A chinese stock/franchise to consider - Tencent Music (TME US)

In investing, heaven and hell is only separated by a thin line. In the case of Tencent Music, it went from the industry leader in online music in China to a business that may be disrupted or even steam rolled by AI generated music and Douyin’s Soda Music. The stock price got chopped from $25 to under $9 in a matter of months.

In my view, this is an opportunity.

Tencent Music is the leading music streaming platform in China. It is the Spotify of China. Its long term rival is Netease Cloud Music. The key is the war is over between the two. In 2025, TME had sales of Rmb33bn vs. Rmb8bn for Cloud Music. TME has MAU of around 530M vs. 200M for Cloud Music. While exclusivity is no longer permitted by the regulator, scale confers certain advantages on TME. TME can afford to pay labels more for the same IPs. In turn, TME can expect more collaborations from the labels. Scale begets scale.

Then Soda Music from Douyin came along. Leveraging traffic support from its parent, and instead of courting the labels for songs, Soda bolstered its playlist with AI generated music/cover. Have a look at Pic 3. Soda over took Cloud Music in MAU in early 2026. To make it worse, Soda’s monthly subscription is much cheaper than TME or Cloud Music. These days, TME is on the back foot defending its low end subs from switching to Soda.

To support the negative narrative, TME sales growth slowed to 7% yoy in Q1 26 (down from double digits through 2025). Q2 26 is expected to be even worse (only 2% yoy growth expected).

The market has spoken….. So why is it interesting to consider TME ?

1.      What is not mentioned often is the internet companies in China build “more” comprehensive eco-systems. In the case of TME, it is not only a music streaming platform like Spotify. It markets and runs concerts. It has its own studios to promote talents and, at some point, will create its own stars. It offers merchandises for fans. It is a Spotify + Live Nation + mini-music labels rolled into one.

2.      It is important to keep in mind its sales mix. Take 2025 for example…. Total sales of Rmb33bn (online music Rmb27bn and social entertainment Rmb6bn). Within online music, the mix was Rmb18bn in subscription, Rmb5bn in advertising, Rmb2.4bn in concerts, and Rmb1.4bn in merchandise.

3.      Another number to keep in mind is its eco-system. In Q4 25, TME had MAU of 528M, of which 127M were pay subscribers, of which 18M were SVIP members. We are looking at paying ratio of 24% at the end of 2025.

4.      Given the perception that Soda Music is top of mind for investors, we can work through this threat. Soda Music has 3 tiers – free, Rmb8 for regular membership, Rmb15 for SVIP. In comparison, regular membership for TME costs Rmb15 and Rmb30 for SVIP. The bear case of Soda Music is it will occupy the low end and make it harder and harder for TME to convert its non-paying MAUs to paying. There are two factors to consider in favour of TME. First, inertia… Users have built up their playlists and TME would have a wider catalogue of real songs/IPs. Second, online music is nothing new in China. It is not unreasonable to assume maybe Soda Music is converting “new” users to paying by pushing the price point even lower. Third, there are always plenty of music around… TME built the company through piracy/free alternatives in its entire history. So more AI sound tracks is part and parcel of the landscape. Also of note, TME mentioned these AI sound tracks only made up small % of streams i.e. its users prefer to listen to their favourite stars. This human element + affinity with one’s own fav songs/artists matter = loyalty. So short term say 1 to 2 years, my base case is low end subscribers of TME likely won’t grow much. But there may be upside if these “new” Soda music subscribers get hooked and start looking for something better.

5.      In my mind, the most exciting development of TME is its pivot to the fan economy. I have followed TME for a long time. It was only in 2H of 2025 when it seriously worked on the offline aspects (such as concerts and merchandises) of the music industry. It is early days still in terms of its potential. Here are scenarios of what it can be. It can offer its SVIP subscriber priority access to concerts. TME is creating its line of “Star Cards”, which it can offer as bonus for members who upgrade to SVIP. The TAM for concerts + merchandise is >Rmb50bn for TME.

6.      What does it mean ? Through time, it should be able to drive better sign up of SVIP, which has much better ARPU (>Rmb20). In addition, its “new” fan economy business (Rmb3.8bn in sales in 2025) will grow strongly in coming years.

