Key insights
- Tencent Music (TME), a leading streaming provider in China, is undervalued based on its low PE and FCF yield. Despite competition from ByteDance, TME's paying user metrics are strong. TME beat earnings and revenue estimates for the last 6 quarters. TME owns pieces of Spotify and Warner Music. The primary risk is geopolitical or regulatory. The US market influence is slightly positive due to TME's holdings in US-listed music companies.
Tencent Music is very cheap trading at a single digit PE multiple (8.98 pe) and FCF yield of 8% (7.76% adjusting for SBC). Dividend yield of 2.5%. Share count has dropped 4.13% over the last 3 years. Net cash of $3.07B.
Tencent Music is the clear market leader in streaming music in China and other countries in Asia. It enjoys a favorable competitive position due to its integration into the broader Tencent ecosystem (WeChat).
There are disruption fears from ByteDance backed Soda Music that has rattled short term sentiment. I believe these disruption fears are overdone. In the Q4 2025 TME reported a 5% drop in MAU’s but paying users rose 5.3% and monthly average revenue per paying user (ARPPU) also rose 7.2%. I think the paying user metrics are what really matter here. Also, they stopped reporting these metrics quarterly and will only report them annually instead of quarterly.
TME also owns pieces of Spotify and Warner Music. They are part of a consortium that is taking a 20% stake in Warner Music, so there's some optionality.
TME reported this week and beat on revenue and EPS. They have beat on both metrics for the last 6 straight quarters.
Because of the low valuation this is very much a heads we win, tails we won't lose much scenario. Like software, so far the disruption fears are theoretical and haven't manifested yet in the fundamentals. As a result, consistently beating their earnings and revenue targets will not change this narrative. I think this will take years to play out.
Not a lot has to go right here to have a favorable outcome. In a best case scenario the multiple rerates to its historical norm of around 15-18x while eps continues to grow. In a middle case scenario the multiple stays low, but earnings grow, and you are paid to wait with the dividend and share buybacks providing an additional boost. In a worst case scenario, there is some sort of geopolitical event, or China cracks down on its tech sector, and TME is delisted or loses most of its value.
Also, full disclosure, Chinese technology and media is way outside my circle of competence. I only understand this investment from a financial/fundamentals perspective and am weighting the size of my investment accordingly based on my ignorance.