TENCENT WECHAT CHINA PAY 800M FREE

As a result, paying users have exploded, more than doubling in just two years. “Premium” tracks – which you can only stream with a subscription - now account for about 25% of total listening, moving towards 30% by the end of 2021 as more songs go behind the wall. But more recently, Tencent Music has been using a paywall to increase their paid user ratio. And unlike Spotify, there is no limit on the number of times a user could “skip” from song to song. Downloading more than a certain number of songs was a premium feature, but all QQ’s music could be streamed for free. It shouldn’t be surprising that the paying rate is low, because historically there was little incentive for a QQ Music or KuGou Music user to upgrade. This reminds us a bit of Facebook’s mobile app in 2012: hundreds of millions of users, a massive amount of time spent, and very little monetization.

TENCENT WECHAT CHINA PAY 800M FREE

Yet this segment still has a massive opportunity to grow revenues, since 89% of users solely use the free tier. This business is quite mature in terms of active users, with most of the adult population in China (>600m total) using one of TME’s apps for over an hour per day on average (page 2 of the F-1). We think investors buying today, at a stock price of less than $8, will generate an IRR of more than 15% over that time period. The stock trades at a record low of just 14x ‘20 EBITDA and 17x ’21 EBITDA, a pedestrian valuation for a company that is likely to double its revenues over the next 6-7 years.

This is exactly the type of investor bias that we seek to exploit in our Fundamental Value strategy. A deeper look reveals a government that is just reining in practices that would’ve been banned in Europe a long time ago. We think investors worried about the regulation of these companies are falling prey to narrative bias, attributing all actions by the Chinese government to a ruthless power grab. The stock price has collapsed in recent months, first with the liquidation of the Archegos fund - a major shareholder - and more recently with the decline of all stocks related to the Chinese internet sector. But despite generating nearly $5 billion in revenue, their subscription business has barely begun to scratch the service in terms of monetization. Today they dominate the online music business in China, with 800m users across multiple platforms. The history of Tencent Music is one of exponential growth, having increased revenues from 4.4b RMB to 32b RMB over the past 5 years.

Tencent wechat china pay 800m