What’s behind Tencent Music Entertainment’s share price decline?
After performing admirably for much of the March 2021 quarter, Tencent Music Entertainment (TME) (market capitalisation of US$25.7 billion), has experienced significant share price dislocation over recent weeks, declining from over US$30 to the current US$15 per share.
The company was caught up in the well-publicised forced deleveraging of one large shareholder in late-March. And in just three days the share price of TME fell by 50 per cent. As far as the team within the Polen Capital Global Emerging Markets Growth strategy can gather, no fundamental news flow was associated with this decline. It seems the sell-off was driven by the same aggressive selling pressure that forced similar drops to the share prices of companies such as Baidu, Vipshop, Discovery Communications and Viacom.
Polen Capital’s underlying view of the company’s prospects are unchanged. With the valuation halved, this non-fundamentally driven fire-sale was seen as an opportunity to buy more of a great asset at an attractive price, and accordingly, the team added to the position. Polen Capital were pleased to observe the management at TME likely reached a similar conclusion, as it quickly reacted with a US$1 billion share buyback program.
TME can be thought of as the Spotify (owned 9 per cent by Tencent) of China with a few differences; and the main difference is the bargaining power dynamic. TME is the dominant audio streaming platform in China with over 800 million monthly users, 120 million monthly paying users and 70 to 80 per cent market share in terms of listeners.
In the West, three big record labels – Warner Music, Sony Music and Universal Music (owned 20 per cent by Tencent) – control almost all the recording artists. In China, the market is much more fragmented with a few scaled Chinese artist record labels, and the share of Warner, Sony and Universal in China remains low.
This means that TME is a critical partner for any record label (or artist) that wants to reach music fans in China. Seemingly, this is a value chain that favours TME in China in a way that appears materially more attractive than it is for those businesses in other parts of the world. And further enrichment is delivered through the recently launched Lanren Changting, which focuses on long-form video and audio across a library of audio books, audio drama, comedy, history and culture.
Net profit for the December 2020 quarter was US$0.8 billion annualised or 15 per cent of revenue at US$5.2 billion annualised. Cash and near cash at year-end stood at US$4.4 billion.
The Polen Capital Emerging Markets Fund is coming soon, to learn more Damian Bird published a short video on the Q1 2021 emerging markets portfolio additions and changes. You can see this video on the fund’s web page: Polen Capital Global Emerging Markets Growth Fund
The Polen Capital Global Growth Fund owns shares in Tencent. The Polen Capital Global Emerging Markets Growth strategy owns shares in Tencent Music Entertainment . This article was prepared 13 May 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.