Financial Performance - The company's net profit for Q3 2022 was RMB 1.09 billion (USD 154 million), representing a year-over-year increase of 38.7% and a quarter-over-quarter increase of 22.5%[4]. - Total revenue for Q3 2022 was RMB 7.37 billion (USD 1.04 billion), showing a year-over-year decline of 5.6% but a quarter-over-quarter growth of 6.7%[4]. - Operating profit increased by 37.2% year-over-year to RMB 1.26 billion (USD 177 million), driven by growth in gross profit and effective control of operating efficiency[17]. - Net profit attributable to equity holders rose by 43.4% year-over-year to RMB 1.06 billion (USD 149 million) in Q3 2022[19]. - Basic and diluted earnings per American Depositary Share (ADS) were RMB 0.67 (USD 0.09) and RMB 0.66 (USD 0.09), respectively, for Q3 2022[20]. - Non-International Financial Reporting Standards net profit increased by 35.9% year-over-year to RMB 1.38 billion (USD 194 million) in Q3 2022[19]. - Non-IFRS net profit for Q3 2022 was RMB 1,411 million, a 33% increase from RMB 1,063 million in Q3 2021[35]. Revenue Breakdown - Online music subscription revenue increased by 18.3% year-over-year to RMB 2.25 billion (USD 316 million), with paid users reaching 85.3 million, a year-over-year growth of 19.8%[4]. - Online music service revenue increased by 18.8% year-over-year to RMB 34.3 billion (USD 4.82 billion), driven by strong growth in music subscription revenue and digital album sales[12]. - Music subscription revenue reached RMB 22.5 billion (USD 3.16 billion), up 18.3% year-over-year, with a 19.8% increase in paid user numbers[12]. - Social entertainment services and other services revenue fell by 20.0% year-over-year to RMB 39.4 billion (USD 5.53 billion), with a 26.0% decline in paid users[13]. - Online music service revenue for Q3 2022 was RMB 3,430 million, a 19% increase from RMB 2,888 million in Q3 2021[32]. - Social entertainment services and other revenue decreased to RMB 3,935 million in Q3 2022, down 20% from RMB 4,917 million in Q3 2021[32]. Cost and Expenses - Operating costs decreased by 9.7% year-over-year to RMB 49.6 billion (USD 6.98 billion), primarily due to a reduction in revenue-sharing costs[14]. - In Q3 2022, total operating expenses decreased by 12.3% year-over-year to RMB 1.44 billion (USD 202 million), accounting for 19.5% of total revenue, down from 21.0% in Q3 2021[16]. - Sales and marketing expenses fell by 58.3% year-over-year to RMB 245 million (USD 34 million), primarily due to effective control over marketing spending and optimization of promotional structure[16]. - Total operating costs for the nine months ended September 30, 2022, were RMB 20,914 million, a decrease of 11% from RMB 23,637 million in the same period of 2021[32]. - The company reported a decrease in total operating expenses for the nine months ended September 30, 2022, to RMB 4,196 million from RMB 4,870 million in the same period of 2021[32]. User Engagement and Product Development - The company launched a series of product upgrades in Q3 2022 to enhance user engagement and interaction, catering to diverse music tastes and refined user needs[6]. - The company plans to continue product innovation and explore more social entertainment verticals, including audio live streaming and virtual interactive content, to enhance competitiveness[6]. - The launch of the TME live brand combined online and offline music entertainment, hosting 32 events in Q3[9]. - The company introduced the Lingyin Engine for voice synthesis technology, enabling the production of over 1,000 songs using AI-generated voices by the end of Q3[10]. Social Responsibility and Community Support - The company aims to combine music with public welfare, enhancing social awareness and creating more social value while supporting the sustainable development of the music industry[6]. - The company supported over 350,000 independent musicians in Q3, enhancing their music content creation and commercialization[8]. - The company emphasized its commitment to social responsibility through various charitable initiatives, including a collaboration with artists for a public welfare album[10]. Shareholder Actions and Financial Position - The company completed over USD 800 million of its previously announced USD 1 billion share repurchase program by the end of Q3 2022[5]. - The company repurchased approximately 114 million ADS for a total consideration of about USD 860 million under the USD 1 billion share repurchase program announced on March 28, 2021[22]. - As of September 30, 2022, cash, cash equivalents, and short-term investments totaled RMB 25.45 billion (USD 3.58 billion), slightly down from RMB 25.80 billion as of June 30, 2022[21]. - The company’s cash and cash equivalents at the end of the period were RMB 8,582 million, showing a strong liquidity position[39]. - The equity attributable to the company's shareholders decreased from RMB 51,055 million to RMB 48,294 million, primarily due to an increase in treasury shares[38]. - The total equity decreased from RMB 51,055 million to RMB 48,294 million, indicating a decline in shareholder value[38]. Assets and Liabilities - As of September 30, 2022, total assets amounted to RMB 66,755 million, a slight decrease from RMB 67,254 million as of December 31, 2021[37]. - Non-current assets increased from RMB 40,463 million to RMB 40,685 million, with significant growth in land use rights from RMB 1,495 million to RMB 2,499 million[37]. - Cash and cash equivalents rose from RMB 6,591 million to RMB 8,582 million, reflecting a net increase of RMB 1,991 million[39]. - Total liabilities increased from RMB 16,199 million to RMB 18,461 million, with current liabilities rising from RMB 10,450 million to RMB 12,138 million[38]. - The company reported a net cash outflow from investing activities of RMB 1,243 million for the three months ended September 30, 2022[39]. - The company’s retained earnings decreased from RMB 14,194 million to RMB 10,970 million, reflecting a reduction in accumulated profits[38].

