December 4, 2018 / 8:59 AM / 9 months ago

Breakingviews - Tencent Music strains to hit Spotify's high notes

Eason Chan sings during the Live Earth concert near the Pearl tower at the new business district in Shanghai July 7, 2007. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - Tencent Music Entertainment will strain to hit Spotify’s high notes. China’s social media and gaming titan is floating its music-streaming arm at a valuation of up to $24.5 billion. Sales are up, and the unit has a novel, profitable business model. Still, the company’s huge premium to Spotify is hard to justify.

China’s top music app originally planned to raise at least $2 billion in October, sources told Reuters at the time. But a global stock-sell off, aggravated by U.S.-China trade tensions, led Tencent Music to delay. Now the plan is to sell up to $1.2 billion of shares in a lower-key initial public offering in New York slated for mid-December. Parent Tencent will chip in an additional $32 million in support, thus lifting its stake to 62 percent.

At the top of the marketed price range, Tencent Music will be worth roughly the same as Spotify. Assuming the Chinese group’s revenue keeps growing at the same run-rate as in the previous nine months, to $2.6 billion, that represents an ear-splitting 9.4 times this year’s sales. That’s more than twice the multiple Daniel Elk’s outfit commands.

True, growth has been impressive, and unlike Spotify, Tencent Music is already in the black. Earnings in the nine months to September more than tripled from a year earlier to $393 million. That’s thanks to the company’s “social entertainment” services, like online karaoke and live-streaming apps that make money from fans buying virtual gifts and such for their favourite performers. Revenue from that fast-growing segment alone accounts for some 70 percent of the company’s total.

Yet the valuation gap still looks a stretch. Tencent Music says paying listeners on its streaming apps increased 36 percent from last year to 25 million as of September. That’s far short of Spotify’s subscribers, which grew 40 percent from the previous year to 87 million. The Swedish group also claims a worldwide market, with Latin America accounting for more than a fifth of monthly active users. In addition, while Tencent Music has poured huge sums into expanding its music catalogue and fighting piracy, it is extracting less average revenue per subscriber than it did in 2016. That is not something to trumpet.


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