Prospectus Summary
PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and the related notes appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors” and information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before deciding whether to buy the ADSs. Investors should note that Tencent Music Entertainment Group, our ultimate Cayman Islands holding company, does not directly own any substantive business operations in the PRC and the businesses described in this prospectus are operated through our VIEs.Overview
Our mission is to use technology to elevate the role of music in people’s lives, by enabling them to create, enjoy, share and interact with music.
Music is a universal passion. No matter who we are, or where we come from, we all have our favorite songs, albums or artists. We love music because it can inspire, uplift, motivate and enrich our lives. Music reaches us in deeply personal ways and connects us with each other through engaging, social and fun experiences.
With over 1.4 billion people, China has a massive audience with a growing demand for music entertainment. Until recently, the music industry in China was relatively underdeveloped and highly fragmented largely due to deficiencies in copyright protection. Piracy was rampant. People didn’t see the value of paying for music. Spending on music entertainment in China has been relatively low. According to iResearch, while the recorded music market in the U.S. was more than 45 times that of China in 2017 on a per capita basis, China’s per capita spending on recorded music is expected to more than quadruple between 2017 and 2023, demonstrating tremendous growth potential.
We are pioneering the way people enjoy online music and music-centric social entertainment services. We have demonstrated that users will pay for personalized, engaging and interactive music experiences. Just as we value our users, we also respect those who create music. This is why we champion copyright protection—because unless content creators are rewarded for their creative work, there won’t be a sustainable music entertainment industry in the long run. Our scale, technology and commitment to copyright protection make us a partner of choice for artists and content owners.
Our Platform
We are the largest online music entertainment platform in China, operating the top four music mobile apps in terms of mobile MAUs in the second quarter of 2018. Our platform comprises our online music, online karaoke and music-centric live streaming services, supported by our content offerings, technology and data.
Our platform is an all-in-one music entertainment destination that allows users to seamlessly engage with music in many ways, including discovering, listening, singing, watching, performing and socializing. On our platform, social interactions such as sharing, liking, commenting, following and virtual gifting, are deeply integrated in our products and highly complementary to the core music experience, thereby enhancing our user experience, engagement and retention. As a result, we have built our platform into not just a music streaming platform, but a broad community for music fans to discover, listen, sing, watch, perform and socialize.
We have worked tirelessly to build a vibrant and fast-growing music platform with the following elements:
We have achieved growth and profitability at scale. In the six months ended June 30, 2018, our revenue reached RMB8,619 million (US$1,303 million) compared to RMB4,485 million in the same period in 2017. In the six months ended June 30, 2017 and 2018, our profit for the period amounted to RMB395 million and RMB1,743 million (US$263 million), respectively. Our adjusted profit increased from RMB732 million in the six months ended June 30, 2017 to RMB2,112 million (US$320 million) in the six months ended June 30, 2018. From 2016 to 2017, our revenue increased from RMB4,361 million to RMB10,981 million (US$1,659 million). In 2016 and 2017, we reported profit for the year of RMB85 million and RMB1,319 million (US$199 million), respectively, and recorded adjusted profit for the year of RMB426 million and RMB1,904 million (US$288 million), respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-IFRS Financial Measure.”
Tencent’s acquisition of CMC was completed on July 12, 2016. Since then, the results of operations of CMC have been consolidated with ours and had contributed to our total revenues since July 2016. For the period from January 1, 2016 to July 12, 2016, CMC’s total net revenues and net loss were RMB1,923 million (US$288 million) and RMB152 million (US$23 million), respectively. After the acquisition of CMC in July 2016, our business and the business that was previously operated by CMC both grew substantially as a result of the combined content library and sharing of operational know-how. Post-acquisition, we: (i) operated our business on a combined basis, with CMC’s business substantially integrated into our business; (ii) shared many costs and expenses, and (iii) ceased to maintain consolidated financial statements of CMC’s business on a standalone basis. For a more detailed discussion of the impact of the acquisition of CMC, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Effects of the Acquisition of CMC.”