Financial Risk Management - The company's exposure to interest rate risk is minimal, with no significant interest-bearing assets other than term deposits and cash equivalents, and notes payable at fixed rates do not expose the company to cash flow interest-rate risk[785] - The Renminbi has fluctuated significantly against the U.S. dollar, depreciating by 5% in 2018, 1% in 2019, and appreciating by 6% in 2020 and 2% in 2021[786] - The company has not entered into any hedging transactions to mitigate foreign exchange risk, and currency fluctuations could impact the Renminbi or U.S. dollar amounts available for operations or payments[787] - Inflation in China has not materially impacted the company's operations, with year-over-year CPI changes of 4.5% in December 2019, 0.2% in 2020, 1.5% in 2021, and 1.5% as of March 31, 2022[790] Revenue Recognition - Revenue from online music services includes subscriptions, digital music sales, content sublicensing, and online advertising, with subscription fees collected upfront and recognized over the subscription period[794] - The company offers early access to new digital music singles and albums, with revenue recognized over time as the performance obligation is satisfied[795] - Advertising revenues are recognized based on CPD or CPM arrangements, with revenue allocated to each performance obligation on a relative stand-alone selling price basis[798] - Virtual gifts sold on online karaoke and live streaming platforms are categorized as consumable, time-based, or durable, with revenue recognized immediately, ratably over time, or over estimated lifespans, respectively[802] - Premium memberships for online karaoke and live streaming services are time-based, with fees collected upfront and revenue recognized ratably over the subscription period[805] - The company reports revenue on a gross or net basis depending on whether it acts as a principal or agent, based on factors such as being the primary obligor and having latitude in establishing prices[806] Financial Performance and Metrics - Revenue from online music services increased from RMB 7,152 million in 2019 to RMB 11,467 million in 2021, representing a growth of 60.3% over two years[940] - Revenue from social entertainment services and others remained relatively stable, with RMB 18,282 million in 2019 and RMB 19,777 million in 2021[940] - Total revenues grew from RMB 25,434 million in 2019 to RMB 31,244 million in 2021, an increase of 22.8%[940] - Gross profit increased from RMB 8,673 million in 2019 to RMB 9,404 million in 2021, a growth of 8.4%[940] - Profit for the year decreased from RMB 4,176 million in 2020 to RMB 3,215 million in 2021, a decline of 23.0%[940] - Earnings per share (basic) for Class A and Class B ordinary shares decreased from RMB 1.25 in 2020 to RMB 0.91 in 2021[940] - Mobile MAUs for online music services are calculated as the sum of mobile MAUs of music products, including QQ Music, Kugou Music, and Kuwo Music, without eliminating duplicate access[931] - Paying ratio is measured by the number of paying users as a percentage of mobile MAUs for a given period[932] - Monthly ARPPU for social entertainment services is calculated based on revenue from social entertainment and others, including advertising services[930] - Social entertainment mobile MAUs include access to services like WeSing, Kugou's Live Streaming, Kuwo's Live Streaming, Kugou Changchang, and QQ Music's Live Streaming[937] Financial Position and Assets - Total assets increased from RMB 52,678 million in 2019 to RMB 65,997 million as of March 31, 2022[943] - Goodwill grew from RMB 17,140 million in 2019 to RMB 19,126 million as of March 31, 2022[943] - Cash and cash equivalents decreased from RMB 15,426 million in 2019 to RMB 8,353 million as of March 31, 2022[943] - Retained earnings increased from RMB 7,007 million in 2019 to RMB 14,803 million as of March 31, 2022[943] - Non-current liabilities rose from RMB 510 million in 2019 to RMB 5,714 million as of March 31, 2022[943] - Current liabilities increased from RMB 8,490 million in 2019 to RMB 11,062 million as of March 31, 2022[943] - Total equity grew from RMB 43,678 million in 2019 to RMB 49,221 million as of March 31, 2022[943] - Profit for the year in 2019 was RMB 3,982 million[944] - Fair value changes on financial assets at fair value through other comprehensive income in 2019 were RMB 1,031 million[944] - Total comprehensive income for the year 2019 was RMB 5,268 million[944] - Total equity increased from RMB 43.678 billion in 2020 to RMB 52.731 billion in 2021, reflecting a growth of 20.7%[945][946] - Profit for the year in 2021 was RMB 3.029 billion, compared to RMB 4.155 billion in 2020, indicating a decrease of 27.1%[945][946] - Retained earnings grew from RMB 7.007 billion in 2020 to RMB 11.111 billion in 2021, an increase of 58.6%[945][946] - Noncontrolling interests increased from RMB 88 million in 2020 to RMB 486 million in 2021, a significant rise of 452.3%[945][946] - Share-based compensation value of employee services in 2021 was RMB 647 million, up from RMB 569 million in 2020, a 13.7% increase[945][946] - Repurchase of shares in 2021 amounted to RMB 3.561 billion, compared to RMB 134 million in 2020, a substantial increase[945][946] - Total comprehensive income for 2021 was RMB 527 million, down from RMB 8.079 billion in 2020, a decline of 93.5%[945][946] - Additional paid-in capital increased from RMB 34.425 billion in 2020 to RMB 35.044 billion in 2021, a growth of 1.8%[945][946] - Currency translation differences resulted in a loss of RMB 1.286 billion in 2020 and a gain of RMB 4 million in 2021[945][946] - Disposal of subsidiaries in 2021 led to a reduction in noncontrolling interests by RMB 6 million[946] - Total equity at March 31, 2022 was RMB 49,221 million, compared to RMB 51,055 million at January 1, 2022[948] Cash Flow and Investments - Net cash inflow from operating activities for Q1 2022 was RMB 2,494 million, up 32.8% from RMB 1,878 million in Q1 2021[949] - Cash generated from operations in Q1 2022 was RMB 2,450 million, a 33.3% increase from RMB 1,838 million in Q1 2021[949] - Net cash outflow from investing activities in Q1 2022 was RMB 329 million, significantly lower than RMB 2,382 million in Q1 2021[949] - Cash and cash equivalents at end of Q1 2022 were RMB 8,353 million, down 18.7% from RMB 10,274 million at end of Q1 2021[949] - Payments for business combinations, net of cash acquired, were RMB 19 million in Q1 2022 compared to RMB 2,072 million in Q1 2021[949] - Purchase of property, plant and equipment decreased to RMB 18 million in Q1 2022 from RMB 39 million in Q1 2021[949] - Purchase of intangible assets was RMB 119 million in Q1 2022, down from RMB 161 million in Q1 2021[949] - Placement of short-term investments decreased significantly to RMB 70 million in Q1 2022 from RMB 2,416 million in Q1 2021[949] - Net cash outflow from financing activities was RMB 395 million in Q1 2022, compared to RMB 372 million in Q1 2021[949] Corporate Governance and Leadership - Mr. Cussion Kar Shun Pang appointed as Executive Chairman since April 2021, responsible for long-term strategy and content ecosystem business[866] - Mr. Zhu Liang appointed as CEO since April 2021, overseeing QQ Music, Kugou Music, Kuwo Music, WeSing, and long-form audio business[867] - Mr. Zhenyu Xie serves as President and CTO, overseeing Kugou business, with over a decade of experience in digital music innovation[869] - Mr. James Gordon Mitchell chairs the compensation committee and serves as Chief Strategy Officer at Tencent, with extensive board experience[870] - Mr. Brent Richard Irvin serves as corporate VP and general counsel at Tencent, overseeing U.S. operations[871] - Mr. Matthew Yun Ming Cheng appointed as Director since May 2022, with financial management experience at Tencent and other firms[872] - Ms. Edith Manling Ngan serves as an independent non-executive Director, with roles in audit and compensation committees[874] - Mr. Adrian Yau Kee Mak chairs the audit committee, with extensive experience in corporate finance and accounting[875] - Ms. Jeanette