The firm operates an all-in-one digital music entertainment platform in China.
TME has enviable financial and operational metrics, but valuation at IPO will be critical.
Shenzhen, China-based Tencent Music, previously known as China Music Corporation, was founded to enable people to create, enjoy, share and interact with music on an online music entertainment platform.
Management is headed by Director and CEO Cussion Kar Shun Pang, who has been with the firm since 2014 and was previously Corporate Vice President at parent firm Tencent (OTCPK:TCEHY).
Tencent Music has developed a digital music entertainment platform that allows users to seamlessly engage with music in many ways, including discovering, listening, singing, watching, performing and socializing.
Social interactions such as sharing, liking, commenting, following and virtual gifting, are integrated into its products, enhancing our user experience, engagement, and retention.
Below is a brief explainer video for Tencent Music:
Tencent Music is part of Tencent’s larger internet ecosystem.
Tencent, the company’s controlling shareholder, is a leading provider of internet value-added services in China, offering a broad range of internet services.
Sales and marketing expenses as a percentage of revenue have been essentially flat, per the table below:
(Source: Company Prospectus and IPO Edge)
According to a market research report by Statista, the total digital music market in China has been growing at a CAGR of 6.7% during the period between 2013 and 2018, starting from $6.42 billion in 2013 to $8.91 billion in 2018.
Major competitors that provide digital music services in China include:
The company also faces competition from online offerings of other forms of content, including live streaming, karaoke, radio services, literature, long- and short-form videos provided by other online service providers, and games.
The social integration between Tencent’s social graph and Tencent Music’s platform gives the company an advantage over its competitors due to low cost and wide distribution and machine-learning data processing to optimize marketing placement for maximum consumer adoption.
TME’s recent financial results can be summarized as follows:
- Strong topline revenue growth, but at a decelerating rate
- A sharp increase in gross profit
- Continued growth in gross margin
- Strong growth in cash flow from operations
Below are the company’s financial results for the past two and ½ years (Audited PCAOB for full years):
(Source: TME F-1)
- Through Q2 2018: $1.3 billion, 89% increase vs. prior
- 2017: $1.66 billion, 147% increase vs. prior
- 2016: $671 million
- Through Q2 2018: $526 million
- 2017: $576 million
- 2016: $189.5 million
- Through Q2 2018: 40.4%
- 2017: 34.7%
- 2016: 28.2%
Cash Flow from Operations
- Through Q2 2018: $311 million
- 2017: $378 million
- 2016: $139.7 million
As of June 30, 2018, the company had $1.47 billion in cash and $740 million in total liabilities. (Unaudited, interim)
Free cash flow during the six months ended June 30, 2018, was $330 million.
TME intends to raise at least $1 billion in gross proceeds from an IPO of its IPO, although the final amount may be significantly different.
The firm is selling ADSs representing underlying Class A ordinary shares.
Class A shareholders will be entitled to one vote per share and Class B shareholders, which include parent firm Tencent, will be entitled to fifteen (15) votes per share.
Multiple classes of stock are a way for existing management or controlling shareholders to retain voting control of the company even after selling economic control to other shareholders.
The SP 500 Index no longer admits firms with multiple classes of stock into its index.
Management says it will use the net proceeds from the IPO as follows:
approximately 40% for investment to enhance our music content offerings to improve the variety, quality and quantity of content on our platform;
approximately 30% for product and service development to expand and enhance our current product and service offerings, as well as to develop new products and services to further enhance user engagement;
approximately 15% for selling and marketing, including marketing and promotions to strengthen our brand and grow our paying user base; and
approximately 15% for potential strategic investments and acquisitions and general corporate purposes.
Management’s presentation of the company roadshow is not yet available.
Listed underwriters of the IPO are BofA Merrill Lynch, Deutsche Bank Securities, Goldman Sachs [Asia], J.P. Morgan, Allen Company, BOCI, CICC, China Renaissance, Credit Suisse, HSBC, KeyBanc Capital Markets, and Stifel.
Expected IPO Pricing Date: Not yet on the calendar.
An enhanced version of this article on my Seeking Alpha Marketplace research service IPO Edge includes my initial commentary and underwriter performance for the IPO.
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