Summary of Tencent Music Entertainment Group (TME) Earnings Call Company Overview - **Company**: Tencent Music Entertainment Group (TME) - **Industry**: China Technology - **Current Price**: USD 14.33 (as of 12-May-2025) - **Price Target**: USD 16.00 - **Market Cap**: USD 24,591 million - **Shares Outstanding**: 1,716.08 million - **Dividend Yield**: 1.26% - **Return on Equity (TTM)**: 10.74% Key Points Financial Performance - TME reported a revenue of RMB 7,356 million in 1Q25, slightly above the estimate of RMB 7,280 million, reflecting a year-over-year growth of 8.7% [2][17] - The Average Revenue Per Paying User (ARPPU) increased by 1.1% to RMB 11.4, surpassing the estimate of RMB 11.3 [17] - However, the number of paying users added was lower than expected, with a net addition of 1.9 million against an estimate of 2.1 million [2] User Growth Strategy - TME's management has shifted focus from aggressive user acquisition strategies to organic growth, avoiding competition for low-value users [2] - The estimate for FY25 paying user growth has been revised down from 8 million to 6 million due to soft growth trends [2] SVIP Performance - The SVIP segment has shown strong performance, with ARPPU growth outpacing that of the VIP segment, contributing to a 7.5% year-over-year growth in overall ARPPU [3] - SVIP now accounts for 11% of total paying users, up from a previous estimate of 10% [3] Advertising and Margins - Advertising revenue grew by 25% year-over-year in 1Q25, maintaining momentum from the previous quarter [4] - Gross margin stood at 44.1%, slightly below estimates, but the adjusted operating margin exceeded expectations by 267 basis points [4] International Expansion - TME is increasing investments in Southeast Asia, particularly through its Joox app, although international business remains a small part of overall revenue [8] Future Outlook - The company is expected to maintain a positive trajectory, with management's ability to adapt and execute strategies being a key strength [12] - Upside potential exists if TME can minimize subscriber slowdown while enhancing ARPU, potentially leading to a higher valuation of $22 [13] - Conversely, if ARPU growth fails to materialize alongside continued subscriber deceleration, a downside scenario could see the stock drop to $11 [14] Risks - Key risks include fluctuations in subscriber growth and ARPU, increased competition, and potential regulatory changes that could impact operations [61][62] Analyst Ratings - The stock is rated as "Overweight" with a positive industry outlook, indicating expected outperformance relative to peers [12][53] Conclusion TME's recent earnings call highlights a mixed performance with solid revenue growth but challenges in user acquisition. The strategic shift towards organic growth and the strong performance of the SVIP segment are positive indicators, while the company faces risks from competition and market dynamics. The outlook remains cautiously optimistic with potential for upside if management effectively navigates these challenges.

Core Viewpoint - Tencent Music Entertainment Group (TME) is facing unprecedented challenges in the online music market, including declining subscription penetration, weakened exclusive copyright advantages, and a lack of original content development, which threaten its market share and reveal structural contradictions during its strategic transformation [3][4]. Subscription Penetration Battle - Tencent Music has over 600 million monthly active users, but its subscription penetration rate is approximately 8%, significantly lower than NetEase Cloud Music's 15%, reflecting differences in business models and user engagement strategies [5][6]. - NetEase Cloud Music enhances user willingness to pay through a community-oriented approach, transforming users from mere "music listeners" to an "emotional community," while Tencent Music relies on functional benefits, lacking emotional value [7][8]. - Tencent Music's attempts to boost subscription rates through low-price promotions have not been effective due to insufficient perceived value of music services, while NetEase Cloud Music has successfully created a positive cycle through differentiated content [9]. Post-Copyright Era - The end of the "copyright arms race" in July 2021, mandated by the State Administration for Market Regulation, has stripped Tencent Music of its core competitive advantage [11]. - Following the removal of copyright barriers, both platforms have a high overlap in music libraries, with over 80% similarity, significantly lowering user migration costs [12]. - Tencent Music's original content incubation efforts have been less successful compared to NetEase Cloud Music, which has effectively supported independent musicians and achieved a higher proportion of original song plays [13]. - Tencent Music's attempts to extend its industry chain through investments and acquisitions have faced challenges due to insufficient business synergy [14]. Social Function Shortcomings - Social features are crucial for enhancing user engagement, but Tencent Music lags behind in this area [17]. - NetEase Cloud Music has successfully integrated music with social interactions, resulting in high user activity, while Tencent Music's community features have low engagement [18][19]. - Data shows that Tencent Music's user retention rate has declined by 12% from 2021 to 2023, while NetEase Cloud Music's has increased by 7%, indicating weak social features lead to lower user loyalty [20]. Overseas Expansion Challenges - Tencent Music's overseas strategy has not achieved significant breakthroughs compared to global competitors like Spotify and Apple Music [22]. - The reliance on capital investments rather than product expansion has limited Tencent Music's ability to establish its own international brand, with its overseas product Joox holding less than 5% market share in Southeast Asia [22]. - Tencent Music's cultural output capabilities are lacking, as it remains focused on copyright resale rather than content innovation, unlike competitors who are reshaping global music trends [23]. - Increasing geopolitical risks and stricter regulations on Chinese companies in the U.S. are closing Tencent Music's window for overseas expansion [24].