Tencent Music Entertainment Group — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone 2020 Q4 report; the supplied filing text does not provide clear Q4-only financial results. Financial statements are audited and prepared under IFRS as issued by the IASB. Amounts below are in RMB unless stated otherwise.
Business context
TME operates online music, karaoke, music-centric live streaming and long-form audio services, primarily in China, through brands including QQ Music, Kugou, Kuwo and WeSing. It reported one operating segment. Substantially all revenue is generated in China, and nearly all revenue is denominated in RMB. The company relies on contractual VIE arrangements for restricted PRC operations.
Key financial metrics
| Metric | FY2020 | FY2019 | Change/comment |
|---|---|---|---|
| Revenue | RMB29.153bn | RMB25.434bn | +14.6% |
| Online music revenue | RMB9.349bn | RMB7.152bn | +30.7%; 32.1% of revenue |
| Social entertainment and other revenue | RMB19.804bn | RMB18.282bn | +8.3%; 67.9% of revenue |
| Gross profit / margin | RMB9.302bn / 31.9% | RMB8.673bn / 34.1% | Profit +7.3%; margin down 2.2 percentage points |
| Operating profit / margin | RMB4.710bn / 16.2% | RMB4.622bn / 18.2% | Profit +1.9%; margin down 2.0 points |
| Profit for the year / net margin | RMB4.176bn / 14.3% | RMB3.977bn / 15.6% | Profit +5.0% |
| Adjusted profit for the year | RMB4.971bn | RMB4.903bn | +1.4%; non-IFRS measure |
| Net cash from operating activities | RMB4.885bn | RMB6.200bn | Down RMB1.315bn |
| Cash and cash equivalents at year-end | RMB11.128bn | RMB15.426bn | Down RMB4.298bn |
Online music subscription revenue rose 56.0% to RMB5.560bn. Online music paying users increased to 49.4 million from 33.7 million; paying ratio rose to 7.7% from 5.2%, and monthly ARPPU increased to RMB9.4 from RMB8.8. Social entertainment paying users were broadly flat at 11.7 million versus 11.6 million; monthly ARPPU rose to RMB141.1 from RMB131.3.
Cost of revenue increased 18.4% to RMB19.851bn, faster than revenue, with service costs up 16.8% to RMB17.478bn. Operating expenses rose 17.5% to RMB5.576bn. R&D expense was RMB1.667bn, up from RMB1.159bn. Basic and diluted IFRS EPS were RMB1.25 and RMB1.24 per ordinary share; basic and diluted EPS per ADS were RMB2.51 and RMB2.47. Each ADS represents two Class A shares.
Liquidity, debt and cash flow
- Year-end current assets were RMB31.687bn and current liabilities RMB9.602bn. Cash and cash equivalents were RMB11.128bn; term deposits totaled RMB17.811bn, including deposits with initial maturities over three months.
- The company issued US$800m of senior unsecured notes in September 2020: US$300m at 1.375% due 2025 and US$500m at 2.000% due 2030. Their year-end carrying amount was RMB5.175bn. Lease liabilities were RMB321m.
- Investing cash outflow was RMB14.206bn, driven in part by term-deposit placements, equity investments including UMG, and other investments. Financing cash inflow was RMB5.292bn, mainly from the notes offering.
- Management said existing cash and expected operating cash flow should cover anticipated working-capital and capital needs for at least 12 months. TME also reported a net-cash position. Cash mobility is subject to PRC restrictions, including rules governing transfers from PRC entities.
Material changes and unusual items
- Online music’s share of revenue increased while social entertainment and other revenue remained the larger business line. The filing attributes music growth mainly to subscription growth, improved retention and its paywall strategy.
- Gross and operating margins contracted as content investment and revenue-sharing payments grew. Management cited higher sharing ratios for karaoke performers, incentives for live-streaming performers, and investment in long-form audio, TME Live and variety programming.
- Other gains increased to RMB362m from RMB78m, including tax rebates, investment-related fair-value changes and other items. Total comprehensive income was RMB8.100bn, materially above net profit, including RMB5.219bn of fair-value gains on financial assets recognized in other comprehensive income and negative currency translation effects.
- Adjusted profit excludes specified items, including acquisition-related amortization and share-based compensation; it is not an IFRS measure. The 2018 comparison also included a one-off RMB1.519bn share-based charge related to shares issued to music-label partners.
- COVID-19 temporarily reduced user and performer activity and disrupted operations in 2020; management said operations had recovered, while warning that further effects could depend on the pandemic and economic conditions.
Outlook, risks and contingencies
- No specific numeric revenue, earnings or margin guidance is provided. Management expects content-related costs and total cost of revenue to rise in absolute terms as it expands content and services, and expects continued investment in products, technology and marketing.
- Key business risks include licensing availability and royalty costs, minimum guarantees, copyright claims and user-uploaded content, competition for users and performers, and the success of monetizing subscriptions, advertising, virtual gifts and long-form audio. As of December 31, 2020, TME reported over 60 million tracks and publishing and recording rights for approximately 85% of them.
- PRC licensing, content, virtual-gift and internet-platform rules are significant uncertainties. The filing discusses new streaming and antimonopoly measures issued after year-end, including potential limits on virtual gifts. VIE enforceability and evolving foreign-investment rules also pose structural risks.
- At year-end, 1,116 alleged copyright-infringement lawsuits were pending against TME or affiliates, with about RMB46.9m in damages sought. Management did not consider the proceedings likely to have a material adverse effect, but adverse outcomes could require payments or business changes.
- A separate CIETAC arbitration includes a claimant’s amended March 2021 demand for damages tied to the fair market value of 4% of TME’s share capital if specified equity interests cannot be returned. TME said it could not estimate any possible loss. A U.S. federal shareholder class action was dismissed on March 31, 2021; related state litigation had been stayed pending that decision.
- The filing identifies audit-access risk: the PCAOB had been unable to inspect the China-based auditor’s work, and U.S. legislation could create delisting risk if inspection requirements are not met. PwC Zhong Tian issued an unqualified audit opinion and concluded internal control over financial reporting was effective at year-end.
- Other investor considerations include Tencent’s control (90.6% of total voting power as of April 2, 2021), the dual-class structure, related-party dealings, no expected near-term dividend, and the absence of liability, property and business-interruption insurance.
Most important facts to verify
- Whether online music subscriber growth and higher ARPPU can continue to offset slower social-entertainment growth and falling gross margin.
- How much of reported earnings and comprehensive income reflects recurring operations versus fair-value movements, tax rebates and other non-operating items; review the adjusted-profit reconciliation.
- The availability and economics of music licenses, minimum guarantees, MCSC renewal and coverage of the remaining catalog, alongside the scale and outcomes of copyright litigation.
- Liquidity access across PRC entities, future use of term deposits, note repayment and interest obligations, and the funding requirements for UMG, acquisitions and repurchases.
- Developments in PRC platform regulation and VIE arrangements, audit-inspection access and delisting rules, and the unresolved arbitration claim.