Tencent Music Entertainment: China's largest music streaming company.

Tencent Music Entertainment is China’s leading digital music platform, combining streaming, social entertainment, and live content to serve a massive and growing user base. With rising subscription and advertising revenue, expanding margins, and greater control over its content, the company is becoming a stronger and more profitable business. The question is: Does it earn a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Tencent Music Entertainment at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Tencent Music Entertainment, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Tencent Music Entertainment Group (TME) is China’s leading online music and audio entertainment platform, serving more than 800 million users and over 120 million paying subscribers through a portfolio of apps including QQ Music, Kugou Music, Kuwo Music, and WeSing. Formed in 2016 through the merger of Tencent’s music services with China Music Corporation, the company offers a broad mix of services including music streaming, online karaoke, live streaming performances, long-form audio, virtual concerts, and social music experiences. Users can discover, listen to, sing, watch, and interact with music and other users in a single ecosystem. The company monetizes its entertainment ecosystem through digital music subscriptions, advertising, virtual gifting on social platforms, merchandise sales, content licensing, and artist-related services. TME’s competitive moat lies in its integrated platform, vast content library, and deep technological capabilities. The company maintains licensing agreements with major global and domestic music labels and produces original content in-house, giving it control over a differentiated and extensive catalog. Its AI-powered recommendation systems and proprietary audio effects enhance the user experience and drive engagement. Integration with Tencent’s broader ecosystem - such as Weixin, QQ, and Tencent Video - supports organic user growth and cross-platform promotion. Each of TME’s music apps targets different types of users - for example, QQ Music appeals to younger users in big cities, while Kugou and Kuwo serve broader and more regional audiences - but they all share the same content library and technical infrastructure, which improves efficiency and consistency across the platform. TME fosters both professional and user-generated content through platforms like Tencent Musician and WeSing, which support new artists and encourage fans to become creators. Social features like virtual karaoke rooms, song-guessing challenges, and live concerts create high engagement and strengthen user loyalty. Unlike Western platforms that focus mainly on streaming, TME’s model includes interactive entertainment, which supports multiple monetization layers. The company also benefits from a strategic partnership with Spotify, which includes cross-ownership and alignment on innovation in global streaming markets. Through a combination of scale, content, technology, and integration with Tencent, TME has built a strong and defensible position in China’s digital music industry.