Market Opportunity
China’s online music pan-entertainment market mainly consists of online music services, online karaoke and music-centric live streaming, online advertising, and online music copyright operations. The market is expected to grow rapidly, supported by a secular upswing driven by strict copyright protection, increasing penetration of online music services and consumers’ increasing willingness to pay for music. It is also a highly dynamic market, which enables Chinese consumers to engage with music in many ways, including discovering, listening, singing, watching and socializing.
According to iResearch, the overall size of China’s online music pan-entertainment market reached approximately RMB33.0 billion in terms of revenue in 2017, and is expected to grow to RMB215.2 billion in 2023, representing a CAGR of 36.7% from 2017 to 2023.
Our Strengths
We have developed an innovative business model with fundamental strengths that positions us for continued leadership.
Largest online music entertainment platform in China
We are the largest online music entertainment platform in China, with over 800 million total unique MAUs in the second quarter of 2018. Our QQ Music, Kugou Music, Kuwo Music and WeSing apps are the top four music mobile apps in China by mobile MAUs in the second quarter of 2018.
Superior products creating engaging, social and fun user experience
We offer a comprehensive suite of music entertainment products to let users engage interactively with music by discovering, listening, singing, watching, performing and socializing.
The seamless integration of music content and services across our platform enables users to immerse themselves in the music they love. Users who hear a song on our platform may be inspired to sing that song and share the performance with friends, or watch a live stream of someone performing that song. This integration not only offers a comprehensive music entertainment experience but also enables us to acquire users in a cost-effective manner by attracting users from our online music services to our social entertainment services.
China’s most comprehensive music library and strong relationships with content partners
We had over 20 million tracks licensed from over 200 domestic and international music labels, including through master distribution and licensing agreements with music labels, such as Sony Music Entertainment, Universal Music Group, Warner Music Group, Emperor Entertainment Group and China Record Group Co., Ltd., as of June 30, 2018. Our comprehensive music library caters to a broad range of user preferences, covering both popular chart-topping music and niche content across multiple genres and languages. Content owners consider us to be a partner of choice as we offer them access to China’s largest online music user base, work closely with them on copyright protection and provide them with diverse monetization opportunities through our long-term relationships.
Our music content is complemented by a vast library of user-generated content including millions of online karaoke songs, short videos, live streaming of music performances, user comments and music-related reviews and articles. This content further expands the breadth of our music content offering, enhancing our user experience and engagement. We have also created an online stage for everyday performers to become professional artists.
As a result, we have developed a virtuous cycle of value creation—our comprehensive and differentiated music content attracts more users and enhances their engagement, which in turn allows us to offer a growing and more engaged audience for our content partners, who then provide us with wider access to content on more attractive terms.
Extensive data and industry-leading technology
We combine extensive data and industry-leading technology to provide superior user experiences and drive user engagement.
Our data and powerful AI technology allow us to provide music content that best matches users’ preferences. We offer hundreds of proprietary audio settings that deliver a superior listening experience, such as our industry-leading QQ Music SuperSound, Kugou Viper and WeSing Super Voice audio settings that we developed ourselves. Our proprietary music recognition technology allows our apps to identify songs by playing a sample of a song track. Our technology also makes our products a part of everyday life, such as our QQ Music Running Station that recommends music to match a jogger’s running tempo.
We also leverage technology to help our content partners protect copyright. For example, our real-time content monitoring system scans our platform as well as other online music platforms to detect potential copyright infringement.
Innovative and proven monetization capabilities to capture the significant demand for music entertainment
Our innovative and multi-faceted monetization models allow us to drive the growth of our platform and profitability, while promoting the development of the online music industry in China. We derive revenues primarily from online music services and music-centric social entertainment services.
deploy a paid music model. Our paying user base grew from approximately 16.6 million in the second quarter of 2017 to 23.3 million in the second quarter of 2018. We had a paying ratio of 3.6% in the second quarter of 2018, which is still very low compared to online games and video services in China and online music services globally, indicating significant growth potential.
