To The Moon

$Tencent Music(TME)$

Tencent Music Entertainment Group (NYSE: TME; HKEX: 1698) has been on a tear. From the capitulation lows of 2022 to early August 2025, the ADR has rallied well over 500%, vastly outpacing global equity benchmarks. The rally has been powered by accelerating subscription growth, expanding ARPPU, and a steady pivot away from lower-quality social entertainment revenue toward a premium, subscription-led model. With shares pressing fresh 52-week highs after a strong Q2 print, investors face a classic late-cycle question: does the growth runway still justify owning TME at these levels—or is it time to crystallize gains?

A New Phase for China’s Streaming Champion

Tencent Music’s strategic rebalance is bearing fruit. The company’s Q2 FY2025 revenue rose 17.9% year over year to RMB 8.44 billion (approximately US$1.18 billion), outpacing consensus and marking a clear acceleration from Q1 trends. GAAP net income attributable to equity holders increased 43% to RMB 2.41 billion, with non-IFRS profitability expanding even faster as operating leverage kicked in. Management highlighted robust momentum in paid subscriptions, advertising, and higher-tier membership (SVIP), while acknowledging a continued structural drag from legacy social entertainment.

The monetization engine is now unmistakably subscription-first. Paying online music users climbed to 124.4 million in Q2, up 6% year on year, while monthly music ARPPU increased 9.3% to RMB 11.7—helped by penetration of “Super VIP,” which surpassed 15 million subscribers. Total MAUs ticked down modestly—an industry-wide normalization—but the mix shift toward higher-value users continued apace.

Performance Overview and Market Feedback

Share-price trajectory. TME’s 52-week range now spans roughly US$9.41 to US$26.54, with the stock up more than 120% over the past year and near cycle highs as of mid-August 2025. From the 2022 trough around US$3.12, the rally exceeds 500%, validating a multi-year turnaround and re-rating.

Street reaction. Following Q2 results, several brokers raised their price targets, some moving into the high-20s with reiterated Buy ratings. Analysts cited strength in non-subscription music revenue and durable subscription growth. Momentum indicators, however, show the stock as technically extended, suggesting potential for short-term pullbacks even amid a strong long-term story.

Investor posture. Long-only growth funds continue to add exposure, encouraged by the quality of earnings, while tactical traders are more cautious given the parabolic price action. Valuation multiples have expanded into the mid-20s on trailing earnings, a level that requires sustained execution to justify further upside.

What’s Driving the Business

From Scale to Quality: Subscription, SVIP, and ARPPU

Tencent Music has deliberately shifted its focus from mass user acquisition to monetizing a more engaged audience:

• Subscriptions: Online music subscription revenue rose approximately 17% year over year to RMB 4.38 billion. Paying users hit 124.4 million, while ARPPU grew about 9%, signaling effective monetization through premium features and content exclusivity.

• Super VIP: Surpassing 15 million SVIP users highlights successful tiered pricing and upselling strategies. This premium customer segment is less price-sensitive, spends more per month, and is more loyal, providing stable recurring revenue.

Social Entertainment: Smaller but Cleaner

Social entertainment services—live karaoke, gifting, and virtual performances—continue to shrink, down roughly high-single digits year over year. This decline is partly due to regulatory changes and management’s intentional scaling back of lower-quality monetization. While this compresses top-line growth in the short term, it reduces volatility and boosts the sustainability of earnings.

The Long-Form Audio Gambit: Ximalaya Acquisition

In June, TME announced its plan to acquire Ximalaya, China’s largest long-form audio platform, for around US$2.4 billion in a mix of cash and stock. This strategic move expands TME’s offerings into podcasts, audiobooks, and spoken-word content—segments with strong engagement potential. By bundling long-form audio with music subscriptions, TME aims to increase user retention, enhance ARPU, and diversify revenue streams. While integration risks exist, the strategic fit is clear: long-form audio is a fast-growing segment with cross-sell potential across TME’s massive user base.

Fundamental Analysis and Cash Flow

Revenue and Margin Trajectory

• Top line: Q2 FY2025 revenue rose 17.9% year over year to RMB 8.44 billion, accelerating from Q1’s pace. Online music services grew around 26%, more than offsetting the decline in social entertainment revenue.

• Profitability: Operating profit increased about 35% year over year to roughly RMB 3.0 billion, benefiting from operational efficiencies and the revenue mix shift. Non-IFRS net income rose 37%, and GAAP net income jumped 43%.