Management

Zhu Liang serves as the CEO of Tencent Music Entertainment Group, a role he assumed in April 2021. He brings nearly two decades of experience within Tencent, where he has held a range of leadership roles since joining the company in 2003. Prior to his tenure at Tencent, Zhu Liang worked at Huawei, one of China’s leading technology firms. He holds a doctorate degree in signal and information processing from Tianjin University. Before becoming CEO, Zhu Liang was instrumental in developing and scaling Tencent’s online entertainment and social ecosystem businesses. He is credited with helping to build some of Tencent’s most successful digital platforms, applying a product- and user-focused approach that emphasizes innovation and operational efficiency. His leadership is often associated with strong execution and an ability to expand into adjacent business areas, including audio, live streaming, and interactive media. Although his time as CEO of Tencent Music has coincided with a particularly challenging period - marked by macroeconomic uncertainty and regulatory tightening in China - Zhu Liang’s appointment reflects Tencent’s long-term confidence in internal leadership continuity. As a long-serving executive, he brings deep institutional knowledge and alignment with Tencent’s broader strategic vision. Importantly, Zhu Liang benefits from the ongoing support of his predecessor, Cussion Kar Shun Pang, who now serves as Executive Chairman of the Board. This continuity reinforces stability during a time of transformation. Given his background, experience, and alignment with Tencent’s values, I believe Zhu Liang is the right person to lead Tencent Music Entertainment forward.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Tencent Music Entertainment made its IPO in 2018, so we only have numbers from 2018 and onwards. TME has delivered underwhelming ROIC historically, as it has not managed to exceed 10% in any year since the IPO. The low return on invested capital stems from a combination of structural and strategic factors tied to the economics of the digital music industry in China. One key factor is the high cost of content acquisition. Licensing music from global and domestic labels - such as Universal Music, Sony Music, and Warner - requires significant upfront payments and ongoing royalty fees. These expenses are essential to remain competitive and retain users, but they weigh heavily on margins, especially when monetization per user remains modest. Another contributor is TME’s significant investment in platform development. Over the past several years, the company has poured capital into building and maintaining multiple apps (QQ Music, Kugou, Kuwo, WeSing), expanding into long-form audio, and developing proprietary technologies such as AI-powered recommendation systems and immersive audio features. While necessary for differentiation and user engagement, these investments have long payback periods and inflate the capital base used in ROIC calculations. Competitive pressures in China’s digital music and entertainment landscape have also limited pricing power. TME has had to keep subscription prices relatively low to retain users, and much of its revenue has historically come from virtual gifting and social entertainment rather than high-margin subscriptions. At the same time, user acquisition and retention costs have remained high, particularly during periods when rivals like NetEase Cloud Music have ramped up marketing or secured content exclusivity. It is nonetheless encouraging that TME recorded its strongest ROIC since the IPO in 2024, suggesting the company may be starting to operate with greater capital discipline and improved efficiency.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. The numbers are a bit mixed, as equity declined in two out of the six years since the IPO. In 2021 and 2022, TME’s equity decreased during a period of heightened regulatory scrutiny in China’s digital entertainment sector. Notably, in 2021, China’s State Administration for Market Regulation fined the company and imposed limits on exclusive music licensing, disrupting parts of TME’s business model and pressuring margins. In contrast, 2023 and 2024 marked a clear turnaround, with equity reaching a record high by the end of 2024. This improvement was driven by several factors, including improved operational efficiency, stronger profit margins, and solid revenue growth. Given these trends, I expect that TME will continue to increase its equity in the years ahead.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Tencent Music Entertainment has delivered positive free cash flow every year since its IPO. In 2024, the company reached record highs in both free cash flow and free cash flow margin. This was driven by a combination of strong revenue growth, improved profitability, and disciplined cost management. The core driver was continued growth in music subscriptions and a steady increase in paying users, which strengthened the foundation of the business and added stability to its revenue. At the same time, TME became more efficient in managing content licensing and platform-related expenses. This operational discipline helped expand margins and allowed the company to convert a larger portion of earnings into free cash flow. Looking ahead, I expect TME to continue growing its free cash flow. Management has indicated that future cash will be invested in content, technology, and international expansion - areas they believe will support long-term sustainable growth. At the same time, the company is also returning capital to shareholders through buybacks and dividends. This means investors can likely expect a gradual reduction in share count and rising dividend payments over time. While the free cash flow yield is at its lowest level since 2020, it remains above 6%, which suggests the stock is still trading at a reasonable valuation. We will return to valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that could reasonably be repaid within a three-year period. This is measured by dividing total long-term debt by earnings. After reviewing Tencent Music Entertainment’s financials, I found that the company has only 0,53 years of earnings in debt. For that reason, debt is not a concern. It’s also worth noting that earnings are nearly double the company’s long-term debt, and TME significantly reduced its debt in 2024. This trend is encouraging and suggests a more conservative and financially stable approach moving forward.

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Risks

Competition is a risk for Tencent Music Entertainment because the company is not only battling direct music streaming rivals like NetEase Cloud Music, but also competing across a much broader and increasingly saturated digital entertainment landscape in China. User attention is limited, and TME must contend with a wide range of platforms offering compelling alternatives - from user-generated short videos on Douyin (TikTok’s Chinese version), to mobile games, to long-form video platforms like iQIYI and Bilibili. These formats are often more interactive, visually engaging, and trend-driven, making them especially attractive to younger audiences. This fragmentation of user attention creates pressure on TME in two key ways. First, it forces the company to continuously invest in product development and new content formats just to maintain engagement. Second, it limits pricing power. In a market where users can easily shift between music, video, gaming, and other social content, TME has little room to raise subscription prices without risking churn - constraining its ability to grow revenue through pricing alone. Another layer of risk involves talent and content creators. Live streaming and social entertainment rely heavily on popular performers and influencers. If competitors offer better revenue-sharing terms or greater visibility, TME risks losing key talent to rival platforms. That would not only impact user engagement but also weaken its ability to differentiate through exclusive or original content. Finally, the pace of content innovation itself presents a risk. Formats that drive engagement today - such as karaoke or live streaming - can quickly be displaced by newer experiences. TME must keep investing to stay ahead, which raises both capital requirements and execution risk. If the company misjudges future trends or fails to deliver compelling new formats, it could lose relevance in a highly competitive market where user preferences shift quickly.