Online music services and music-centric social entertainment services and others accounted for 28.7% and 71.3%, respectively, of our revenues in 2017, and 29.6% and 70.4%, respectively, of our revenues in the first half of 2018.
Significant synergies with Tencent
We enjoy significant synergies with Tencent, our controlling shareholder, which further strengthen our competitive advantages. Tencent is a leading provider of internet value added services in China, offering a broad range of internet services, including communications and social, online games, digital content, online advertising, mobile payment, mobile utilities and other services. We benefit from unique access to Tencent’s massive user base, representing China’s largest online social community, with over one billion MAUs of Weixin and WeChat combined and 803 million MAUs of QQ in the second quarter of 2018, which facilitates the organic growth of our user base.
The integration between Tencent’s social graph and our platform enables us to deliver a superior user experience and increase user engagement. For example, the music module embedded in the QQ mobile app allows QQ users to seamlessly access QQ Music. Tencent has strategically invested in a variety of content. It has built the largest digital content platforms in online video, online literature and online music in China, developing strong synergies with each platform. For example, WeSing users can enjoy the recorded performances of their Weixin/WeChat and QQ friends and interact with them on our platform. In return, our users and their content enrich Tencent’s content ecosystem. In addition, we also benefit from opportunities to collaborate with other platforms in Tencent’s content ecosystem. For example, we have the unique opportunity to co-produce Tencent Video’s music talent shows, which enables us to promote our brands, drive user stickiness and expand our music content.
Pioneering and visionary management team
With extensive experience and leading industry knowledge, our management team are pioneers in the online music entertainment industry in China, leading product innovation, spearheading music copyright protection and building an extensive licensed online music library in China. They have built strong partnerships with industry participants and been recognized by industry and government organizations. Their success is demonstrated by our track record of strong user base growth, our sustained online music content leadership, and our success in leading the industry toward a paid music business model.
Our Strategies
We seek to lead the development of a vibrant music entertainment economy in China, creating long-term value for users, artists and content partners. We intend to pursue the following strategies:
Our Challenges
We face risks and uncertainties in realizing our business objectives and executing our strategies, including those relating to:
Corporate History and Structure
Launch of QQ Music, Kugou, Kuwo and WeSing
Kugou Music. In September 2012, Guangzhou Kugou commenced offering its live streaming services through Fanxing Live, which was rebranded to Kugou Live in December 2016.
CMC’s Acquisition of Beijing Kuwo and Guangzhou Kugou
In June 2012, China Music Corporation, or CMC, was incorporated in the Cayman Islands.
In December 2013, CMC obtained effective control over Beijing Kuwo and its business operations in the PRC through a series of contractual arrangements between Beijing Kuwo and an indirect wholly-owned subsidiary of CMC.
In April 2014, CMC, through an indirect wholly-owned subsidiary in the PRC, entered into a series of contractual arrangements with Guangzhou Kugou and its shareholders.
As a result of these contractual arrangements, CMC obtained effective control over, and became the primary beneficiary of, each of Guangzhou Kugou and Beijing Kuwo through which it operated substantially all of its online music and live streaming services in the PRC.
Combination of Tencent’s Online Music Business with CMC
Prior to July 2016, Tencent held an approximately 15.8% equity interest in CMC.
In July 2016, Tencent acquired control of CMC through a series of transactions pursuant to which (i) Tencent injected substantially all of its online music business in the PRC (which primarily included QQ Music and WeSing) into CMC and (ii) in consideration of the foregoing, CMC issued an aggregate of 1,290,862,550 ordinary shares to a wholly-owned subsidiary of Tencent (Min River Investment Limited, or Min River). Upon the completion of these transactions, Tencent owned an approximately 61.6% equity interest of CMC and CMC became a consolidated subsidiary of Tencent.
