Tencent Music: A Vertical Bull Stock, an Endless Gold Mine?

On August 12, after the Hong Kong stock market closed and before the U.S. stock market opened, $Tencent Music(TME.US) $TME-SW(01698.HK) released its Q2 2025 financial report. As expected from a top Chinese stock, Q2 performance remained strong.

Specifically:

1. Subscriptions met expectations: Subscription revenue grew by 16% in Q2, with a net increase of 1.5 million subscribers, and an average payment of 11.7 yuan per month, both volume and price changes met guidance and expectations.

After a year of subscription user expectation adjustments, the market has gradually accepted the management's growth guidance—abandoning the tracking of single subscription numbers and focusing on subscription revenue growth as the core target. The company can flexibly adjust the volume and price growth based on the competitive environment and product content changes in the short term.

2. Advertising and other revenues significantly exceeded expectations: The main outperformance this time was in other online music revenues, which grew nearly 50% in Q2, exceeding the original guidance. In addition to the incremental revenue from the deferred licensing from Q1 to Q2, current advertising, offline concerts, physical albums, and ticket peripherals all showed strong growth.

In the long term, this is indeed beneficial for further strengthening TME's brand in the music industry chain, helping future business extensions. However, short-term factors such as concert density and album releases by popular artists are not easily extrapolated linearly.

3. Continued efficiency improvement, profitability still has room for growth: Compared to revenue, Dolphin Research was pleasantly surprised by the performance on the profit side. It was originally thought that the efficiency improvement cycle had ended, and with increased external acquisitions, the company would enter a new investment cycle.

However, the actual situation is that the three expenses continued to slow down in Q2, reaching new lows or relatively low levels in recent years in absolute terms, reflecting a stable external competitive environment (no need to increase customer acquisition promotion) and efficient internal operations (flexible personnel adjustments). Ultimately, core operating profit was 31%, and adjusted net profit was 2.6 billion yuan, exceeding the guidance and expectations of 2.2-2.3 billion yuan.

4. Attention to potential competitive impacts: Finally, let's look at the traffic pool. Monthly active users (MAU) in Q2 were 553 million, with a loss of 2 million users quarter-on-quarter. Meanwhile, Soda Music grew against the trend, with MAU exceeding 100 million by the end of Q2. Although the average duration per user is not as high as Tencent Music and Cloud Music, it is also rising against the trend.

Although Soda Music's copyright library is currently at a relative disadvantage, its recent collaboration with Jay Chou (inviting him to join Douyin) is intriguing, and future actions are worth watching. It is recommended to continue paying attention.

5. Cash remains abundant: As of the end of Q2, Tencent Music had net cash of 20 billion yuan (cash + short-term investments - long and short-term interest-bearing debt), equivalent to 2.8 billion USD.

As Tencent Music uses part of its cash to steadily increase shareholder returns, the net cash, which was not previously considered in the valuation, may be factored into an optimistic valuation during positive market sentiment.

6. Detailed financial data overview

Dolphin Research's View

Amid tariff disturbances, Tencent Music, like global streaming media, showed the momentum of a top stock in Q2. Although Dolphin Research had certain expectations for Tencent Music's short-term catalysts last quarter, the actual effect of the "value revaluation" far exceeded our expectations.

Concentrated capital preference is one aspect, but the driving logic is also relatively clear—besides the long-term logic of "price increase" (increasing content to improve SVIP penetration, including flexible promotions to ensure user stickiness) and "cost reduction" (controlling central traffic to indirectly reduce the power of upstream labels), the acquisition of Himalaya for a total of 2.7 billion yuan also allows for the short-term narrative of traffic pool expansion or increasing payment rates through "user growth" logic.

Of course, similar to Spotify, the acquisition of long-form audio itself is more likely to promote the penetration and conversion of high ARPPU packages or SVIP that include audio content, while also negotiating a lower revenue share ratio with top music labels using long-form audio content.

However, Himalaya has not yet been consolidated in Q2, and it is expected that from Q3 onwards, operational indicators will see a boost in both MAU and MAP.

In the long term, we believe Tencent Music can still develop according to the following "operating trajectory":

Revenue side: A 15% CAGR growth rate in membership revenue (mainly driven by ARPPU, but also retaining the flexibility to adjust volume and price based on competitive advantages), and a bottoming out and low growth or flat live karaoke, resulting in an overall revenue growth rate of 10-15%. The company's ultimate steady-state target remains 150 million subscribers with an ARPPU of 15 yuan.

Expenditure side: Besides optimizing the revenue share ratio to limit the importance of live social entertainment (which continues to decline), the greatest optimization potential in the core music business lies in the revenue share ratio, i.e., improving gross margin through traffic allocation.

Over the past three years, Tencent Music's gross margin has improved by nearly 15 percentage points. As the live adjustment ends, the pace of future improvement will slow, but the trend of continuous improvement remains unchanged. Secondly, customer acquisition and promotion expenses, as well as R&D expenses that continue to "deflate" with scale expansion, can ultimately achieve a profit growth rate of 15-20% CAGR.

Adding a potential shareholder return of over 2% (long-term dividend rate of around 30% + buyback yield of around 1%), theoretically, it can support a steady-state valuation of 20x P/E.

With a current market value of 35 billion yuan, based on Q2's profit margin, this corresponds to a 25x P/E for this year, and a 20-22x P/E for next year based on a 15-20% growth rate, which fits the growth rate within a reasonable range but does not fully reflect our expectations for copyright cost optimization, so there is still room in the long term.

In the short term, TME is still more of a catalyst than a risk: with many concerts by artists like G-Dragon, and the integration effect of Himalaya worth looking forward to.

For Dolphin Research, which has been paying close attention to competition issues this year, in Q2, Soda Music still "came on strong," with user scale and duration continuing to grow against the trend, MAU has exceeded 100 million, but it is not yet commercialized, and its copyright music inventory still lags behind top platforms.

In the short term, Tencent Music's competitive position is secure, but long-term competitive risks still exist. In July, Douyin introduced Jay Chou at a high price, and whether there will be further cooperation in the future remains to be seen. Keep a close eye on the dynamics.