7.      Another change that has been under appreciated within TME has been its acquisition of Ximalaya (which only closed in May 26), the largest long form audio/pod casting app in China. TME paid $1.2bn in cash + 5% of its stocks. In return, Ximalaya has over 250M MAUs who listen over 140mins per day. For reference, Ximalaya had sales of Rmb4bn (Rmb1.7bn in subscription + Rmb1bn in advertising + Rmb700M in live streaming + Rmb400M in education and others) in 2020. In terms of user overlap, estimates range from 20-40%. Personally, given both eco-systems have been around, I would just assume minimal up-sell/cross-sell opportunities when it comes to subscription. Where I think it is under-stated is the potential power of advertising for TME going forward. MAUs of TME with Ximalaya are between 650-700M (which covers half of the population in China). Listening time per day is now longer. In terms of demographic, TME has gained more older listeners (music users tend to be younger). Put it another way, TME has just about become the largest “radio station” in China. I am also prepared to bet that the advertising targeting technology is much better at TME than Ximalaya. TME had advertising revenue of Rmb5bn in 2025.

8.      There will be upside in its cost control. Its largest cost is IP licensing fees to labels. One thing it has been working on for years is to help budding musicians to produce songs and gain exposure. With AI, the barrier to creating new music is even lower. As it pushes its “fan economy” strategy, it is putting together music festivals with new talents. Frankly, it has been responding to strategy of Netease Cloud Music whose strategy to differentiate has been to nurture Indie musicians….. As a result, these “self originated” songs now make up over 15-20% of play time (which means it is less beholden to music studios). Apparently, it has been pushing for better terms with music labels these days…. I understand that in some cases it may be paying similar fees as before but it is gaining more collaboration opportunities with stars in return.

Pulling everything together

1.      With the stock still in the tank @ US$9.2, MV is US$14.5bn (Rmb99bn). In Q1 26, it had net cash of Rmb36bn. After adjusting for cash outlay for Ximalaya, we are looking at net cash of Rmb26bn. In addition, it had equity investments of Rmb21bn or so in Q1 26 (including Warner Music + Spotify + Universal Music).

2.      In 2026, its net profit (before Ximalaya) is expected to be around Rmb10bn.

3.      The stock is trading at 10X with say 25% of MV in cash + another 20% of MV in investments. It is almost a deep value stock.

4.      Now the question is if it is a value trap ? So the question comes down to can it grow ? My base case is subscription + social entertainment just hold flat. There are three growth engines. First, every 10M new SVIP it can convert, will add Rmb1.2bn in top line (assume ARPU kicks up from Rmb11-12 to Rmb20 for SVIP). TME thinks it can grow its SVIP to as many as 50M (up from 18M in 2025). Second, advertising should grow from Rmb5bn in 2025 to Rmb10bn in time. Third, its fan economy initiatives (concerts + merchandises) could generate sales of as much as Rmb20bn (up from Rmb4bn).

5.      Quick summary is, if it executes its business plan, in the next 4-5 years, it can generate as much as Rmb8bn in high margin revenue (SVIP conversion of 30M + Rmb5bn in incremental ad revenue). And its fan economy business can grow like weeds (despite lower margin). Just focusing on the Rmb8bn high margin revenue fall through alone, net profit can grow Rmb4-5bn in coming years. At the very least, TME can grow net profit by high single digits to say 10%ish.

6.      And don’t forget, after closing the Ximalaya acquisition, TME can start buying back its stocks. It has plan in place to buy back US$1bn in stocks by March 27.

7.      Last but not least, don’t forget the long term….. GDP/cap in China is only around US$15K.  Given TME’s ARPU is only Rmb12 or so (less than half the price of a decent bubble tea these days) + its push into the fan economy, TME is a play on the next wave of consumption i.e. experiences + differentiation + sense of belonging trump “material things”.

8.      Also longer term, note the tie up of TME with Hybe. Given the reach of TME, I wonder one day if TME can create its own BTS or Blackpink in China ? Think about it… A hit song needs to be catchy. The star needs to be relatable. And then the song needs play time (which the algo of TME can influence). TME is putting together the building blocks now.

What is the upside ?

1.      My base case is in the next 4-5 years, TME will hit net profit of Rmb15bn (up from Rmb10bn in 2026).

2.      It is capable of buying back say 3-5% of its stocks each year.

3.      So EPS growth rate can be between low to mid teens.

4.      Say in 2030, it is on 15X… We are looking at MV of Rmb225bn. My base case is TME can double from here.

5.      Consider Spotify is on 25-30X PE in 2026/2027, there could well be valuation upside in TME once folks realize the power of its eco-system vs. JUST a music streaming platform.

6.      If a bull market ever returns in China/HK or ADRs, once TME demonstrates its execution and potential i.e. it won’t be roadkill of AI or Douyin/Soda, as a new kind of consumption stock, the stock will re-rate….. Potential to be a multi-bagger.

PS. Not investment advice. Do you own research.