Samir Mehta: Tune in to Tencent Music if you’re looking for a hidden gem

In investing – just like in music – real success is found beyond the obvious. China’s Tencent Music is a great example, argues Pendal’s SAMIR MEHTA

• Value to be found in Asian equities if you know where to look
• Tencent Music generating cash and buying back stock
• Find out more about the Asian Share Fund

WHO is the Bob Dylan of music streaming?

That’s the question Pendal’s Samir Mehta posed at the Sohn Hearts & Minds Conference in Adelaide last month.

For most, the answer is obvious: Sweden’s Spotify has revolutionised the way we consume music, dominating developed markets and setting the benchmark for subscription-based streaming.

But in investing – just like in music – real success is found beyond the obvious.

For every Bob Dylan – whose sandpaper voice and sermon-like lyrics changed the face of music worldwide – there’s a Sixto Rodriguez: overlooked by mainstream audiences until an Oscar-winning documentary, Searching For Sugar Man, revealed he had been quietly building a cult following in small but devoted markets.

“Spotify has done a brilliant job in developed markets, but there’s lots of other markets that still have potential,” says Mehta, who manages the Pendal Asian Share Fund.

“What we need to do is search for the Sugar Man of streaming.”

“Music follows exactly the same trends across the world – and the Sixto Rodriguez of streaming is China’s Tencent Music Entertainment.”

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With paying subscriber base of 117 million, a market capitalisation of around US$20 billion, over US$4 billion in cash, and revenues in the online subscription business growing at 20 per cent annually, Tencent Music generates almost US$1 billion of cash each year, says Mehta.

They have already bought back US$1 billion of shares and this year’s US$500 million buyback is ongoing.

“Generating cash and buying back stock is not something that you associate with Chinese companies,” says Mehta.

“But there’s been a sea change in attitudes among well-managed Chinese companies and Tencent Music represents one of those; doing exactly what we as minority shareholders want them to do.”

Streaming has transformed the global music industry, replacing one-time purchases of LPs, cassettes, and CDs with stable, long-term subscription revenue.

When Tencent Music was first launched by its parent Tencent Holdings, which retains a 52 per cent stake, some 70 per cent of sales came from so-called ‘social entertainment’ – essentially user-generated karaoke and live music performances.

But after Beijing imposed regulatory changes in 2021 that forced the business to take responsibility for the content on its platform, 78 per cent of revenue is now from traditional online music streaming.

“That is Spotify-like subscription revenues – growing at a clip of 20 per cent per annum,” says Mehta.

“Faced with a regulatory diktat, the company cleaned up and now they proudly proclaim ‘we are now progressing towards a healthy development of China’s online music industry’.

“They are signalling to the government that their business now is well within the requirements of the law that the Chinese government imposes.”

They currently have 117 millio active monthly paying subscribers. A key focus for management is to steadily raise average subscription from the current US$1.5 per month to US$2 over the next 5 years.

Tencent Music generates 42 per cent gross margins – and a nascent advertising revenue stream will only supplement growth, says Mehta.

“You can see the similarities.

Searching for Sugar Man made a cult figure of Sixto Rodriguez. This conference, Sohns Hearts and Minds, is going to do for Tencent Music what the documentary did for Rodriguez.”

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

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About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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