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After a Delay, Tencent Music Goes Public in the U.S.

By Evan Niu, CFA - Dec 12, 2018 at 2:24PM

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U.S. investors now have an opportunity to invest in the largest music platform in the world.

Tencent Music (NYSE: TME) was planning on going public earlier this year, but delayed those plans due to market volatility. The company, which is a controlled subsidiary of Chinese tech giant Tencent ( TCEHY 1.02% ), is actually the largest music-streaming service in the world by monthly active users (MAUs), though most of those MAUs are free users that do not pay subscription fees. Tencent Music has just completed its IPO, and the offering ended up pricing at $13, which was the low end of the expected pricing range of $13 to $15.

Here's what investors need to know about the company's public debut.

A woman using her smartphone

Image source: Getty Images.

Details of the offering

Tencent Music just sold nearly $1.1 billion worth of stock in the offering, which is much less than it had hoped to sell. The company had initially wanted to sell as much as $4 billion, before reducing expectations to $2 billion in September. The offering included a little over 41 million American depositary shares (ADSs) being sold by Tencent Music, in addition to another 40.97 million ADSs being sold by existing shareholders. Only about $512 million of the offering's proceeds will go to Tencent Music, with $511 million going to existing shareholders.

At the offering price of $13, Tencent Music is valued at around $21.3 billion (shares are currently trading slightly above the offering price). That's comparable to Spotify's ( SPOT 1.95% ) current market cap of $23.9 billion. Remember that Spotify holds a 9% stake in Tencent Music after conducting an equity swap in 2017, and stands to benefit from the IPO.

The underwriters have a 30-day option to purchase up to another 12.3 million ADSs. Tencent Music has two share classes, Class A and Class B, and each ADS represents one Class A share. Supervoting Class B shares, which get 15 votes per share, are held by insiders and parent company Tencent. Following the offering, Tencent will hold 40% of Class A shares and 62% of Class B shares, and wield 61.5% of total voting power. That means public shareholders should have no illusions of having a meaningful say in how Tencent Music is run, as it is considered a "controlled company" as defined by the New York Stock Exchange due to Tencent's stake and voting power.

A tale of two segments

Beyond different dynamics of the user base, the most meaningful difference between Tencent Music and Spotify is that Tencent Music is solidly profitable, thanks to its social entertainment business. Not only do relatively more social entertainment MAUs actually pay, but those paying users pony up significantly more than online music MAUs. Average revenue per paying user (ARPPU) in social entertainment was nearly 14 times higher than online music ARPPU in the third quarter.

Operating Metric

Q3 2018

Online music paying ratio


Social entertainment paying ratio


Online music ARPPU

8.5 yuan ($1.24)

Social entertainment ARPPU

118.5 yuan ($17.22)

Data source: Prospectus. Yuan translated to U.S. dollars based on current exchange rates.

Even though there are fewer paying social entertainment MAUs on an absolute basis, the much stronger monetization of those users more than makes up for it. The social entertainment segment represents 70% of revenue. U.S. investors now have an opportunity to invest in one of the biggest and most profitable music platforms, which encompasses both music streaming and live-streamed performances.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
$60.34 (1.02%) $0.61
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