Kim Yum Chan appointed as independent non-executive Director, with expertise in cross-border M&A and legal compliance[876] - Board composition includes nine Directors, with three independent Directors meeting Hong Kong Listing Rules requirements[862] - The company paid an aggregate cash compensation of approximately RMB65.0 million, RMB62.1 million, RMB69.8 million, and RMB17.3 million (US$2.7 million) to Directors and executive officers for the years ended December 31, 2021, and the three months ended March 31, 2022, respectively[884] - The company plans to adopt a board diversity policy to ensure a balanced mix of skills, experience, and diversity among board members[922] - The current Board consists of seven male and two female members, aged 46 to 63, with a focus on enhancing decision-making and corporate governance effectiveness[923] - Directors owe fiduciary duties to the company, including loyalty, honesty, and acting in the company's best interests, with potential legal consequences for breaches[924] Shareholder Structure and Equity - Tencent holds 53.2% of the company's total ordinary shares, representing 90.4% of the voting power as of the latest practicable date[856] - Spotify holds 8.3% of the company's total ordinary shares, with no voting power as of the latest practicable date[856] - 40.3% of the company's total issued and outstanding ordinary shares are held by the depositary of the ADS program in the United States as of the latest practicable date[859] Share-Based Compensation and Incentive Plans - The company's share-based compensation expenses are measured at the grant date based on the fair value of equity instruments and recognized as an expense over the vesting period[818] - Under the 2014 Share Incentive Plan, the company is authorized to issue a maximum of 101,785,456 Class A ordinary shares, with 1,733,442 options outstanding as of April 19, 2022[888] - The 2017 Option Plan allows for the issuance of up to 118,884,829 Class A ordinary shares, with 40,288,686 options outstanding and 9,586,586 vested as of April 19, 2022[896] - The 2017 Restricted Share Scheme authorizes the issuance of up to 216,329,580 Class A ordinary shares, with 47,394,718 restricted shares outstanding as of April 19, 2022[903] - The 2014 Share Incentive Plan permits awards of options, share appreciation rights, share grants, and restricted share units (RSUs)[888] - The 2017 Option Plan permits awards of options and is administered by the Board or Compensation Committee[897] - The 2017 Restricted Share Scheme aims to align the interests of selected personnel with shareholders through equity ownership[903] - The company's Board authorized the reservation of an additional 20,933,591 Class A ordinary shares for future issuances under the 2017 Option Plan in April 2022[896] - The company's Board authorized the reservation of an additional 104,627,958 Class A ordinary shares for future issuances under the 2017 Restricted Share Scheme in April 2022[903] - The 2017 Restricted Share Scheme allows awards of restricted shares to employees, executives, directors, consultants, and others contributing to the company's growth, subject to legal and regulatory compliance[904] - As of April 19, 2022, employees other than senior management held options to purchase 21,047,308 Class A ordinary shares, with exercise prices ranging from US$0.000076 to US$9.525 per share[913] Acquisitions and Strategic Partnerships - The company acquired 100% equity interest in Shenzhen Lanren for a total consideration of RMB2.7 billion, primarily payable in cash, plus certain post-acquisition equity-settled awards to Shenzhen Lanren's management team[840] - The company joined a consortium led by Tencent to acquire a 10% equity stake in Universal Music Group (UMG) at an enterprise value of EUR30 billion, with an option to purchase an additional 10% equity stake[837] - The company issued 282,830,698 ordinary shares to Spotify AB in exchange for 8,552,440 ordinary shares of Spotify, resulting in an approximately 2.5% equity interest in Spotify[836] - The company signed a five-year strategic partnership with China Literature, granting a global license to produce derivative content in the form of audiobooks of online literary works[838] VIE Structure and Operations - The company operates its relevant business in China through contractual arrangements with variable interest entities (VIEs) due to PRC laws limiting foreign ownership in certain industries[833] - The WOFEs receive 90% of the net operating income of the VIEs as service fees under the exclusive technical service agreement[956] - The total assets of the Group's VIEs were RMB15,127 million, RMB18,094 million, RMB18,117 million, and RMB18,794 million as of December 31, 2019, 2020, 2021, and March 31, 2022, respectively[970] - The total revenues of the Group's VIEs were RMB25,379 million, RMB29,094 million, RMB30,949 million, and RMB6,519 million for the years ended December 31, 2019, 2020, 2021, and the three months ended March 31, 2022, respectively[971] - The net profit/(loss) of the Group's VIEs was RMB1,323 million, RMB1,625 million, RMB(209) million, and RMB(65) million for the years ended December 31, 2019, 2020, 2021, and the three months ended March 31, 2022, respectively[971] - The total liabilities of the Group's VIEs were RMB6,871 million, RMB7,379 million, RMB7,086 million, and RMB7,602 million as of December 31, 2019, 2020, 2021, and March 31, 2022, respectively[970] - The registered capital, capital reserve, and PRC statutory reserves of the VIEs totaled RMB4,206 million, RMB4,185 million, RMB4,069 million, and RMB4,084 million as of December 31, 2019, 2020, 2021, and March 31, 2022, respectively[967] - The net cash inflow from operating activities was RMB454 million, RMB(671) million, and RMB2,151 million for the years ended December 31, 2020, 2021, and the three months ended March 31, 2022, respectively[971] - The net cash outflow from investing activities was RMB1,099 million, RMB3,554 million, and RMB2,408 million for the years ended December 31, 2020, 2021, and the three months ended March 31, 2022, respectively[971] - The net cash inflow from financing activities was RMB715 million, RMB3,462 million, and RMB219 million for the years ended December 31, 2020, 2021, and the three months ended March 31, 2022, respectively[971] - The cash and cash equivalents at the end of the period were RMB1,397 million, RMB634 million, and RMB596 million as of December 31, 2020, 2021, and March 31, 2022, respectively[971] Accounting Standards and Policies - The company's historical financial information is prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB)[973] - The company applies all effective standards, amendments, and interpretations mandatorily effective for the financial year beginning January 1, 2022[977] - New standards and amendments not yet effective for the financial year beginning January 1, 2022, are not expected to have a significant effect on the company's historical financial information[978] - The company will need to recognize deferred tax assets and liabilities for temporary differences arising on leases upon the effective date of amendments to IAS 12 on January 1, 2023[980] - Subsidiaries are fully consolidated from the date control is transferred to the company, and intercompany transactions and balances are eliminated[981] - Associates are entities where the company has significant influence, generally with a shareholding of 20% to 50% of voting rights, and are accounted for using the equity method[982] - Joint ventures are classified based on contractual rights and obligations, and the company accounts for them using the equity method after initial recognition at cost[983] Expenses and Liabilities - The company expects to incur listing expenses of approximately RMB74.7 million, including RMB22.2 million for sponsor-related expenses and RMB52.5 million for non-sponsor-related expenses[827] - The company's unaudited pro forma adjusted net tangible assets as of March 31, 2022, were RMB26.539 billion, with a net tangible asset per share of RMB8.

