Thread by @frankinvesting

Thread/

$TME Tencent Music & Entertainment is the $SPOT of China with double the Monthly Active Users (MAUs), higher margins and a cheaper valuation.

$TME have 841m MAUs (636m music streaming) in comparison to Spotify’s 381m MAUs.

$TCEHY owns ~51% of $TME

1/

However $SPOT have more paying users. 180m vs. 71m premium subscriptions.

Only ~10% of $TME MAUs pay for music streaming. That % has doubled since 2019. But is well below the global average of 45%.

Potentially a large runway for $TME if they can convert a larger %

2/

$TME business operations also include live karaoke (>200m MAUs), live concerts, long-form audio and live streaming.

Operations are somewhat different to $SPOT currently but both are exploring similar avenues for monetisation.

3/

It is not a perfect comparison as the business models and markets they operate in are different. But it is worth considering.

It’s also interesting that $TCEHY own ~10% of $SPOT and $UMG. A very dominant position in the music industry, which could only help $TME

4/

Currently only 37% of $TME revenues comes from music streaming. The majority of revs come from the lower quality live streaming/karaoke business.

Music streaming growth will almost certainly outpace the rest of the business and make up a larger % of revs in the near future.

5/

Total paying users of $TME increased 30.5% YoY, which again only ~10% of MAUs are paying. If $TME can increase paying users to 20%+ the upside is high. It’s possible they convert closer to global avg of 45% long-term

$TCEHY through WeChat could potentially assist conversions

6/

Over the LTM total revenues for $TME were ~US$5b, meaning ~$1.85b came from the music streaming business. ~$1.2b from subscriptions (paid users)

If they can double paying users (20% conversion) by FY25 and slightly grow total MAUs, we get to ~$3.25b in revs (music biz only)

7/

Let’s look at a base case:

At 30% gross margins ($1b gross profit) and a 10x EV/Gross Profit the music streaming business in worth $10b in FY25. Which is equal to the current $TME market cap.

Keeping in mind, the music biz is only 37% of total revenues.

8/

We can assume the remainder of the biz doesn’t grow at all, revs stay at ~$3.15b and is valued at 2x sales, $TME has typically traded at ~5x sales… we get an additional $6.3b in value.

That’s brings the total FY25 value to $16.3b, implying a 63% upside.

9/

If we apply a bull case;

- 25% conversion to paid subs & 30% gross margins
- 12x gross profit for music biz
- 5% growth for remain co and a 3x sales multiple.

We get to a value of ~$24B in FY25, an annual return of 34%.

I don’t think this is an overly bullish scenario.

10/

This ‘bull case’ scenario for FY25 is actually a lower price than $TME traded for in early FY21.

If market sentiment changes in China, they may be awarded significantly higher multiples and the upside for $TME could be even higher than a 34% annual return over 3 years.

11/

I don’t hold shares in $TME directly, my interest comes from a position in $TCEHY

If you are interested in $TCEHY you can check out my 5000 word deep-dive at:

Seekingvalue.substack.com/p/tencent