Tencent Music Entertainment Group — FY2021 Form 20-F
Reporting period: Fiscal year ended December 31, 2021; this is an annual report, not a standalone 2021 Q4 filing. Financial statements are prepared under IFRS and presented primarily in RMB. U.S. dollar figures are filing translations.
Business context
TME operates online music, karaoke, live-streaming and long-form audio services in China, including QQ Music, Kugou, Kuwo, WeSing and Lazy Audio. It reports one operating segment. Substantially all revenue is generated in China, and 99.1% of FY2021 revenue was generated by VIEs consolidated through contractual arrangements rather than direct equity ownership.
Key financial results
| Metric | FY2020 | FY2021 | Change |
|---|---|---|---|
| Revenue (RMB millions) | 29,153 | 31,244 | +7.2% |
| Online music revenue (RMB millions) | 9,349 | 11,467 | +22.7% |
| Social entertainment and other revenue (RMB millions) | 19,804 | 19,777 | -0.1% |
| Gross profit (RMB millions) | 9,302 | 9,404 | +1.1% |
| Gross margin | 31.9% | 30.1% | -1.8 percentage points |
| Operating profit (RMB millions) | 4,710 | 3,800 | -19.3% |
| Operating margin | 16.2% | 12.2% | -4.0 percentage points |
| Profit for the year (RMB millions) | 4,176 | 3,215 | -23.0% |
| Adjusted profit for the year, non-IFRS (RMB millions) | 4,971 | 4,332 | -12.9% |
| Basic earnings per ADS (RMB) | 2.51 | 1.82 | -27.5% |
Online music subscriptions generated RMB7,333 million, up 31.9%; online music paying users rose 38.9% to 68.6 million, while monthly ARPPU declined from RMB9.4 to RMB8.9. Online music paying ratio increased from 7.7% to 11.0%. Social entertainment paying users fell 12.0% to 10.3 million, while monthly ARPPU rose 13.4% to RMB160.0. Mobile MAUs declined: online music to 622 million from 644 million, and social entertainment to 203 million from 240 million.
Cash flow, balance sheet and debt
- Operating cash flow was RMB5,239 million, compared with RMB4,885 million in FY2020.
- Investing cash outflow was RMB5,999 million, down from RMB14,206 million; financing cash outflow was RMB3,710 million, compared with RMB5,292 million of inflow in FY2020.
- Cash and cash equivalents were RMB6,591 million at year-end, down from RMB11,128 million. Term deposits totaled RMB17,072 million, including current and non-current balances; short-term investments were RMB1,029 million.
- Total assets were RMB67,254 million, total liabilities RMB16,199 million and total equity RMB51,055 million. Management said existing cash and anticipated operating cash flow should cover expected needs for at least 12 months.
- Senior notes had US$800 million aggregate principal: US$300 million of 1.375% notes due 2025 and US$500 million of 2.000% notes due 2030. Their year-end carrying amount was RMB5,062 million. The filing states the group had a net cash position.
- Capital expenditures were RMB2,758 million, including RMB1,504 million for land use rights. Share repurchases used RMB3,479 million of cash in FY2021; approximately US$553 million was spent under the 2021 repurchase program during the year.
Material changes and management commentary
- Revenue growth came increasingly from online music, which rose to 36.7% of revenue from 32.1%. Management attributed subscription growth to higher paying-user numbers, expanded sales channels and user loyalty; promotions weighed on ARPPU.
- Gross margin declined as online music represented a larger revenue share and the company invested more in new products, original content and long-form audio. Service costs rose 8.7% and operating expenses rose 19.9%; general and administrative expenses increased 29.3%, reflecting R&D, acquisition-related awards, share compensation and amortization.
- Operating profit fell despite modest gross-profit growth. Management cited increased competition, a changing macro environment and regulation as pressures on social entertainment and expected its revenue growth to moderate, with possible downward pressure in the foreseeable future.
- TME acquired Shenzhen Lanren, operator of Lazy Audio, in March 2021 for stated consideration of RMB2.7 billion, primarily cash, plus post-acquisition awards. The acquisition contributed to higher goodwill, intangible assets and operating expenses.
- In response to a July 2021 SAMR decision concerning Tencent’s 2016 acquisition of CMC, Tencent and TME terminated exclusive music-copyright arrangements, subject to limited exceptions, and planned nonexclusive collaborations. The filing warns that content availability, royalty terms and competitive dynamics may change.
- No quantified company-wide revenue or earnings guidance is provided in the supplied filing text. The company emphasized continued investment in content, technology, product innovation and monetization.
Risks, contingencies and unusual items
- VIE and PRC regulatory risk: The Cayman Islands parent relies on contractual arrangements to control VIEs that generated 99.1% of FY2021 revenue. Their enforceability has not been tested in court; regulatory action could impair consolidation, operations or access to economic benefits.
- U.S. listing and audit risk: The PCAOB had determined it could not inspect the company’s auditor completely. Under the law as described in the filing, potential delisting could occur in 2024; proposed legislation could shorten that period. The filing also discusses uncertainty over PRC cybersecurity review and overseas-listing filings.
- Content and live-streaming exposure: Licensing, copyright completeness, minimum guarantees, user-generated content and changing live-streaming rules could raise costs, restrict content or constrain monetization. The company reported more than 90 million music tracks on its platform and noted that some copyright coverage may be incomplete.
- Litigation: As of December 31, 2021, 456 alleged copyright-infringement lawsuits were pending against TME or affiliates, with approximately RMB57.3 million in damages sought. Management did not consider them likely to have a material adverse effect. In a separate arbitration, CIETAC dismissed substantially all claims against CMC and TME, but awarded RMB661 million against former co-president Guomin Xie; a court case to set aside the award was pending, and no hearing had occurred by the report date. Shareholder class actions were also pending, and potential loss was not estimable.
- Goodwill and estimates: Goodwill was RMB19,121 million; management reported no impairment for 2020 or 2021. The auditor identified goodwill impairment testing and revenue recognition for durable virtual gifts as critical audit matters, highlighting reliance on forecasts and estimated user relationship periods.
- Capital returns and controls: TME said it had no plan to pay cash dividends in the near future. PRC capital controls and statutory reserve requirements may limit transfers to the offshore parent. Internal control over financial reporting was assessed effective, and the auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Review the full audited statements and notes for cash, term-deposit availability, debt maturities, acquisition spending and the cash effects of buybacks.
- Track online-music payer growth and ARPPU against declining MAUs, and test whether subscription gains can offset social-entertainment weakness and margin pressure.
- Assess the financial contribution and integration of Lazy Audio, and monitor goodwill and other acquired-asset impairment assumptions.
- Confirm developments in nonexclusive music licensing, royalty commitments, copyright litigation and live-streaming regulation.
- Monitor PRC rules affecting the VIE structure, data security and overseas listings, together with PCAOB inspection and NYSE listing status.
- Check the subsequent status and potential financial exposure of the copyright cases, shareholder actions and Guomin Xie arbitration proceedings.