Cash Generation and Capital Allocation

Tencent Music operates a high-margin, cash-generative model thanks to the subscription base. Historical data indicates strong free cash flow conversion. The balance sheet is well-positioned to absorb the Ximalaya acquisition without excessive leverage, and there is scope for future shareholder returns via buybacks or dividends. In the near term, cash flow may be temporarily affected by integration costs and content investments.

Financial Highlights and Valuation

Key Q2 FY2025 Metrics

• Revenue: RMB 8.44B (+17.9% YoY)

• Online Music Subscriptions: RMB 4.38B (+17.1% YoY)

• Paying Users: 124.4M (+6.3% YoY)

• ARPPU: RMB 11.7 (+9.3% YoY)

• GAAP Net Income: RMB 2.41B (+43.2% YoY)

• SVIP Subscribers: Over 15M

• MAUs: ~553M–555M (down slightly YoY)

These metrics show Tencent Music’s successful transition toward higher-quality, recurring revenue, with pricing power evident in the ARPPU gains.

Valuation and Peer Context

With a market capitalization in the low-to-mid US$30 billions and a trailing P/E in the mid-to-high 20s, TME is no longer in deep value territory but still trades at a discount to some global streaming peers. This leaves room for re-rating if the company continues to deliver double-digit growth with improving margins.

Industry Structure, Competition, and Risks

Industry Dynamics

China’s audio streaming market is maturing, shifting from user acquisition toward monetization depth. Paid subscription penetration is still below that of Western markets, leaving a runway for growth in premium tiers, bundled services, and long-form audio.

Competitive Pressures

TME’s biggest rival in music streaming remains NetEase Cloud Music, alongside specialized long-form audio platforms. TME’s edge lies in its extensive ecosystem integration with Tencent, cross-promotional capabilities, and ability to offer a diversified bundle of music, long-form audio, and live experiences.

Key Risks

• Regulatory: The sector has been subject to changing policies that could limit certain features or monetization methods.

• Integration Risk: Ximalaya’s merger success depends on smooth operational and cultural integration.

• Macro Factors: A slowing Chinese economy could impact advertising revenue and discretionary subscription spending.

• User Trends: Continued MAU declines could eventually limit revenue growth if not offset by ARPPU increases.

Market Sentiment and Guidance

Sentiment Check

• Analyst View: The majority remain bullish, citing strong subscription growth, pricing power, and a diversified product roadmap. Price targets cluster in the mid-to-high 20s.

• Investor Positioning: Growth-oriented investors are holding or adding, while some short-term traders are taking profits after the rapid ascent.

Outlook

Management expects continued growth in paying users and ARPPU, improved advertising yields, and revenue synergies from the Ximalaya integration. The near-term growth rate should remain in the mid-to-high teens, with margins trending higher.

Technicals and Trading Scenarios

Support and Resistance: The breakout above US$22–24 suggests this zone could now serve as strong support. Deeper support lies near US$20. Upside resistance is around US$28–30.

Bull Case: Sustained double-digit subscription growth, ARPPU expansion, and successful integration of Ximalaya push earnings and the multiple higher. Base Case: Growth moderates but remains healthy; valuation stabilizes. Bear Case: Regulatory or macro headwinds slow growth, leading to multiple compression.

Verdict: Hold for Strength, Buy on Pullbacks

Tencent Music has transitioned into a high-quality, subscription-led audio streaming leader with strong pricing power and expanding margins. The 500% rally from 2022 lows reflects real business progress. However, after a steep run, new investors may benefit from waiting for pullbacks.

Entry Price Zones:

• Primary Buy Zone: US$16–20

• High-Conviction Buy Zone: Around US$12 during broader market weakness

• Trim Zone: Above US$28–30 for risk management

For current holders, the improving fundamentals support a “Hold” or “Overweight” stance. For new buyers, patience can help secure better long-term returns.

Conclusion: Quality Growth Is the New Moat

Tencent Music’s 2025 story is less about sheer user numbers and more about the quality of its growth. Subscription momentum, premium tier penetration, and expansion into long-form audio give the company a durable competitive advantage. While volatility is inevitable after a rally of this magnitude, the underlying transformation makes TME a compelling name to watch and potentially accumulate during market pullbacks.

Key Takeaways

1. Subscription revenue and ARPPU growth are driving long-term value.

2. Premium SVIP tiers show strong adoption and loyalty.

3. Ximalaya acquisition adds diversification and cross-sell potential.

4. Valuation is fair but demands continued execution.

5. Tactical buying on pullbacks offers the best risk-reward for new investors.