Tencent Music Entertainment Group (騰訊音樂娛樂), the online music arm of China’s largest social media company, was filed for an initial public offering (IPO) in a continuing surge of US listings by Chinese companies.
The music streaming site listed its offering size as US$1 billion in a filing on Tuesday with the US Securities and Exchange Commission. The amount is likely a placeholder and might change.
Tencent Music is preparing to sell shares after its parent company reported its first profit drop in at least a decade, while also grappling with new game-approval restrictions imposed by Chinese regulators. China Literature Ltd (閱文集團), the e-book business spun off from Tencent Holdings Ltd (騰訊) in November last year, has fallen 43 percent in Hong Kong trading this year.
Many Chinese start-ups have enthusiastically pursued listings this year while some of their US counterparts have held back. On US exchanges alone, US$7.4 billion has been raised in IPOs by China-based businesses, almost double the US$3.9 billion last year, according to data compiled by Bloomberg.
Tencent Music focuses on three main experiences: Online music listening through products such as QQ Music that also help users discover new tunes; online karaoke sites such as WeSing, where people can sing virtually with friends, celebrities or strangers; and live-streamed performances.
The company counted 872 million monthly active users, combining the music service and social entertainment platform, in the second quarter of the year, up from 806 million monthly users in the same period last year, the filing said.
People who used Tencent Music’s technology daily in the second quarter spent on average more than 70 minutes on its platforms, it said.
Yet Tencent Music is making money from only a sliver of those people. Just 3.6 percent of users pay for music, and only 4.2 percent for social and entertainment services, according to the filing.
For the first six months of the year, the company reported a profit of US$263 million on total revenue of US$1.3 billion. For fiscal year 2017, its profit was 1.3 billion yuan (US$189.26 million) on revenue of almost 11 billion yuan, compared with 85 million yuan on sales of 4.36 billion yuan a year earlier.
Tencent Music’s platforms are becoming important vehicles for US pop stars such as Katy Perry and Rihanna to reach a Chinese audience, alongside homegrown artists including Jason Zhang (張杰) and Joker Xue (薛之?)
The company is to remain closely linked to its parent, which holds 58 percent of the shares before the offering.
The music business, whose tools are integrated into a range of Tencent’s Internet services, depends on the parent company to drive user growth, the filing said.
Stockholm-based Spotify Technology SA is both a competitor and an investor, holding 9.1 percent of Tencent Music’s shares before the offering, according to the filing. The two companies might increasingly become rivals in regions such as Southeast Asia.
The cash raised in Tencent Music’s IPO is to go toward efforts to edge out competitors, with the company planning to use 40 percent of the proceeds to enhance its music content library, the filing said.
Thirty percent of the funds are to go toward product development, with the rest split between marketing efforts and strategic investments including acquisitions, the company said.
Bank of America Corp, Deutsche Bank AG, Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley are arranging the share sale. The company has applied to list its shares on the NASDAQ Global Market under the symbol TME.
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