In December 2016, CMC was renamed “Tencent Music Entertainment Group,” or TME.
Share Issuances to Music Label Partners
On October 1, 2018, we entered into share subscription agreements with each of WMG China LLC (“Warner”), an affiliate of Warner Music Group, and Sony Music Entertainment (“Sony”) pursuant to which we agreed to issue to these two strategic investors, subject to satisfaction of certain customary closing conditions, a total of 68,131,015 ordinary shares for an aggregate cash consideration of approximately US$200 million, in reliance on Section 4(a)(2) of the Securities Act regarding private sales of securities. The share issuances are currently expected to be consummated prior to the completion of the offering. Under the agreements, all shares held by Warner and certain shares held by Sony will be subject to a lock-up that will expire upon the earlier of the third anniversary of the completion of this offering or October 1, 2021, subject to limited exceptions. The remaining shares held by Sony will be subject to a lock-up that will expire upon the earlier of the end of six months following the completion of this offering or April 1, 2019, subject to limited exceptions. We believe that such transactions will help deepen our strategic cooperation with our major music label partners and better align our interests with theirs to create long-term value for our users and shareholders. We expect to record a share-based accounting charge upon the consummation of such share issuances in an amount equal to the excess of the fair value of the ordinary shares sold over the aggregate consideration to be received by us. We are currently in the process of assessing the fair value of our ordinary shares and the amount of the accounting charge we expect to incur as a result of these transactions. Assuming the fair value of our ordinary shares is US$ per share, the midpoint of the estimated range of the initial public offering price, the expected accounting charge would be approximately US$ . As a result of this material one-off, non-cash accounting charge, we expect to record a loss for the three months ending December 31, 2018.
Contractual Arrangements and Corporate Structure
Currently, substantially all of our users and business operations are located in the PRC and we do not have plans for any significant overseas expansion, as our primary focus is the PRC online music entertainment market, which we believe possesses tremendous growth potential and attractive monetization opportunities.
We are a Cayman Islands holding company and, other than external financing, rely principally on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and for services of any debt we may incur.
Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services, internet audio-video program services and certain other businesses. The Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2018 Version) provides that foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider other than an e-commerce service provider, and the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision) require that the major foreign investor in a value-added telecommunication service provider in China must have experience in providing value-added telecommunications services overseas and maintain a good track record. In addition, foreign investors are prohibited from investing in companies engaged in certain online and culture related businesses, internet audio-visual programs businesses, internet culture businesses and radio and television program production businesses. See “PRC Regulation—Regulations on Foreign Investment Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2018 Version).” We are a company incorporated in the Cayman Islands. Beijing Tencent Music, Yeelion Online and Shenzhen Ultimate Xiangyue, our PRC subsidiaries, are considered foreign-invested enterprises. To comply with the foregoing PRC laws and regulations, we primarily conduct our business in China through Guangzhou Kugou, Beijing Kuwo, Shenzhen Ultimate Music and Xizang Qiming, our VIEs and their subsidiaries in the PRC, based on a series of contractual arrangements. As a result of these contractual arrangements, we exert effective control over our VIEs and consolidate their operating results in our consolidated financial statements under IFRS. For a summary of these contractual arrangements, see “Corporate History and Structure—Contractual Arrangements with Our VIEs and Their Respective Shareholders.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs. If our VIEs or their respective shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For details of these and other risks associated with our VIE structure, see “Risk Factors—Risk Related to Our Corporate Structure.”
The following diagram illustrates our corporate structure, including our significant subsidiaries and VIEs, immediately upon the completion of this offering.
Notes:
Lekong Investment Partnership (Limited Partnership) (1.08%), an employee equity incentive platform of Guangzhou Kugou, with Mr. Zhenyu Xie being its general partner. Guangzhou Kugou operates Kugou Music and Kugou Live.