At a certain point in 2022, you can see some value investors thinking that Tencent Music, which is listed with ticker TME on the NYSE, is undervalued:
Like many listed Chinese companies, their stock price soared in late 2020 to early 2021. Like many listed Chinese Companies, the share price came down as well.
But Tencent music has an easier to understand business model, but then it is also not that simple because of how innovative Chinese can be in thinking about how to monetize their users. What worked for Tencent Music is that it is profitable, unlike other companies.
The stock fell from $30 to $4 or so, and as with many value stories, there are enough supporters on both sides. With 4 years of history (it IPO in 2018), the naysayers will be saying how likely the figures can be trusted, after Covid, the demand and competition will change so much. The current share price (less than $10) tells us that there are some risks.
Well, now in near end 2025, we got a better picture.
There is stiff competition. The revenue struggled to grow at all.
But fxxk they really can keep cost under control. So much so that grew net income by 16%, 27%, 33%, 40% in the last 4 years just by controlling cost of revenue, and operating costs.
This year, we finally see top line growing.
And currently it trades at 20 times forward earnings.
I think with all things recently, I find the valuation to be fair. It is not expensive but if you grow your income just by keeping your cost in control, how long can you maintain that earnings growth rate? It has to come down.
20 times is fair for a recurring revenue business without growth, but the opportunity is whether they can grow like 10% in revenue, and if they manage the cost, and buy back a little of their shares they can grow at 20%.
This was definitely a value stock where without growth in top line, the income can grow.
Then it will be interesting. Can they do it? That is your research.
I laid out some of the numbers that I look at below, which might be useful to get you interested and started. There are no conclusions at the end of this article.
What is Tencent Music?
Tencent Music (TME) is China’s leading online music entertainment platform, backed by Tencent Holdings. It operates multiple popular apps including QQ Music, Kugou, Kuwo, and the WeSing karaoke app, covering virtually all aspects of digital music and social entertainment in China. It went public in December 2018 on the NYSE as American Depositary Shares (ADS).
Here are some stats:
- 551 million monthly active users (MAU)
- 125 million paying customers of online music
- Monthly average revenue per paying user (ARPPU) in CNY: $11.9, a 10% growth from last year
Tencent Music generates revenue through three primary segments:
- Online Music Services (Subscriptions + Advertising)
- Revenue from paid music subscriptions (ad-free, high-quality streaming) and digital ads in music apps.
- Dominant Segment in profitability — high gross margins (~40–50%+).
- Revenue growth is driven by paying users (over 120 million+) and increasing ARPPU (average revenue per paying user).
- Social Entertainment Services (Live streaming, virtual gifts, karaoke)
- Users can watch live streams, send virtual gifts, and participate in interactive singing.
- Historically the largest revenue contributor, but lower gross margin due to revenue sharing with performers/hosts.
- Revenues fluctuate with user engagement and regulatory oversight of live content.
- Others / Advertising
- Includes merchandise, content licensing, and other online services.
- Smaller contributor to overall revenue but complements the main segments.
Valuation
Tencent Music IPO in Dec 2018 and the price earnings then was about 78 times.
The current historical earnings per share (EPS) is $0.96 and at a share price of $18.93, the PE is 19.7 times. The projected forward EPS is $0.94, putting it at a PE of 20.1 times. Relative to history, this is not expensive at all.
If this is a business that is in a competitive environment, then it is not so cheap because the earnings can drop off anytime. However, if this business has a decent moat, then paying 20 times is not too expensive.
I think we have a bit of history (8-10 years) to consider and in a way, we learn from Netflix that while they may not have a lot of competition in their vertical, everyone is competing for attention. Each person only has 24 hours in a day.
How about if we factor in growth?
PEG takes the PE as the numerator divide by the growth rate at the denominator. What we get is a relationship between valuation and growth. If the number is small, preferably less than 1.25, the stock is relatively cheap if we factor in growth.
In this case I take the yearly PE divide by the net income growth for the year. If the income is negative, I don’t calculate for it. As you can see, there are many years that the PEG end up less than 1.
But we got to be careful to draw conclusions with 1 year’s of growth because the earnings can have some crazy growth in 1 year and how likely is that kind of growth going to repeat.
At some point, Tencent Music is not that cheap if we factor in how fast it can grow. But in recent two years, a PEG of 0.48 times is cheap. The PEG is cheap because the main reason for the growth was not top-line growth but cost optimization.
This means that the improvement in earnings will have to slow that at some point (like probably already slow down already).
I can see it growing at 10% p.a. if it maintains a tight operation and growing revenue by 5%, and that would put it at a current PEG of 2 times, which is not cheap. But if earnings can grow at 15% p.a., that puts the PEG at 1.3 times which is pretty reasonable.
What we have to discern is what kind of growth profile we are looking for.
What We are buying if We Pay $18.93 per Share Today
The chart below shows the growth of Tencent Music revenue year on year:
Since they IPOed in Dec 2018, revenue has been on a one way down.
But revenue picked up in the past year.
The chart below shows the Gross Margins of Tencent Music:
Gross margin is one of the area we can tell if a company is able to preserve its economic moat. A lowering of gross margin may indicate that the moat is not as strong.
Despite the revenue growth being so lackluster, gross margins dip after IPO but since 2023, the gross margin have improved significantly.
We can dive deeper by looking at the revenue, cost of revenue:
The blue bar is the revenue and the organ is the cost of revenue, which is the cost of providing the service to the customers. Revenue went up and peak in 2021 before going nowhere.
The Cost as a percentage of revenue shows us the cost of revenue divided by the revenue.
Since 2021, they went on an exercise to keep the cost in control.
Reasons for the margin dip from 2019 to 2021:
- 2019: Higher revenue sharing fees (share of revenue paid out to content creators / performers) and increase in content expenses.
- 2020: Increased investments in new products and content such as long-form audio and “TME Live” platform. Increased in revenue-sharing fees.
- 2021: Higher margin segments shrank or grew more slowly, lower margin segments make up a larger percentage of total revenue. Increased investments
Reasons for the margin improvement from 2022 to 2025:
- 2022: Drop in revenue from social entertainment services led to lower revenue sharing fees. Effective cost control, and optimization of content costs.
- 2023: Shift in revenue mix to more online music services which are higher in margins, decline in social-entertainment revenue which result in less revenue sharing fees incurred.
- 2024: Same as in 2023, but also ramping up their own content, which will improve the efficiency in content cost structure.
The charge below shows the Operating Margins:
We kind of see the same thing: Post 2021, after the crash, the cost control permeates to selling and marketing, as well as general administration, such that the operating margins look good.
Here is a further breakdown:
They manage to reduce their operating expenses from $1 billion in 2021 to $675 mil today, despite the revenue starting to grow again.
So here is the net income and EPS chart:
I capped the income growth to 200% and the income growth pre-IPO in 2017 was 1480%. But since then income growth has slowed dramatically until they actually have negative income growth in 2021.
Since then, all these cost cutting has helped grow the earnings, despite top-line not growing.
In the following chart, we see Tencent Music’s change in outstanding shares:
Tencent Music (TME) has publicly indicated multiple times that it wants to buy back its own shares:
- In Dec 2019, the board authorized a US$400 million ADS repurchase program.
- In March 2021, it announced another US$1 billion buyback program.
- According to its 2023 20-F, in March 2023 the board approved a US$500 million repurchase plan (over a 2-year period).
- And most recently (from its Q4 2024 financials), it authorized a new US$1 billion share repurchase program starting March 2025.
$1 billion at today’s price will reduce the shares by 3.5% a year.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
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