20 April 2019
Tencent must convince investors that its plan to spin off its online music platform will not dilute their interest in the company as a whole. Photo: Bloomberg
Tencent must convince investors that its plan to spin off its online music platform will not dilute their interest in the company as a whole. Photo: Bloomberg

Can Tencent Music repeat the success of China Literature?

Several months ago, an article that went viral on Chinese social media chastised Tencent Holdings for focusing on financial tricks rather than its business operations, alleging that the company has drifted away from its original mission of building a platform to connect people.

On Sunday, Tencent announced in a stock exchange filing a plan to spin off its music entertainment unit in the United States, which market analysts have valued at US$30 billion, or almost the same as its partner Spotify’s current valuation.

Tencent Music Entertainment Group, the leading online music platform in China, will be spun off for a separate listing on a recognized stock exchange in the United States.

The Hong Kong stock exchange has confirmed that the company may proceed with the proposed spin-off, although the details – offering size, price range, stake of Tencent shareholders in the company, etc. – have yet to be finalized.

Investors are looking forward to the spin-off as it may mean reaping a huge profit from Tencent’s initial public offering once again. Last year, Tencent China Literature Ltd. surged 86 percent in its Hong Kong debut after the online books unit raised HK$8.3 billion in the IPO.

On its trading debut, China Literature finished almost double its IPO price, valuing it at almost US$12 billion.

But this year, market sentiment is completely different from what it was in previous years. Technology stocks are no longer market favorites. Tencent’s own share price has fallen below HK$400, and this may affect the listing of Tencent Music.

Tencent Music owns digital music services QQ Music, Kuwo and KuGou in China. More than 700 million people use the music service every month. It has 25 million paying subscribers, although the proportion is much lower than those of its US counterparts.

Spotify, which is now an investor of Tencent Music, earlier said it had 170 million active users every month, 75 million of whom were paying subscribers. Indeed, Tencent Music has much room to grow its paying subscribers.

China is notorious for the rampant piracy in its music industry. Nonetheless, the nation was listed last year as one of the 10 biggest recorded music markets in the world.

China generated US$292.3 million for music labels and artists in 2017, up 35.3 percent from the previous year. according to figures from the International Federation of the Phonographic Industry.

The revenue surge is attributed to the growing popularity of streaming music. Companies like Tencent, Alibaba and NetEase are spending a lot to clinch deals with record labels to provide streaming services in China.

But market analysts are not exactly viewing a bright, cloudless outlook for Tencent Music. Some worry that music streaming services may start a bidding war for copyright among themselves, thereby affecting their margins and casting doubts on the sustainability of their business.

In December last year, Tencent and Spotify announced a share swap for a strategic alliance. In its filing, Spotify said it took 9 percent of Tencent Music which it valued at 910 million euros (US$1.07 billion) at the time.

That translates to a total valuation of 10.11 billion euros, or US$12.3 billion, although Spotify includes 10 percent leeway above and below that figure.

In exchange, Tencent got 7.5 percent of Spotify to become one of its largest shareholders. It bought its stake using a mix of newly issued and secondary shares. The holding was valued at around US$1.5 billion, based on a rough valuation of US$20 billion for Spotify.

In China, foreign companies find it hard to enter the media and entertainment sector. But through the share swap, Spotify is able to invest in the long-term potential of China’s music industry. In turn, Tencent Music is able to tap the music industry outside its home market.

Tencent has also forged another music alliance in India with a US$115 million investment in India-based music streaming service Gaana.

The Chinese company is also building its own music streaming service to compete with other players in the market across Asia. Tencent’s JOOX, for example, is a popular music streaming service in selected markets in Asia such as Hong Kong, Taiwan and Southeast Asia.

It is completely understandable for Tencent to seek to spin off its online music unit in order to raise more money for its future growth.

But the company must convince investors that such a spin-off will not dilute their interest in Tencent as a whole, especially considering that the separate listing will be launched in the US.

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