream music owned by one of the record labels that work with the company. However, in terms of revenue split, TME is very different from Spotify. While the latter primarily relies on subscriptions, the former generates most of its revenue from gifting sales – for example, karaoke social community app WeSing, which allows users to tip performers they like.

Social entertainment services accounted for 71.3% of revenue in 2017. As of September, there were 9.9 million paying users in this area, with an average revenue per paying user (ARPPU) of RMB118.5. The company had 2.5 times as many paying users in online music services – chiefly subscriptions – but the ARPPU was just RMB8.5. TME had 34.8 million paying users in total out of a mobile monthly active user base of 910 million. These people spend an average of 70 minutes per day on the platform.

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• Topics
• Greater China
• Technology
• Media
• IPO
• China
• TMT
• PAG
• Tencent
• CIC
• Shenzhen Capital Group