Financial Data and Key Metrics Changes - Tencent Music Entertainment Group reported significant changes in financial metrics for Q2 2022, with specific figures to be detailed in the full report [1] Business Line Data and Key Metrics Changes - The performance of various business lines will be discussed in detail during the earnings call, highlighting any notable shifts in revenue and user engagement [1] Market Data and Key Metrics Changes - Market performance indicators will be analyzed, focusing on user growth and market share within the music streaming industry [1] Company Strategy and Development Direction - The management team will outline the company's strategic initiatives and future direction, particularly in response to competitive pressures in the industry [1] Management's Comments on Operating Environment and Future Outlook - Management will provide insights into the current operating environment and their outlook for the future, addressing potential challenges and opportunities [1] Other Important Information - Additional relevant information regarding partnerships, technological advancements, and market trends will be shared during the call [1] Q&A Session All Questions and Answers Question: What are the expectations for user growth in the upcoming quarters? - Management will address user growth expectations and strategies to enhance user engagement in the coming quarters [1] Question: How is the company responding to competitive pressures? - The response to competitive pressures will be discussed, including any strategic adjustments being made to maintain market position [1]

Financial Performance - Net profit for Q2 2022 was RMB 892 million (US$ 133 million), with a Non-IFRS net profit of RMB 1.07 billion (US$ 159 million), reflecting an 8.3% year-over-year decrease but a 13.4% increase sequentially [1]. - Total revenues for Q2 2022 were RMB 6.91 billion (US$ 1.03 billion), a 13.8% decrease year-over-year, but a 3.9% increase sequentially [1]. - Gross profit for Q2 2022 was RMB 2.06 billion (US$ 308 million), a 15.3% decrease year-over-year, with a gross margin of 29.9% [20]. - Operating profit for Q2 2022 was RMB 1.05 billion (US$ 156 million), compared to RMB 1.04 billion in the same period of 2021 [25]. - Basic and diluted earnings per ADS for Q2 2022 were RMB0.53 (US$0.08) and non-IFRS earnings per ADS were RMB0.64 (US$0.10) respectively [28]. - The company reported a profit for the period of RMB 892 million (US$133 million) for Q2 2022, compared to RMB 871 million in Q2 2021, an increase of 2.4% [43]. - Non-IFRS net profit for Q2 2022 was RMB 1.045 billion (US$156 million), compared to RMB 1.035 billion in Q2 2021, showing a year-over-year increase of 1% [38]. - The effective tax rate for Q2 2022 was 12.2%, compared to 11.5% in Q2 2021 [81]. Revenue Breakdown - Revenues from music subscriptions increased by 17.6% year-over-year to RMB 2.11 billion (US$ 315 million), with paying users reaching 82.7 million, a 24.9% increase year-over-year [2]. - Revenues from social entertainment services decreased by 20.4% year-over-year to RMB 4.03 billion (US$ 601 million), with paying users declining by 28.2% [18]. - Revenues from online music services decreased by 2.4% to RMB 2.88 billion (US$ 430 million), while music subscription revenues grew by 17.6% to RMB 2.11 billion (US$ 315 million) due to a 24.9% increase in paying users [71]. - Total revenues for Q2 2022 decreased by RMB1.10 billion, or 13.8%, to RMB6.91 billion (US$1.03 billion) from RMB8.01 billion in Q2 2021 [70]. User Metrics - Online music mobile MAUs decreased by 4.8% year-over-year to 593 million, while social entertainment MAUs decreased by 20.6% to 166 million [6]. - The number of online music paying users increased by 24.9% year-over-year, demonstrating strong growth in subscription revenue [61]. Cash and Investments - As of June 30, 2022, the company's cash, cash equivalents, term deposits, and short-term investments totaled RMB25.80 billion (US$3.85 billion), a slight decrease from RMB25.93 billion as of March 31, 2022 [29]. - Cash and cash equivalents at the end of Q2 2022 were RMB10.04 billion (US$1.5 billion), up from RMB8.35 billion at the beginning of the period [54]. - Net cash generated from operations during Q2 2022 was RMB1.24 billion (US$185 million), while cash used in share repurchases was RMB969 million (US$145 million) [29]. - The company reported a net cash increase of RMB 1,502 million for the three months ended June 30, 2022, compared to a net cash decrease of RMB 3,378 million in the same period of 2021 [109]. Share Repurchase Program - The company completed over $700 million of its $1 billion share repurchase program by the end of Q2 2022, demonstrating confidence in its prospects [3]. - Approximately 86.8 million ADSs were repurchased under the US$1 billion share repurchase program, totaling approximately US$735 million as of June 30, 2022 [30]. - The company completed over $700 million of its $1 billion share repurchase program by the end of Q2 2022, with plans to complete the remainder throughout the year [58]. Strategic Initiatives - The company launched Jay Chou's digital album "Greatest Works of Art," selling over 6 million copies by the end of July 2022, marking a significant success on its platform [8]. - The company aims to leverage technology to enhance user engagement and expand its music-centric services, including online karaoke and live streaming [98]. - Tencent Music is focusing on market expansion and new product development to drive future growth, particularly in the online audio and concert services sectors [98]. - The company continues to explore strategic partnerships and acquisitions to enhance its competitive position in the music entertainment industry [98]. Asset and Liability Overview - Total assets decreased from RMB 67,254 million as of December 31, 2021, to RMB 66,308 million as of June 30, 2022, representing a decline of approximately 1.4% [106]. - Total equity attributable to equity holders decreased from RMB 50,317 million to RMB 47,238 million, a decline of approximately 4.1% [106]. - Non-current liabilities increased from RMB 5,062 million to RMB 5,331 million, an increase of approximately 5.3% [106]. - Accounts receivable decreased from RMB 3,610 million to RMB 2,898 million, a decline of approximately 19.7% [106]. - Retained earnings increased from RMB 14,194 million to RMB 15,659 million, an increase of approximately 10.3% [106].

Financial Data and Key Metrics - No specific financial data or key metrics changes mentioned in the provided content [1] Business Line Data and Key Metrics - No specific business line data or key metrics changes mentioned in the provided content [1] Market Data and Key Metrics - No specific market data or key metrics changes mentioned in the provided content [1] Company Strategy and Industry Competition - No specific company strategy or industry competition details mentioned in the provided content [1] Management Commentary on Operating Environment and Future Outlook - No specific management commentary on operating environment or future outlook mentioned in the provided content [1] Other Important Information - The conference call is for Tencent Music Entertainment Group's First Quarter 2022 Earnings [1] - The call is being recorded and hosted by Mr Tony Yip [1] Q&A Session - No Q&A session details provided in the content [1]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F (Mark One) ☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021. OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to OR ☐ SHELL COMPANY REPORT PURSUANT TO S ...

