Fitch has affirmed Tencent Music Entertainment Group's (01698.HK, TME.US, "Tencent Music") Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) and Senior Unsecured Ratings of 'A', with a revised outlook to 'Negative' from 'Stable'.
Fitch said that based on the strong correlation between Tencent Music and Tencent Holdings, Fitch has adopted a top-down rating methodology to assign Tencent Music's IDR one notch below Tencent Holdings' long-term local currency IDR of "A+".
Not long ago, Tencent Music announced its 2023 financial report, but the outside world has mixed reviews for this report card. In the case that the performance did not meet the expectation of "double profit increase", the "earthquake" of the product and service structure caused by the change in the general environment also added another uncertainty to the company's transformation and breakthrough road.
How to seek disruptive breakthroughs on the premise of attracting and retaining customers is a common problem faced by online music platforms, including Tencent Music.
First, the scale of revenue to the left, profit and efficiency to the right
According to the financial report, Tencent Music will achieve a total revenue of 27.752 billion yuan in 2023, a year-on-year decrease of 2.1%. It is worth noting that this is the second consecutive year of revenue decline for the company, and its revenue scale will decline by 9.3% to 28.339 billion yuan in 2022 after briefly exceeding the 30 billion mark to 31.244 billion yuan in 2021.
In terms of breakdown, Tencent Music's revenue will drop significantly in the second half of 2023. The company's revenue in the first quarter and second quarter was 7.004 billion yuan and 7.286 billion yuan respectively, an increase of 5.4% and 5.5% year-on-year respectively, but the revenue in the third quarter narrowed by 9.8% quarter-on-quarter to 6.569 billion yuan, and decreased by 10.8% from the same period in 2022.
In the fourth quarter of 2023, Tencent Music achieved a single-quarter revenue of 6.893 billion yuan, although it rebounded from the revenue performance in the third quarter, compared with 7.425 billion yuan in the same period in 2022, the company's revenue scale still existed, and the decline was 7.2%.
Focusing on Tencent Music's profitability, the company's net profit in 2023 was 5.220 billion yuan, a year-on-year increase of 36.0% from 3.839 billion yuan in the same period in 2022. On a non-IFRS basis, Tencent Music's adjusted profit was RMB6,223 million, an increase of 26.8% from RMB4,907 million in 2022.
Among them, Tencent Music's net profit in the first quarter and second quarter of 2023 will be 1.148 billion yuan and 1.298 billion yuan respectively, a year-on-year increase of 88.5% and 51.6%. Under the premise of year-on-year decline in revenue, the company's net profit in the third quarter and fourth quarter still increased by 10.1% and 13.5% to 1.168 billion yuan and 1.306 billion yuan respectively.
It is not difficult to see that whether it is in terms of single-quarter performance in the third and fourth quarters, or in terms of the scale changes in total revenue and net profit, the official financial data is enough to prove that there is indeed an objective situation of "increasing profits but not increasing income" in the 2023 report card handed over by Tencent Music.
Tencent Music's executive chairman Peng Jiaxin revealed at the release of the fourth quarter of 2022 financial report that the company is confident that it will achieve year-on-year growth in total revenue and profit in 2023. From this perspective, Tencent Music's performance in 2023 did not meet the management's expectation of "double profit increase".
Even so, Tencent Music still emphasized in the lawyer's letter to Bedo Finance that the conclusion of "increasing profits without increasing revenue" was a partial generalization, and believed that the latter had maliciously smeared Tencent Music's executives' expectations and prospects for the future, damaged the image of senior executives as entrepreneurs, and maliciously speculated on the reasons for "increasing profits".
Source: Screenshot of the lawyer's letter
Second, the control is becoming stricter day by day, and social entertainment is declining
Peng Jiaxin has predicted that 2023 will be a critical year for Tencent Music's transformation, and it is expected that the company's online music service revenue in a single quarter will exceed the social entertainment service revenue in the same quarter. Judging from the financial report released by Tencent Music, the structural changes in its product and service matrix have become an established fact.
Source: Screenshot of the lawyer's letter
Tencent Music's social entertainment service revenue in 2023 will be RMB10.427 billion, not only down 34.2% year-on-year, but also narrowing its proportion of total revenue from 56.0% to 37.6%. In this regard, the company explained that it has adjusted some of the live interactive functions and implemented stricter compliance procedures to improve services and strengthen risk control management.
Tencent Music, which inherits the "social" gene of Tencent Holdings, relies on the social entertainment service sector for self-evident. Among them, the national karaoke born from the online karaoke community operation path, as well as QQ music, Kugou music, and Kuwo music, which added music live broadcast activity sections, have achieved a certain degree of popularity in the user portal.
However, extending the timeline, it can be seen that Tencent Music's social entertainment services have continued to decline since 2020, with revenue falling from 19.804 billion yuan in 2020 to 19.777 billion yuan in 2021, and further declining to 15.856 billion yuan in 2022, accounting for 56.0% in 2022 from 67.9% in 2020.