Relying on third-party licenses is a risk for Tencent Music Entertainment because a large portion of the content on its platform - including music and long-form audio - is not owned outright but instead licensed from domestic and international publishers, record labels, and other rights holders. This means the company’s ability to offer a compelling and diverse content library depends on the continued willingness of these external partners to license their works on favorable terms. Any changes to these relationships - such as higher royalty rates, reduced licensing scope, or non-renewal - could significantly impact TME’s cost structure and limit the quality or breadth of its offerings. The company has little control over shifts in bargaining power or broader industry dynamics that might lead to such changes. If key partners choose to license their content to competitors or limit access altogether, TME could lose major titles, making it harder to retain users or attract new ones. In addition, China’s licensing environment is complex and often uncertain. In some cases, it may not be clear who holds the rights to certain content, or whether TME has obtained all necessary licenses - especially for user-uploaded material or legacy works. This introduces legal and regulatory risks, as copyright owners - or newly defined rights groups - may later assert claims or demand additional compensation. This dependency also limits TME’s strategic flexibility and raises operational risk. The company must continually manage and renew a wide range of licensing agreements while ensuring full compliance with evolving copyright laws. If any major agreement is terminated or renewed under less favorable terms, it could reduce TME’s ability to compete effectively - hurting user engagement, weakening its brand, and affecting financial performance.

Regulations represent a significant risk for Tencent Music Entertainment due to the complex, evolving, and often unpredictable nature of China’s internet and digital media regulatory environment. The company operates in industries—online music, audio entertainment, live streaming, and content publishing - that are tightly controlled by multiple government agencies. These authorities oversee a wide range of compliance areas, including content approvals, licensing, copyright enforcement, data security, and foreign ownership restrictions. TME must obtain and maintain various licenses and permits to legally operate its platforms. These include Internet Content Provider licenses, Audio and Video Service Permissions (AVSP), Online Publishing Service Permits, and Internet Cultural Operation Licenses. In many cases, these licenses are not held by TME itself, but by affiliated entities controlled by its parent company, Tencent. This structure adds complexity and legal uncertainty. If regulators require TME to obtain certain licenses in its own name - rather than rely on Tencent’s - TME may not be eligible. For example, AVSP licenses are currently limited to wholly state-owned or state-controlled entities, which could prevent TME from securing one independently. Although the company has not faced penalties so far for lacking certain licenses under its own name, there is no assurance this will remain the case. Past regulatory actions have shown that enforcement can be swift and far-reaching. In 2021, for instance, TME was ordered to terminate exclusive music licensing agreements following an antitrust ruling. This not only weakened its competitive position but also increased content acquisition costs. While TME has since shifted to non-exclusive partnerships, there is no guarantee that these arrangements will remain available or economically viable. In summary, Tencent Music Entertainment operates in a highly regulated environment where compliance is a moving target. The company’s continued ability to operate depends not only on holding the right licenses, but also on its capacity to respond quickly to changes in laws, policies, and enforcement priorities. Any disruption, delay, or tightening of regulatory oversight could materially affect its operations, growth prospects, and competitive position in China’s digital music market.

Reasons to invest

Its extensive and expanding library is a reason to invest in Tencent Music Entertainment. With over 260 million licensed and co-created tracks by the end of 2024 - up from 200 million the year before - TME offers one of the largest and most comprehensive music and audio libraries in the world. This vast catalog spans nearly every genre and format, including domestic Chinese classics, global pop hits, premium long-form audio, and exclusive artist collaborations. The depth and diversity of this content ecosystem not only enhance user engagement but also help drive higher daily usage across its platforms. Strategic renewals with major international labels such as SM Entertainment and Kakao Entertainment have expanded access to popular Korean music and premium concert-related content. Meanwhile, TME’s ability to partner directly with renowned Chinese artists, including Dao Lang, Lo Ta-yu, and Angela Zhang, further strengthens its content pipeline. These collaborations go beyond licensing: TME often co-produces, promotes, and distributes original music, creating exclusive content that is not only culturally relevant but also commercially differentiated. This growing base of self-produced and co-created music has important financial implications. Unlike fully licensed tracks, content produced or owned by TME typically carries higher margins. It allows the company to avoid third-party licensing fees, retain more control over distribution, and generate additional revenue through monetization channels such as live streaming, merchandise, and artist promotion. As this segment scales, it contributes meaningfully to gross margin expansion. TME’s ability to combine scale with vertical integration is also a competitive advantage. It not only maintains licensing relationships with top global and local labels but also develops in-house content through its Tencent Musician Platform and strategic alliances. This dual approach strengthens user retention, supports average revenue per paying user growth, and helps the platform stand out in a market where many competitors depend solely on third-party licenses.