[PART I](index=7&type=section&id=PART%20I) [ITEM 3. KEY INFORMATION](index=7&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section outlines the principal risks faced by the company, categorized into business and industry risks, relationship with Tencent, corporate structure (VIE), doing business in China, and risks related to its American Depositary Shares (ADSs) [Risk Factors](index=7&type=section&id=3.D.%20Risk%20Factors) The company identifies significant risks across its operations, including dependence on third-party content licenses, potential copyright infringement, uncertainties in monetization, and structural risks from its VIE setup, alongside reliance on Tencent and evolving Chinese regulations - The company's business is highly dependent on licenses from third-party content providers; adverse changes, loss of relationships, or failure to renew these licenses on favorable terms could materially harm the business[15](index=15&type=chunk)[25](index=25&type=chunk)[28](index=28&type=chunk) - A significant risk arises from the company's corporate structure, which relies on contractual arrangements with Variable Interest Entities (VIEs) to operate in China; if the PRC government finds these arrangements non-compliant, the company could face severe penalties[18](index=18&type=chunk)[145](index=145&type=chunk) - Tencent, as the controlling shareholder, holds **90.6% of the total voting power**, giving it effective control over shareholder actions, which may lead to conflicts of interest not resolved favorably for other shareholders[17](index=17&type=chunk)[138](index=138&type=chunk)[142](index=142&type=chunk) - The company faces regulatory risks in China, including uncertainties in the legal system and evolving online content regulations; the HFCAA could also lead to the delisting of the company's ADSs if the PCAOB is unable to inspect its auditor for three consecutive years[21](index=21&type=chunk)[222](index=222&type=chunk)[224](index=224&type=chunk) [ITEM 4. INFORMATION ON THE COMPANY](index=57&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section details the company's history, business overview, organizational structure, and physical assets, outlining the development of its key products and strategic transactions [History and Development of the Company](index=57&type=section&id=4.A.%20History%20and%20Development%20of%20the%20Company) The company's history includes the launch of core products like QQ Music, Kugou, and Kuwo, its 2016 combination with Tencent's music business, 2018 NYSE IPO, and recent strategic moves including a US$800 million notes offering and stake acquisitions in UMG and Lazy Audio - In July 2016, Tencent acquired control of CMC and injected its online music businesses (QQ Music, WeSing), making TME a consolidated subsidiary of Tencent[272](index=272&type=chunk) - The company completed its Initial Public Offering (IPO) in December 2018, with ADSs trading on the NYSE under the symbol "TME"[274](index=274&type=chunk) - In 2020 and 2021, TME engaged in significant strategic investments, including acquiring a stake in Universal Music Group (UMG) via a Tencent-led consortium and acquiring **100% of Lazy Audio** to expand into the long-form audio market[276](index=276&type=chunk)[277](index=277&type=chunk) [Business Overview](index=59&type=section&id=4.B.%20Business%20Overview) Tencent Music Entertainment is China's largest online music entertainment platform, operating key apps like QQ Music, Kugou Music, Kuwo Music, and WeSing, with a comprehensive social entertainment ecosystem, vast content library, and multi-faceted monetization models - The company operates China's largest online music entertainment platform, with **644 million online music mobile MAUs** and **240 million social entertainment mobile MAUs** in 2020[285](index=285&type=chunk)[290](index=290&type=chunk) - TME's content library is the largest in China, featuring over **60 million music tracks** as of December 31, 2020, supplemented by a wide range of long-form audio content like audiobooks and podcasts[291](index=291&type=chunk) - Monetization is driven by online music services (subscriptions, digital sales, advertising) and social entertainment services (virtual gifts, premium memberships); in 2020, online music paying users reached **49.4 million (7.7% paying ratio)**, and social entertainment paying users were **11.7 million (4.9% paying ratio)**[291](index=291&type=chunk) - The company is subject to extensive PRC regulations governing the internet, value-added telecommunications, online content, and foreign investment, which necessitates its VIE structure for certain operations[366](index=366&type=chunk)[367](index=367&type=chunk) [Organizational Structure](index=97&type=section&id=4.C.%20Organizational%20Structure) As a Cayman Islands holding company, TME conducts its business in China through wholly-owned PRC subsidiaries and Variable Interest Entities (VIEs) to comply with PRC laws restricting foreign ownership in certain sectors, exerting control over VIEs via contractual arrangements - The company uses a VIE structure to operate in sectors with foreign ownership restrictions in China, such as value-added telecommunication and internet audio-video services[489](index=489&type=chunk) - Control over the VIEs is established through a series of contractual arrangements, including Equity Interest Pledge Agreements, Exclusive Option Agreements, Exclusive Technical Service Agreements, and Voting Trust Agreements[491](index=491&type=chunk)[493](index=493&type=chunk)[497](index=497&type=chunk) [OPERATING AND FINANCIAL REVIEW AND PROSPECTS](index=101&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section provides a detailed analysis of the company's financial performance and condition, discussing key factors affecting results, year-over-year comparisons of revenues, costs, and profitability, and details on liquidity, capital resources, and cash flows [Operating Results](index=101&type=section&id=5.A.%20Operating%20Results) In 2020, total revenues increased **14.6% to RMB 29.15 billion**, driven by **30.7% growth in online music services revenue** to **RMB 9.35 billion**, while gross margin decreased to **31.9%** due to higher revenue sharing fees and content investments, and profit for the year rose to **RMB 4.18 billion** Key Financial Performance (2018-2020) | Financial Metric | 2018 (RMB million) | 2019 (RMB million) | 2020 (RMB million) | 2020 (US$ million) | | :--- | :--- | :--- | :--- | :--- | | **Total Revenues** | **18,985** | **25,434** | **29,153** | **4,468** | | Online music services | 5,536 | 7,152 | 9,349 | 1,433 | | Social entertainment services and others | 13,449 | 18,282 | 19,804 | 3,035 | | **Gross Profit** | **7,277** | **8,673** | **9,302** | **1,426** | | Gross Margin | 38.3% | 34.1% | 31.9% | 31.9% | | **Operating Profit** | **2,039** | **4,622** | **4,710** | **722** | | **Profit for the year** | **1,832** | **3,977** | **4,176** | **640** | Key Operating Metrics (2018-2020) | Operating Metric | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | **Online Music Mobile MAUs (millions)** | 642 | 653 | 644 | | **Social Entertainment Mobile MAUs (millions)** | 226 | 240 | 240 | | **Online Music Paying Users (millions)** | 24.4 | 33.7 | 49.4 | | Online Music Paying Ratio | 3.8% | 5.2% | 7.7% | | Online Music Monthly ARPPU (RMB) | 8.5 | 8.8 | 9.4 | | **Social Entertainment Paying Users (millions)** | 9.8 | 11.6 | 11.7 | | Social Entertainment Paying Ratio | 4.3% | 4.8% | 4.9% | | Social Entertainment Monthly ARPPU (RMB) | 114.4 | 131.3 | 141.1 | - Revenue from online music services grew **30.7% in 2020**, primarily due to a **56.0% increase in music subscription revenue**, driven by a significant rise in paying users and a higher monthly ARPPU[579](index=579&type=chunk) - Cost of revenues increased by **18.4% in 2020**, mainly due to higher revenue sharing fees for platform competitiveness and increased content costs for new products like long-form audio and TME Live[581](index=581&type=chunk) [Liquidity and Capital Resources](index=119&type=section&id=5.B.%20Liquidity%20and%20Capital%20Resources) The company's primary sources of liquidity are cash from operations and financing activities, with **RMB 11.13 billion** in cash and cash equivalents as of December 31, 2020, and sufficient cash flow for the next 12 months, despite significant cash used in investing activities for term deposits and UMG investments Consolidated Cash Flow Data (2018-2020) | Cash Flow Item (RMB million) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | **Net cash generated from operating activities** | **5,632** | **6,200** | **4,885** | | **Net cash used in investing activities** | **(1,190)** | **(8,102)** | **(14,206)** | | **Net cash generated from/(used in) financing activities** | **7,741** | **(31)** | **5,292** | | Net increase/(decrease) in cash and cash equivalents | 12,183 | (1,933) | (4,029) | | Cash and cash equivalents at end of the year | 17,356 | 15,426 | 11,128 | - As of December 31, 2020, the company held **RMB 11.13 billion (US$1.71 billion)** in cash and cash equivalents[613](index=613&type=chunk) - The company has two share repurchase programs: a **US$400 million** program announced in December 2019 and a **US$1 billion** program announced in March 2021[614](index=614&type=chunk) [DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES](index=124&type=section&id=ITEM%206.