It is worth noting that the payment system in the era of digital copyright has given birth to the social entertainment service sector to launch revenue sources such as fan rankings and live broadcast rewards. In 2021, Xinhua News Agency criticized Kugou Music, QQ Music and other platforms for promoting irrational "krypton gold", and such transactions may be suspected of unjust enrichment.
Since 2023, as the state has intensified its efforts to rectify chaos in the field of online live streaming and short video, the list of responsibilities for online live streaming platforms has become clearer. According to Beduo Finance, Tencent Music's national karaoke "show live broadcast" and QQ Music's "game live broadcast room" have been rectified for gambling.
Under the risk control measures, the indicators of Tencent Music's social entertainment service sector have shrunk significantly. Among them, the number of mobile monthly active users decreased from 157 million to 126 million, the number of paying users also decreased from 7.8 million to 7.6 million, and the average monthly revenue per paying user decreased by 32.5% to 11.43 billion yuan.
Third, the rise of online music, the scale gap still exists
Also in 2023, Tencent Music's online music service revenue will surpass that of social entertainment services. The single-quarter revenue of online music services in the second quarter increased by 47.6% year-on-year to RMB4.249 billion, higher than the RMB3.037 billion of social entertainment services for the first time, and further widened the revenue gap in the second half of the year.
As of the end of 2023, Tencent Music's online music service revenue reached RMB17.325 billion, an increase of 38.8% from RMB12.483 billion in the same period of 2022, and the proportion of total revenue increased from 44.0% in 2022 to 62.4%. With the original core business constrained, online music services are undoubtedly the new growth drivers that the company focuses on.
According to the annual report, the number of paying users of Tencent Music's online music services in 2023 will be 101 million, a year-on-year increase of 19.8%, and the payment rate will also increase from 13.6% in 2022 to 17.1%. Tencent Music believes that the excellent performance of online music services has eased the pressure on the decline of the social entertainment services sector.
In Tencent Music's view, the company's online music business has achieved strong growth in 2023, becoming the core driver of performance, driving a steady increase in quarterly profits. However, Bedo Finance found that the increase in the number of users in this sector is actually not significant by sorting out the company's financial reports.
Specifically, the number of monthly active users under Tencent Music's online music service segment decreased by 5.0% from 620 million in 2022 to 589 million. Among them, the number of monthly active users in the fourth quarter was 576 million, down 4.2% year-on-year and 18 million month-on-month.
In the long run, the number of monthly active users in Tencent Music's online music service sector has declined for four consecutive years. Prior to that, the company's monthly active users in 2019, 2020 and 2021 were 653 million, 644 million and 622 million, respectively, and the user retention rate is hardly impressive.
Not only that, Tencent Music users' willingness and payment habits are also more inclined to social entertainment. As of the end of 2023, the average monthly revenue per paying user in the online music service sector is only 10 yuan, far less than the 114.3 yuan in the social entertainment service sector.
According to the "China Digital Music Industry Report (2022)", the total size of China's digital music market in 2022 will be about 155.49 billion yuan, of which the online music market size is only 18.02 billion yuan. Although the social entertainment market such as live music and online karaoke has declined, the total scale is close to 100 billion yuan, and the market potential far exceeds the former.
Looking forward to 2024, Peng Jiaxin said that Tencent Music will adhere to the strategic drive of "one body, two wings" of content and platform, and seize more diversified development opportunities. However, Tencent Music's business transformation road is not only faced with the deconstruction and reshaping of the product and service structure, but also the pain of mining the breadth and depth of value of users under the difference in market size.
Fourth, the lawyer's letter is extremely unprofessional
At present, Bedo Finance has received 4 complaint records and 1 lawyer's letter from Tencent Music, involving corporate goodwill infringement and content infringement of reputation, privacy, portrait rights, etc.
It should be emphasized that Bedo Finance did not use the form of partial generalization, selected negative information that was unfavorable to Tencent Music to make misleading reports, and the published content was derived from the financial data publicly released by the latter, and on this basis, it was analyzed and prospected, and there was no distortion of facts and malicious slander.
It is not difficult to see from the content of the lawyer's letter that the company and the relevant law firm do not have a clear understanding of themselves and do not respect the content. At its core, the arguments and arguments in the lawyer's letter were inconsistent with the facts, misleading, and extremely unprofessional.
According to Article 1025 of the Civil Code of the People's Republic of China, on the premise that there is no fabrication or distortion of facts, the use of insulting language to demean others, and the obligation of reasonable verification has been fulfilled, the perpetrator does not bear civil liability if he or she carries out news reporting, public opinion supervision, or other acts for the public interest, affecting the reputation of others.
The future development trend of Tencent Music, Bedo Finance will continue to pay attention to the requirements of authenticity, objectivity and fairness of content reporting.