Tencent Music Entertainment - TME

Investment Analysis Clubs Saul’s Investing Discussions
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TME is a newly listed hyper-growth music streaming/online entertainment business which has recently been spun off from China’s internet giant - Tencent.

TME (via its 4 apps and its ecosystem) controls 76% of China’s music streaming market; with Netease’s streaming service coming in at 2nd spot (just 16% market share).

Unlike Spotify (SPOT), TME is already profitable and its earnings are projected to increase by 32% CAGR over the next 5 years. Its year-end P/E ratio is around 34, so the PEG ratio is just 1 - which is a bargain for such a dominant/high quality business.

TME has already amassed 800 MILLION monthly active users in China and at present, only 3.6% of these pay a subscription fees, so there is a massive runway for growth. Approximately, 70% of the company’s revenue is generated from users buying virtual gifts for their favourite artists (TME keeps a cut from these gifts/tips) and this business segment is growing like a weed!

It is notable that in December 2017, Tencent and Spotify did a “stock swap”, so now the latter owns 9.1% of TME whilst its parent company (Tencent) still owns 58%.

Before the IPO, both Sony and Warner were given $200 million worth of stock in TME at $2.93/share and since the stock is currently trading around $15, they have already made a tidy profit.

TME’s music library is massive - it is home to 20 million songs and the company has signed licensing/partnership deals with approximately 200 music labels.

Since TME controls 76% of the online music streaming/entertainment market in China, this industry is still in its infancy and Tencent is the parent company, this business seems to have a very bright future.

In terms of the stock itself, after a month-long post IPO consolidation, TME has broken out of its base today (on heavy volume), which is a sign that institutions are keen on this issue.

Given the above factors, I’ve just invested 5% of my portfolio in this business (and in order to raise cash for this opportunity, I’ve booked my gains in New Oriental Education - EDU).

At present, approximately 35% of my portfolio is invested in high-growth businesses in China (I’ve been increasing my China holdings since October 2018) and the rest of my capital is invested in other high-growth companies in the US and Latin America.

Hope this has been helpful,

GM

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At present, approximately 35% of my portfolio is invested in high-growth businesses in China (I’ve been increasing my China holdings since October 2018) and the rest of my capital is invested in other high-growth companies in the US and Latin America.

Good for you. For those with an interest in China, it was getting a bit lonely here so welcome to the party!

I hold Tencent and NetEase but not TME. I’d be interested to see whether Tencent or TME will be a better performer depending on Tencent’s ongoing interests in TME and core growth potential of gaming and WeChat. Tencent and Ali Baba are not only high performing franchises in their own right but orchestrators of their own Softbank like investment funds of a range of China tech pre/post IPO investment plays.

I hold both Ali Baba and Tencent and am very bullish on both. Also still hold CTrip, TAL Education and a number of Chinese insurers listed in HK (Ping An, China Taiping). Interested in TME, Baozun & a few others also. Ali Baba is one of my largest holdings.

Ant

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Ant,

I was reluctant to post about TME as I wasn’t sure whether all sorts of high growth stocks are welcome here or if this board is set up to only discuss software as a service/cloud stocks.

I think TME has lots of potential so decided to introduce it to this board.

Yes, China has been battered over the past year but it appears to me as though its stocks have now bottomed out.

I live in Hong Kong (been here since 1997) so know this part of the world fairly well.

I know that many posters on this board have sworn not to invest in Chinese companies and this is understandable given their bad experience with the reverse merger scams in 2010-2012. Unfortunately, I was also personally stung by a few of those scams (Deer Consumer Products, RINO, Wonder Auto etc.); but looking back, it was my own fault for investing in these issues. After all, those companies had no analyst coverage, institutions and major funds did not own shares and given their growth rates, their market caps/valuations were insanely cheap!

Fast forward to today, the current crop of Chinese businesses listed in the US don’t appear to be scams - they are dominant/viable operations with ‘monopolistic’ characteristics. More often than not, they are led by billionaire founders with skin in the game and their valuations are now super cheap (PEG ratios of 0.5 to 1 are the norm, rather than the exception).

So, I’ve been gradually increasing my exposure and think these investments will produce 20-25%CAGR over the next few years.

I have positions in the following Chinese businesses -

Alibaba (BABA)
Baozun (BZUN)
Baidu (BIDU)
IQ (IQ)
Ping An Healthcare & Technology (HK - 1833)
Tencent (HK - 700)
Tencent Music (TME)
Weibo (WB)

All of the above businesses have ‘moats’ and are growing rapidly. Their operating results may weaken during any economic slowdown but I am optimistic about China’s long-term prospects.

Best,

GM

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I live in Hong Kong (been here since 1997) so know this part of the world fairly well.

Sorry for the off-topic post but will email the author directly to take it offline as well. Do you visit Singapore at often or at all? Let us know, I don’t go to HK too often these days, use to go monthly. Ant probably goes time from time. But always welcome to meet other members if they pass through or if I am traveling in other Asia countries.