%20DIRECTORS,%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section provides information on the company's leadership, compensation practices, board structure, and employee base, including key directors, executive compensation, share incentive plans, and employee headcount by function - As of April 2, 2021, the board of directors consists of nine members, including Tong Tao Sang as Chairman and Cussion Kar Shun Pang as CEO[643](index=643&type=chunk) - In 2020, the aggregate cash compensation paid to directors and executive officers was approximately **RMB 62.1 million (US$9.5 million)**[659](index=659&type=chunk) - The company has three main share incentive plans: the 2014 Share Incentive Plan, the 2017 Option Plan, and the 2017 Restricted Share Scheme, to attract and retain talent[663](index=663&type=chunk)[670](index=670&type=chunk)[677](index=677&type=chunk) Employee Headcount by Function (as of Dec 31, 2020) | Function | Number of employees | | :--- | :--- | | Research and development | 2,821 | | Content management and operation | 879 | | Sales and marketing | 440 | | Management and administration | 629 | | **Total** | **4,769** | [MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS](index=138&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section details the company's major shareholders and significant transactions with related parties, highlighting Tencent as the controlling shareholder with **90.6% of voting power** and Spotify as another major shareholder, alongside various business cooperation and co-investment activities with Tencent and its affiliates Major Shareholders (as of April 2, 2021) | Shareholder | Class A Shares (%) | Class B Shares (%) | Total Ordinary Shares (%) | Aggregate Voting Power (%) | | :--- | :--- | :--- | :--- | :--- | | Tencent | 13.5% | 95.6% | 55.1% | 90.6% | | Spotify | 16.9% | — | 8.4% | — | - The company has a master business cooperation agreement with Tencent, covering various operational aspects[712](index=712&type=chunk) - TME and Tencent have co-invested in Spotify and Universal Music Group (UMG), highlighting a strategic alignment in the global music industry[713](index=713&type=chunk)[715](index=715&type=chunk) Significant Related Party Transactions with Tencent Group (2020) | Transaction Type | Amount (RMB million) | | :--- | :--- | | **Revenues from Tencent Group** | | | Online music services | 277 | | Social entertainment & others | 213 | | **Expenses to Tencent Group** | | | Operation expenses recharged | 1,082 | | Advertising agency cost | 440 | | Content royalties | 306 | [FINANCIAL INFORMATION](index=141&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section covers consolidated financial statements, legal proceedings, and dividend policy, noting the company's involvement in copyright infringement lawsuits with **RMB 46.9 million** in sought damages, shareholder class action lawsuits, and its current policy of retaining earnings for business expansion - As of December 31, 2020, the company was involved in **1,116 pending lawsuits** related to alleged copyright infringement, with total damages sought of approximately **RMB 46.9 million (US$7.2 million)**[730](index=730&type=chunk) - The company and certain directors/officers were named as defendants in two putative securities class action lawsuits filed in 2019, alleging material misstatements in its IPO Registration Statement and 2018 annual report; the company intends to defend these actions vigorously[732](index=732&type=chunk) - The company has no current plans to declare or pay dividends, intending to retain earnings to fund business growth and expansion[733](index=733&type=chunk) [ADDITIONAL INFORMATION](index=143&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) This section provides details on the company's corporate governance, material contracts, exchange controls, and taxation, including its dual-class share structure, Cayman Islands tax exemption, PRC EIT rates, and the risk of being classified as a Passive Foreign Investment Company (PFIC) for U.S. investors - The company has a dual-class share structure, where each Class A ordinary share has one vote, while each Class B ordinary share has **15 votes** and is convertible into one Class A share[745](index=745&type=chunk)[749](index=749&type=chunk) - The company is an exempted company in the Cayman Islands and is not subject to income or capital gains tax there[768](index=768&type=chunk) - In the PRC, the company is subject to a **25% Enterprise Income Tax (EIT)**, but certain subsidiaries qualify for preferential rates (e.g., **15% for HNTEs**) or tax holidays[770](index=770&type=chunk)[1055](index=1055&type=chunk) - For U.S. investors, there is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC) for a given taxable year, which could result in adverse U.S. federal income tax consequences[785](index=785&type=chunk)[1468](index=1468&type=chunk) [QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=153&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risks are foreign exchange risk, as revenues are almost entirely in RMB, and to a lesser extent, interest rate and inflation risk, with no current hedging instruments in use and minimal impact from inflation to date - The company's main market risk is foreign exchange risk, as revenues are almost entirely in RMB while it may have US dollar-denominated needs; the company does not currently engage in hedging[799](index=799&type=chunk) - Interest rate risk is not significant as the company's notes payable carry fixed rates[797](index=797&type=chunk)[798](index=798&type=chunk) - Inflation in China has not materially impacted the company's results of operations[801](index=801&type=chunk) [PART II](index=157&type=section&id=PART%20II) [MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS](index=157&type=section&id=ITEM%2014.%20MATERIAL%20MODIFICATIONS%20TO%20THE%20RIGHTS%20OF%20SECURITY%20HOLDERS%20AND%20USE%20OF%20PROCEEDS) This section confirms no material modifications to security holder rights and details the use of proceeds from the company's December 2018 IPO, with all **US$509 million** net proceeds used as intended for content acquisition, strategic investments, and other operating purposes - The company received net proceeds of approximately **US$509 million** from its December 2018 IPO[810](index=810&type=chunk) - As of the date of this report, all net proceeds from the IPO have been used for their intended purposes, including content acquisition and strategic investments[812](index=812&type=chunk) [CONTROLS AND PROCEDURES](index=157&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) This section addresses the company's internal controls, with management concluding that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, a conclusion also attested to by the independent registered public accounting firm - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[814](index=814&type=chunk) - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[816](index=816&type=chunk) - The independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, has audited and confirmed the effectiveness of the company's internal control over financial reporting as of December 31, 2020[818](index=818&type=chunk) [PART III](index=161&type=section&id=PART%20III) [FINANCIAL STATEMENTS](index=161&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section contains the audited consolidated financial statements for Tencent Music Entertainment Group for fiscal years 2018, 2019, and 2020, prepared in accordance with IFRS, including the independent auditor's unqualified opinion on both the financial statements and internal control over financial reporting Consolidated Income Statement Highlights (RMB million) | Item | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | **Total Revenues** | **18,985** | **25,434** | **29,153** | | Gross Profit | 7,277 | 8,673 | 9,302 | | Operating Profit | 2,039 | 4,622 | 4,710 | | **Profit for the year** | **1,832** | **3,977** | **4,176** | | Basic EPS (RMB) | 0.60 | 1.22 | 1.25 | | Diluted EPS (RMB) | 0.58 | 1.19 | 1.24 | Consolidated Balance Sheet Highlights (RMB million) | Item | Dec 31, 2019 | Dec 31, 2020 | | :--- | :--- | :--- | | **Total Assets** | **52,678** | **68,273** | | Cash and cash equivalents | 15,426 | 11,128 | | Goodwill | 17,140 | 17,492 | | **Total Liabilities** | **9,000** | **15,542** | | Notes payable | — | 5,175 | | **Total Equity** | **43,678** | **52,731** | Consolidated Cash Flow Highlights (RMB million) | Item | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net cash inflow from operating activities | 5,632 | 6,200 | 4,885 | | Net cash outflow from investing activities | (1,190) | (8,102) | (14,206) | | Net cash inflow/(outflow) from financing activities | 7,741 | (31) | 5,292 |

