Tencent Music: A 'New' Growth Cycle – Falling into Mediocrity or Steady Happiness?

On May 13 Beijing time, after the Hong Kong stock market closed and before the U.S. stock market opened, Tencent Music ($Tencent Music(TME.US) ; $TME-SW(01698.HK)) released its Q1 2025 earnings report. Amid the ongoing tariff trade war, while Western streaming platforms have delivered better-than-expected results, can Tencent Music also surprise the market?

Looking beyond short-term performance, what will drive and support Tencent Music's future earnings and valuation growth?

Key details:

1. Subscription: More Focused, More Niche

By the end of Q1, Tencent Music's paid penetration rate reached 22%, continuing to rise quarter-over-quarter. Compared to the long-term video subscription target set three years ago, completion is nearing 90%. Meanwhile, average revenue per user (ARPU) has also climbed alongside paid rates due to premium membership strategies—marking Tencent Music's golden three-year growth period. Thus, when both volume and pricing drivers weakened in the second half of last year, market concerns about growth intensified.

Q1 subscription growth slowed as guided (aligned with overall revenue guidance), but breaking it down: paid user growth remains modest, while ARPU shows signs of a new uptick. In other words, before competition worsens further, Tencent Music—holding its leading advantage—can dynamically balance volume and pricing contributions.

Facing persistent user churn, Tencent Music has adopted a more niche-focused approach: targeting core heavy users to boost SVIP conversions, optimizing monetization efficiency per user.

Operational metrics reflect this:

1. Despite a shrinking traffic pool, total paid users grow slowly, with paid rates rising.

2. Higher-tier SVIPs increase, lifting ARPU.

3. Steady ad growth; digital albums depend on star power.

Other online music revenue includes ads and digital album sales. Q1 ads grew steadily by increasing inventory. Digital albums fluctuate quarterly, hinging on star releases.

For instance, rumors swirl about Jay Chou's new album this year. Though unconfirmed, as one of Tencent Music's key artists, his release would significantly boost this revenue stream—and potentially subscriptions.

2. Social Entertainment: Adjusting, Awaiting Bottom

Live streaming/karaoke adjustments show diminishing impact, with Q1 revenue down 12% YoY (beating expectations). However, a turnaround to growth may wait until next year. Detailed user metrics weren’t disclosed, but Dolphin Research estimates paid users bottomed while ARPU dipped slightly. Updates may come on the earnings call.

3. Margins: Slow Improvement, Shareholder Returns Gain Focus

Q1 gross and core operating margins rose, albeit slower. (Other income included a ~2% gain from UMG’s stock dividend, but we focus on core ops.)

Margin gains stem from business mix shifts. Beyond subscriptions, offline concerts added limited content cost drag.

Core operating profit (= gross profit - opex), Dolphin Research’s key metric, climbed QoQ but slowed, reflecting strict cost controls—i.e., ongoing efficiency gains.

But with slowing revenue, profit growth will inevitably decelerate. Thus, shareholder returns gain importance. Q1 buybacks totaled $65M, with a new $1B program (over 2 years) now available.

Assuming $500M buybacks and 15% 2025 profit growth, with a 26% payout ratio (2024 level), total shareholder returns could hit $860M ($500M + $360M dividends)—a 3.8% yield on today’s $22.2B market cap. Though modest, Tencent Music’s strong cash flow fuels hopes for higher returns, offering downside support.

4. Earnings Snapshot

Dolphin Research’s Take

Past its high-growth "open-source 节流" phase, Tencent Music’s core profit growth is slowing. Management’s guidance paints this future:

Before competition intensifies (e.g.，汽水音乐 aggressively buying 版权， hitting 200M users), Tencent Music will dynamically balance subscription volume and pricing to sustain steady growth.

Guided ~15% subscription CAGR, plus flat/slow-growth social 娱乐 post-bottom, implies 5-10% total revenue growth. Internal efficiency gains and indie artist 扶持 could optimize 版权 costs, enabling 10-15% long-term profit growth.

Leadership + 10-15% profit growth + potential 4%+ shareholder returns + subscription resilience justify a 15x–20x P/E—current levels. Thus, near-term moves hinge on catalysts/risks.

Currently, Dolphin Research sees more catalysts than risks (e.g.，汽水音乐 competition，消费 shocks). First, tariffs remain uncertain, keeping 流媒体 a defensive play. Second, collaborators Jay Chou and G-Dragon (album/tour rumors) may boost retention/reactivation.

These "near-term catalysts" could lift valuations from neutral to positive. But for sustained re-rating, new growth drivers are needed—clarity is low now. Recent rumors about acquiring 喜马拉雅 raise questions: Is audio Tencent Music’s next focus? Watch this space.

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Dolphin Research’s Tencent Music Coverage (Past Year):

Earnings Season

Mar 18, 2025 Call: Tencent Music (Minutes): Margin Upside Remains

Mar 18, 2025 Report: Tencent Music: "Small Wins" in a Tough Period

Nov 12, 2024 Call: Tencent Music: How’s SVIP Driving Growth? (3Q24 Minutes)

Nov 12, 2024 Report: Tencent Music: How Far Can Price Hikes Go?

Aug 13, 2024 Call: Tencent Music: What Supports Growth as User Adds Slow? (2Q24 Minutes)

Aug 13, 2024 Report: Tencent Music: Flaws or Overreaction?

May 13, 2024 Report: Tencent Music: Niche & Premium—The Endless Goldmine?

Mar 19, 2024 Call: Tencent Music: Early-Year Promos Beat Expectations (4Q23 Minutes)

Mar 19, 2024 Report: Tencent Music: Pricing Power Shields Against Cycles