Tencent Music Entertainment Group — 2019 Form 20-F Summary
Period and basis: Annual report for the fiscal year ended December 31, 2019, filed March 25, 2020. This is not a standalone fourth-quarter report; the filing does not provide clear standalone Q4 financial results. Financial statements are audited and prepared under IFRS, with RMB as the reporting currency. Unless noted, amounts below are RMB.
Business context and reporting period
Tencent Music operates online music, karaoke and music-centered live-streaming services in China, principally through QQ Music, Kugou, Kuwo and WeSing. It reports one operating segment. Tencent controls the company; substantially all revenue-generating operations are conducted through PRC variable interest entities (VIEs), which are consolidated through contractual arrangements.
For 2019, the company reported average online music mobile monthly active users (MAUs) of 653 million and social entertainment mobile MAUs of 232 million. Online music paying users were 33.7 million, with a 5.2% paying ratio; social entertainment paying users were 11.6 million, with a 5.0% paying ratio. These internal metrics may include duplicate device or account access.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | RMB25,434 million (US$3,653 million) | RMB18,985 million |
| Online music revenue | RMB7,152 million; +29.2% | RMB5,536 million |
| Social entertainment and other revenue | RMB18,282 million; +35.9% | RMB13,449 million |
| Gross profit / margin | RMB8,673 million / 34.1% | RMB7,277 million / 38.3% |
| Operating expenses | RMB4,744 million | RMB3,972 million |
| Operating profit / margin | RMB4,622 million / 18.2% | RMB2,039 million / 10.7% |
| Profit for the year | RMB3,977 million | RMB1,832 million |
| Adjusted profit for the year (non-IFRS) | RMB4,903 million | RMB4,174 million |
| Basic / diluted EPS | RMB1.22 / RMB1.19 per ordinary share | RMB0.60 / RMB0.58 |
| Operating cash flow | RMB6,200 million | RMB5,632 million |
| Investing cash flow | (RMB8,102 million) | (RMB1,190 million) |
| Financing cash flow | (RMB31 million) | RMB7,741 million |
| Cash and cash equivalents at year-end | RMB15,426 million | RMB17,356 million |
At December 31, 2019, total assets were RMB52,678 million, current assets RMB26,914 million, current liabilities RMB8,490 million and total liabilities RMB9,000 million. Term deposits totaled RMB7,500 million, including RMB7,000 million current. The company reported no external borrowings; lease liabilities were RMB147 million. Management said existing cash and anticipated operating cash flows should cover expected needs for at least 12 months.
Material changes versus the prior comparable period
- Revenue rose 34.0% year over year. Online music subscriptions increased 42.6% to RMB3,563 million, alongside paying users rising 38.1% to 33.7 million and monthly ARPPU increasing from RMB8.5 to RMB8.8.
- Cost of revenue rose 43.2% to RMB16,761 million, faster than revenue, largely from higher music licensing and content costs, increased in-house production and revenue sharing. Gross margin fell 4.2 percentage points to 34.1%.
- Operating profit increased 126.7%; operating margin rose from 10.7% to 18.2%. The comparison is affected by a one-time RMB1,519 million share-based charge for shares issued to music-label partners in 2018.
- IFRS profit increased to RMB3,977 million. Adjusted profit, a company-defined non-IFRS measure, rose to RMB4,903 million; it excludes specified amortization, share-based items, investment gains or losses, puttable-share fair value changes and related tax effects.
- Investing cash outflow widened mainly because the company placed RMB12,050 million in term deposits with initial maturities over three months, partly offset by RMB4,550 million of maturities. Cash declined by RMB1,933 million during 2019.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no numerical revenue or earnings guidance. Management expects content-related costs, cost of revenue, selling and marketing spending and general and administrative expenses to increase in absolute terms as the business expands. It expects paying users to continue growing, while noting that monetization and content investment returns are uncertain.
- COVID-19: The report says the outbreak had caused reduced activity among users and performers and affected operations, including live-streaming virtual-gift revenue in early 2020. The duration and economic impact were not estimable. The company reported no significant impact on its financial position through the report date, while continuing to monitor developments.
- Content and copyright: As of year-end, the platform offered over 40 million tracks and held both publishing and recording rights for approximately 85%. Licensing costs, minimum guarantees, incomplete rights information and potential infringement claims could affect costs, catalog availability and results.
- Legal matters: The company disclosed 132 pending copyright-infringement lawsuits against it or affiliates seeking approximately RMB20.5 million in aggregate damages. It also disclosed shareholder securities class actions for which it could not estimate potential loss, and a pending PRC arbitration in which the claimant seeks, among other relief, RMB100 million. Management said it intended to defend the matters; outcomes remain uncertain.
- Regulatory and structure risks: Certain licenses and permit applications or scope changes were pending, and PRC rules on online content, foreign investment and VIE arrangements are subject to interpretation and change. The VIEs generated substantially all revenue; the contractual structure may be less protective than direct ownership.
- Other notable items: The company proposed joining a Tencent-led consortium to acquire a 10% stake in Universal Music Group at an enterprise value of EUR30 billion, subject to approvals and closing conditions; it was not completed as of year-end. A share repurchase program authorized up to US$400 million over 12 months; approximately US$16 million was repurchased in March 2020, after year-end.
- Audit and governance: The auditor issued unqualified opinions on the IFRS financial statements and internal control over financial reporting. The filing also cautions that the auditor was not then subject to PCAOB inspection in China. Tencent held 78.7% of voting power as of the report’s stated date, and the dual-class structure concentrates voting control.
Important facts for investors to verify
- Confirm the annual figures against the audited statements and do not treat them as standalone Q4 results; assess the effect of the 2018 one-time share-based charge when comparing operating performance.
- Track whether subscription growth and the pay-for-streaming model can offset rising royalties and other content costs, and whether gross margins stabilize.
- Review cash availability and restrictions on moving funds from PRC subsidiaries and VIEs; distinguish cash and cash equivalents from term deposits and other investments.
- Check developments in copyright litigation, shareholder actions, the Guo arbitration, outstanding licensing coverage and required operating permits.
- Verify the status, funding and terms of the proposed UMG investment, subsequent share repurchases, and the operational effects of COVID-19.
- Consider VIE enforceability, Tencent’s control and related-party dealings, and the audit-inspection and regulatory risks identified in the filing.