Growing SVIP membership is a reason to invest in Tencent Music Entertainment because it reflects both the company’s ability to deepen user engagement and its strategy to unlock higher-margin revenue streams. SVIP members are TME’s most dedicated users, and the company has continued to enhance this tier by offering an increasingly rich set of privileges - ranging from high-fidelity audio and early album access to premium digital concerts, personalized experiences, and exclusive content collaborations. In 2024, TME saw strong sequential growth in both SVIP membership and average revenue per paying user, driven by the successful rollout of new perks. These included exclusive access to popular artists like JJ Lin and Jackson Yee, online concerts in high-definition, and a growing library of premium digital albums. By delivering more value to its most loyal users, TME has created a differentiated subscription experience that goes well beyond basic streaming, helping to increase user satisfaction, retention, and monetization per subscriber. SVIP users also tend to spend more time on the platform and exhibit higher engagement than standard subscribers. This increased stickiness translates into a more stable and predictable revenue base. It also supports margin expansion: while SVIP services come with a richer feature set, the incremental cost to serve these users is relatively low, allowing TME to enjoy operating leverage as the subscriber base scales. Beyond financial performance, the success of the SVIP program also strengthens Tencent Music’s position in the industry. Exclusive partnerships with top artists and labels reinforce TME’s reputation as a premium destination for music experiences. The SVIP tier serves as a valuable channel for artists to reach highly engaged fans and monetize new types of offerings - from meet-and-greet sessions and limited-edition merchandise to online album debuts and live performance streams.

Advertising is a reason to invest in Tencent Music Entertainment because it is an increasingly important growth driver that complements the company’s subscription revenue and plays a key role in improving profit margins. TME has made strong progress in growing its advertising business by introducing better ad formats, improving how ads are targeted, and making advertising feel more natural and less disruptive for users - especially through interactive and reward-based ads. One of Tencent Music Entertainment’s key strengths is its ability to connect advertisers with a large and active user base. The company offers several ways for brands to reach listeners - such as splash screen ads, ads that play during music, and a “watch an ad to listen for free” model. A particularly effective approach has been reward-based ads, where users choose to watch an ad in exchange for benefits like premium content. This kind of ad works well because it doesn’t interrupt the experience and makes users feel like they’re getting something in return. It also helps advertisers get better results by creating stronger connections with their audience. Advertising revenue has grown strongly compared to the previous year, mainly because of the ad-supported model for users who don’t pay for a subscription. By offering more interactive formats, better user rewards, and improved ad technology, TME has been able to keep users more engaged, earn more revenue per ad shown, and attract a wider range of advertisers - from consumer brands and luxury products to online services and games. Importantly, advertising is a high-margin business. As the number of users grows, the cost of showing more ads stays low, which helps TME turn advertising into a very profitable revenue stream. In recent quarters, advertising has become one of the key reasons behind the company’s rising gross margin.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,58, which is from the year 2024. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 16,1% in the next five years, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Tencent Music Entertainment's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $17,40. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Tencent Music Entertainment at a price of $8,70 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.408, and capital expenditures were 44. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 31 in our calculations. The tax provision was 220. We have 1.582 outstanding shares. Hence, the calculation will be as follows: (1.408 – 31 + 220) / 1.582 x 10 = $10,09 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Tencent Music Entertainment's free cash flow per share at $0,86 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $13,58.

Conclusion

I believe Tencent Music Entertainment is an intriguing company with solid management. It has built a moat through its integrated platform, vast content library, and strong technological capabilities. Historically, the company’s return on invested capital has been low due to high content acquisition costs, significant investments in platform development, and competitive pressures. While ROIC remains below 10%, it's encouraging that TME reached its highest level since the IPO in 2024. The company also posted record-high free cash flow and levered free cash flow margin, which bodes well for future profitability. That said, competition remains a risk. The company not only competes with other music streaming platforms but also faces pressure from a broader range of digital entertainment services vying for user attention in China. Another risk is its dependence on third-party licenses, which exposes it to rising royalty costs, non-renewals, and reduced content control. In addition, regulatory uncertainty is a constant challenge. Operating in a tightly controlled environment with evolving policies and multiple licensing requirements means that any regulatory shift could raise costs or disrupt operations. On the positive side, the company’s expansive and growing music library enhances user engagement, supports exclusive content creation, and helps improve margins. By blending licensed content with a growing share of self-produced music, TME gains more control over monetization while differentiating itself from competitors. Its SVIP membership program is also a bright spot, helping to increase user loyalty, expand average revenue per paying user, and drive higher-margin subscription revenue. Meanwhile, advertising has become a fast-growing and highly profitable part of the business. With innovative, user-friendly ad formats, TME is successfully monetizing its large user base and further reducing its reliance on subscriptions. In summary, there are many reasons to like Tencent Music Entertainment. For investors looking to gain exposure to China’s music streaming market, I believe buying shares around the Ten Cap price of $10 could represent a compelling long-term opportunity.

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