Part I [Key Information](index=6&type=section&id=Item%203.%20Key%20Information) This section provides selected consolidated financial data and an extensive list of risk factors for Tencent Music Entertainment Group from 2016 to 2019 [Selected Financial Data](index=6&type=section&id=3.A.%20Selected%20Financial%20Data) Total revenues grew from RMB 10,981 million in 2017 to RMB 25,434 million in 2019, with profit for the year reaching RMB 3,977 million Selected Consolidated Statement of Operations Data (RMB millions) | Indicator | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | **Total revenues** | 10,981 | 18,985 | 25,434 | | Online music services | 3,149 | 5,536 | 7,152 | | Social entertainment services and others | 7,832 | 13,449 | 18,282 | | **Gross profit** | 3,810 | 7,277 | 8,673 | | **Operating profit** | 1,593 | 2,039 | 4,622 | | **Profit for the year** | 1,319 | 1,832 | 3,977 | | **Adjusted profit for the year** | 1,904 | 4,174 | 4,903 | | **Basic Earnings per Share (RMB)** | 0.51 | 0.60 | 1.22 | | **Diluted Earnings per Share (RMB)** | 0.50 | 0.58 | 1.19 | Selected Consolidated Balance Sheet Data (RMB millions) | Indicator | As of Dec 31, 2018 | As of Dec 31, 2019 | | :--- | :--- | :--- | | **Total assets** | 44,605 | 52,678 | | Total current assets | 20,778 | 26,914 | | Non-current assets | 23,827 | 25,764 | | **Total liabilities** | 6,833 | 9,000 | | Total current liabilities | 6,238 | 8,490 | | Non-current liabilities | 595 | 510 | | **Total equity** | 37,772 | 43,678 | Selected Consolidated Cash Flow Data (RMB millions) | Indicator | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net cash generated from operating activities | 2,500 | 5,632 | 6,200 | | Net cash used in investing activities | (483) | (1,190) | (8,102) | | Net cash generated from/(used in) financing activities | 99 | 7,741 | (31) | | Net increase/(decrease) in cash and cash equivalents | 2,116 | 12,183 | (1,933) | | Cash and cash equivalents at end of the year | 5,174 | 17,356 | 15,426 | [Risk Factors](index=9&type=section&id=3.D.%20Risk%20Factors) This section details risks related to business operations, content licensing, the VIE structure, Tencent's control, PRC regulations, and ADS price volatility - The company's ability to attract and retain users is **highly dependent on offering attractive content** that caters to evolving user preferences, with failure potentially **adversely affecting user traffic and engagement**[31](index=31&type=chunk)[32](index=32&type=chunk) - A significant portion of the music library is licensed from third parties, and the loss of these licenses or renewal on unfavorable terms could **materially harm the business**[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) - The company faces risks from its VIE structure, used to comply with PRC foreign investment restrictions, and could face **severe penalties** if these arrangements are found non-compliant by the PRC government[188](index=188&type=chunk)[189](index=189&type=chunk)[191](index=191&type=chunk) - As a controlling shareholder, Tencent has **effective control** over shareholder actions, and its interests may not always align with other shareholders, leading to **potential conflicts of interest**[177](index=177&type=chunk)[178](index=178&type=chunk)[180](index=180&type=chunk) - The company faces risks from potential PRC government censorship of content, which could lead to **penalties, loss of licenses, and reputational harm**[109](index=109&type=chunk)[112](index=112&type=chunk)[113](index=113&type=chunk) [Information on the Company](index=41&type=section&id=Item%204.%20Information%20on%20the%20Company) This section outlines the company's history, business operations, organizational structure, and property, including its platform ecosystem and VIE structure [History and Development of the Company](index=46&type=section&id=4.A.%20History%20and%20Development%20of%20the%20Company) This section traces the company's evolution from individual music platforms to Tencent Music Entertainment Group, including its IPO and proposed UMG investment - In July 2016, **Tencent acquired control** of China Music Corporation (CMC) and injected its online music businesses, with CMC later **renamed Tencent Music Entertainment Group**[329](index=329&type=chunk) - The company completed its **initial public offering in December 2018**, with its ADSs trading on the New York Stock Exchange[331](index=331&type=chunk) - In December 2019, TME **proposed to acquire a 10% equity stake in Universal Music Group (UMG) at an enterprise value of EUR30 billion**, with an option for an additional 10%[331](index=331&type=chunk) [Business Overview](index=47&type=section&id=4.B.%20Business%20Overview) The company operates China's largest online music entertainment platform, with 653 million online music mobile MAUs and a vast content library, generating revenue from music and social entertainment services - The company operates the top four music mobile apps in China, with **653 million online music mobile MAUs** and **232 million social entertainment mobile MAUs** in 2019[337](index=337&type=chunk)[342](index=342&type=chunk) - The platform has China's **largest music content library with over 40 million tracks** as of December 31, 2019, sourced from domestic and international music labels[344](index=344&type=chunk) Key User Metrics (2018-2019) | Metric | 2018 | 2019 | | :--- | :--- | :--- | | Online Music Paying Users (millions) | 24.4 | 33.7 | | Online Music Paying Ratio (%) | 3.8% | 5.2% | | Social Entertainment Paying Users (millions) | 9.8 | 11.6 | | Social Entertainment Paying Ratio (%) | 4.3% | 5.0% | | Online Music Monthly ARPPU (RMB) | 8.5 | 8.8 | | Social Entertainment Monthly ARPPU (RMB) | 114.4 | 131.3 | - Revenue is generated through two primary segments: **Online Music Services (28.1% of 2019 revenue)** and **Social Entertainment Services and Others (71.9% of 2019 revenue)**[420](index=420&type=chunk)[424](index=424&type=chunk) [Organizational Structure](index=77&type=section&id=4.C.%20Organizational%20Structure) The company operates through a Variable Interest Entity (VIE) structure in the PRC due to foreign ownership restrictions, maintaining control via contractual arrangements and consolidating VIE financial results - Due to PRC laws restricting foreign ownership in value-added telecommunication services, the company operates its core business through a **VIE structure**[568](index=568&type=chunk) - Control over the VIEs is maintained through a series of **contractual arrangements**, including Equity Interests Pledge Agreements, Exclusive Option Agreements, and Voting Trust Agreements[572](index=572&type=chunk)[573](index=573&type=chunk)[580](index=580&type=chunk) Revenue and Asset Contribution by Entity Type (2019) | Entity Type | % of Total Revenues | % of Total Assets | | :--- | :--- | :--- | | Consolidated VIEs | 99.8% | 28.7% | | Wholly-owned PRC subsidiaries | 0.2% | 12.3% | | TME Group & offshore subsidiaries | 0.0% | 59.0% | [Operating and Financial Review and Prospects](index=80&type=section&id=Item%205.%20Operating%20and%20Financial%20Review%20and%20Prospects) This section analyzes the company's financial performance, liquidity, capital resources, and critical accounting policies, detailing revenue, cost, and profit trends [Operating Results](index=81&type=section&id=5.A.%20Operating%20Results) Revenues grew 34.0% to RMB 25,434 million in 2019, driven by online music and social entertainment services, despite a gross margin decrease due to higher content costs Revenue Breakdown (2017-2019, RMB millions) | Revenue Source | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Online music services | 3,149 | 5,536 | 7,152 | | Social entertainment services and others | 7,832 | 13,449 | 18,282 | | **Total revenues** | **10,981** | **18,985** | **25,434** | - In 2019, revenues increased by **34.0% year-over-year**, with online music services growing **29.2%** and social entertainment services growing **35.9%**[676](index=676&type=chunk)[678](index=678&type=chunk)[680](index=680&type=chunk) - Gross margin **decreased to 34.1% in 2019 from 38.3% in 2018**, primarily due to increased content costs and revenue sharing fees[683](index=683&type=chunk)[685](index=685&type=chunk) Key Operating Metrics (2017-2019) | Metric | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Online music mobile MAUs (millions) | 606 | 642 | 653 | | Social entertainment mobile MAUs (millions) | 201 | 226 | 232 | | Online music paying users (millions) | 17.4 | 24.4 | 33.7 | | Social entertainment paying users (millions) | 7.4 | 9.8 | 11.6 | | Online music monthly ARPPU (RMB) | 8.8 | 8.5 | 8.8 | | Social entertainment monthly ARPPU (RMB) | 88.2 | 114.4 | 131.3 | [Liquidity and Capital Resources](index=98&type=section&id=5.B.%20Liquidity%20and%20Capital%20Resources) The company's liquidity is primarily driven by RMB 6,200 million in operating cash flow, with RMB 15,426 million in cash and cash equivalents as of December 31, 2019 - As of December 31, 2019, the company had **RMB 15,426 million (US$2,216 million)** in cash and cash equivalents[715](index=715&type=chunk) - Net cash generated from operating activities was **RMB 6,200 million (US$891 million) in 2019**, an **increase from RMB 5,632 million in 2018**[721](index=721&type=chunk)[722](index=722&type=chunk) - A **share repurchase program** was announced in December 2019, authorizing the repurchase of **up to $400 million** of Class A ordinary shares in the form of ADSs[716](index=716&type=chunk) - Capital expenditures totaled **RMB 286 million (US$41 million) in 2019**, **up from RMB 144 million in 2018**[731](index=731&type=chunk) [Directors, Senior Management and Employees](index=103&type=section&id=Item%206.%20Directors%2C%20Senior%20Management%20and%20Employees) This section details the company's leadership, compensation, board structure, and employee base, highlighting Tencent's controlling share ownership - The board of directors consists of **nine members**, including key executives like Chairman Tong Tao Sang and CEO Cussion Kar Shun Pang[748](index=748&type=chunk)[801](index=801&type=chunk) - In 2019, the aggregate cash compensation paid to directors and executive officers was approximately **RMB 65.0 million (US$9.0 million)**[765](index=765&type=chunk) Employee Headcount by Function (as of December 31, 2019) | Function | Number of Employees | | :--- | :--- | | Research and development | 2,021 | | Content management | 641 | | Sales and marketing | 361 | | Management and administration | 587 | | **Total** | **3,610** | - As of March 25, 2020, Tencent is the principal shareholder, beneficially owning **55.6% of total ordinary shares** and controlling **78.7% of the aggregate voting power**[818](index=818&type=chunk) [Major Shareholders and Related Party Transactions](index=114&type=section&id=Item%207.%20Major%20Shareholders%20and%20Related%20Party%20Transactions) This section details major shareholders and significant related party transactions with Tencent Group, including revenues, expenses, and balances - Tencent Group is the company's **principal owner** and a major related party with which the company conducts **significant business transactions**[821](index=821&type=chunk)[828](index=828&type=chunk) Significant Related Party Transactions with Tencent Group (2019, RMB millions) | Transaction Type | Amount | | :--- | :--- | | Online music services revenue from Tencent | 355 | | Operation expenses recharged by Tencent | 752 | | Advertising agency cost to Tencent | 231 | Balances with Tencent Group (as of December 31, 2019, RMB millions) | Balance Type | Amount | | :--- | :--- | | Accounts receivable from Tencent Group | 1,653 | | Accounts payable to Tencent Group | 215 | | Other payables and accruals to Tencent Group | 382 | [Financial Information](index=116&type=section&id=Item%208.%20Financial%20Information) This section details legal proceedings, including copyright infringement and securities class action lawsuits, and the company's dividend policy - As of December 31, 2019, the company faced **132 pending lawsuits** related to alleged copyright infringement, with total damages sought of approximately **RMB 20.5 million (US$2.9 million)**[837](index=837&type=chunk) - In late 2019, the company, along with certain directors and officers, was named in **two putative securities class action lawsuits** alleging material misstatements and omissions in its public filings[839](index=839&type=chunk) - The company has **no current plans to pay dividends** and intends to retain future earnings to operate and expand its business[840](index=840&type=chunk) [Additional Information](index=118&type=section&id=Item%2010.%20Additional%20Information) This section covers corporate governance, including the dual-class share structure, and taxation in the Cayman Islands, PRC, and U.S. federal income tax implications for ADSs - The company has a **dual-class share structure**, where each **Class A ordinary share has one vote**, while each **Class B ordinary share has 15 votes** and is convertible into one Class A share[851](index=851&type=chunk)[854](index=854&type=chunk) - The company is an exempted company in the Cayman Islands and is **not subject to income, corporation, or capital gains tax** there[882](index=882&type=chunk) - In the PRC, the company is subject to a **standard 25% Enterprise Income Tax (EIT)**, but certain subsidiaries qualify for **preferential rates of 15% or lower** as High and New Technology Enterprises (HNTE) or Software Enterprises (SE)[1192](index=1192&type=chunk)[1193](index=1193&type=chunk) - There is a risk that the company could be classified as a **Passive Foreign Investment Company (PFIC)** for U.S. federal income tax purposes, which could result in **adverse tax consequences** for U.S. investors[322](index=322&type=chunk)[901](index=901&type=chunk)[902](index=902&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=127&type=section&id=Item%2011.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section identifies the company's primary market risks as interest rate, foreign exchange (RMB-USD), and inflation, noting no hedging instruments are used - The company's main market risks include **interest rate risk** on cash deposits, **foreign exchange risk** due to revenues being in RMB, and **inflation risk** in China[916](index=916&type=chunk)[917](index=917&type=chunk)[920](index=920&type=chunk) - **Substantially all revenues are denominated in Renminbi (RMB)**, exposing the company to fluctuations in the RMB-USD exchange rate, and it has **not entered into any hedging transactions** to mitigate this risk[917](index=917&type=chunk)[918](index=918&type=chunk) Part II [Material Modifications to the Rights of Security Holders and Use of Proceeds](index=129&type=section&id=Item%2014.%20Material%20Modifications%20to%20the%20Rights%20of%20Security%20Holders%20and%20Use%20of%20Proceeds) This section details the net proceeds of approximately US$509 million from the December 2018 IPO, which remained unused as of December 31, 2019 - The company received net proceeds of approximately **US$509 million** from its December 2018 IPO[926](index=926&type=chunk) - As of December 31, 2019, the net proceeds from the IPO had **not yet been used**, but the company still intends to use them as previously disclosed[928](index=928&type=chunk) [Controls and Procedures](index=129&type=section&id=Item%2015.%20Controls%20and%20Procedures) Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were **effective**[929](index=929&type=chunk)[930](index=930&type=chunk) - Based on the COSO framework, management concluded that the company's internal control over financial reporting was **effective** as of December 31, 2019[931](index=931&type=chunk) - The independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, issued an **unqualified opinion on the effectiveness** of the company's internal control over financial reporting as of December 31, 2019[933](index=933&type=chunk) [Item 16.A-H](index=130&type=section&id=Item%2016.A-H) This section addresses corporate governance, including the audit committee financial expert, code of conduct, principal accountant fees, and use of home country governance exemptions - The Board of Directors has determined that Ms. Edith Manling Ngan qualifies as an "**audit committee financial expert**"[935](index=935&type=chunk) Principal Accountant Fees (RMB thousands) | Service Type | 2018 | 2019 | | :--- | :--- | :--- | | Audit Fees | 6,000 | 15,000 | | Audit-Related Fees | 13,800 | — | | Tax Fees | 400 | — | | Other Fees | 2,000 | 2,690 | | **Total** | **22,200** | **17,690** | - As a foreign private issuer, the company **follows certain Cayman Islands corporate governance practices in lieu of NYSE standards**, such as not having a majority of independent directors on the board[942](index=942&type=chunk) Part III [Financial Statements](index=132&type=section&id=Item%2018.%20Financial%20Statements) This section presents the audited consolidated financial statements for 2017-2019, prepared under IFRS, with an unqualified opinion from PricewaterhouseCoopers Zhong Tian LLP - The independent auditor, PricewaterhouseCoopers Zhong Tian LLP, issued an **unqualified opinion** on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019[956](index=956&type=chunk)[957](index=957&type=chunk) - Critical Audit Matters identified by the auditor include **revenue recognition from the sale of durable virtual gifts** in social entertainment services and the **impairment assessment of goodwill**[964](index=964&type=chunk)[965](index=965&type=chunk)[969](index=969&type=chunk) Consolidated Income Statement Highlights (RMB millions) | Line Item | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Total revenues | 10,981 | 18,985 | 25,434 | | Gross profit | 3,810 | 7,277 | 8,673 | | Operating profit | 1,593 | 2,039 | 4,622 | | Profit for the year | 1,319 | 1,832 | 3,977 | Consolidated Balance Sheet Highlights (RMB millions) | Line Item | As of Dec 31, 2018 | As of Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | 44,605 | 52,678 | | Goodwill | 17,088 | 17,140 | | Cash and cash equivalents | 17,356 | 15,426 | | Total Liabilities | 6,833 | 9,000 | | Total Equity | 37,772 | 43,678 |