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Important points:
- Tencent Music’s revenue fell slightly in the fourth quarter of last year, but profits more than doubled thanks to aggressive cost cutting
- Following positive response to self-developed virtual idols, company wants to explore new opportunities using AI-generated content
Phi Pui
China’s tech giants, once accustomed to the free-wheeling ways of China’s internet, are forced to change their tune by controlling costs as growth slows, due to the double whammy of coronavirus restrictions and tightening regulations. I lost it. Tencent Music Entertainment Group TMEEquivalent to Spotify in China.
The company’s fourth-quarter earnings report, released last Tuesday, stunned some investors as net profit rose 115% year-on-year to reach 1.15 billion yuan ($167 million). may have pleased the However, top-line revenue moved in the opposite direction, dropping 2.4% year-on-year to 7.43 billion yuan.
The full-year results showed a similar trend, with profit rising 21.4% to 3.68 billion yuan, despite a 10% decline in sales to 28.34 billion yuan. This increased profit without increased revenue was not what investors were looking for. Tencent Music’s shares plummeted by as much as 14% in New York the day the results were announced, closing down 9.2% despite the company announcing a new $500 million buyback of his shares. I was.
Major cost savings
Tencent Music could significantly boost profits in the face of reduced revenue from aggressive cost cutting. The company’s fourth quarter operating expenses fell by 25.1% to 1.36 billion yuan, with sales and marketing expenses down another 64.5% year-on-year, mainly due to optimization efforts.
Over the past year, Tencent Music has shifted its strategy from acquiring new subscribers to improving the quality of existing subscribers. This is due to the fact that the number of paying subscribers on his three platforms, QQ Music, Kugou Music and Kuwo Music, grew by 16.1% in the fourth quarter, reaching a record high of 88.5 million in the period. It is reflected. Average revenue per paying user (ARPPU) from those paying subscribers also increased by 4.7%, and online music service revenue increased by more than 20%.
While all may look good for the company’s long-term prospects, analysts accustomed to the booming growth of Chinese tech companies have a mixed view of Tencent Music. Citi beats expectations in fourth quarter revenue and earnings performance, with online music service revenue up more than 20%.
Daiwa was more optimistic on the company’s ‘buy’ rating, boosted by improved fundamentals and the announcement of a new buyback plan. It means 40% up from the normal.
Tencent Music’s latest price-to-earnings ratio (P/E) is about 23 times, and its price-to-sales ratio is 3.2 times. This is well ahead of his rival’s P/S ratio of 1.4. cloud music (9899.HK), still in the red. Tencent Music is also rated higher than its international peers Spotify spot and dither (DEEZR.PA), 2x and 0.54x respectively. This shows that investors are not so happy with the company’s latest results, but still consider it the clear industry leader in China.
Tencent once had a near monopoly on China’s huge online music market, but about two years ago the Chinese government forced it to end its practice of signing exclusive Chinese rights with most major music labels. Since then, the competition has become even more intense as competitors have signed their own music licensing deals. Cloud Music has been a big beneficiary, with his revenue increasing by nearly 30% last year. Other rising challengers include Apple Music, Migu Music and TikTok.
The power of AI
One of Tencent Music’s biggest growth engines has been social entertainment services such as online karaoke and music-based live streaming. The service allows viewers to purchase and receive virtual gifts for their favorite hosts. However, the business has also come under criticism as it faces competition from short videos and other social platforms. As a result, revenue from that part of the business plummeted by nearly 20% for him last year, while paying users fell by 24.3% for him.
Cost reductions boost profits, but the amount you can save is limited. Instead, Tencent Music has turned its focus back to growing its revenue streams in the new, more competitive environment.
South Korea’s Yonhap News Agency reported that company executives recently visited a South Korean music production company in hopes of bringing back South Korea’s popular “K-pop” music to China. Most South Korean pop-culture products, including music and TV shows, are based on the Chinese government’s response to the country’s deployment of advanced U.S.-supplied missile systems to defend against potential attacks from North Korea. In dissatisfaction, it was banned for seven years.
More recently, China has begun easing restrictions on Korean TV dramas and games. Record sales and online fan clubs have resumed, but Korean singers are still unable to perform in China.
Technology-enabled products and services will be another important growth engine for the company as it differentiates itself from its rivals after it loses its exclusive music license. Tencent Music had inked licensing deals with his 33 record labels late last year. Cloud Music had 29 of him, 15 of which were the same as Tencent Music. As platforms increasingly offer similar music services, user-generated content (UGC) and artificial intelligence-generated content (AIGC) could become the new future battleground for music platforms to differentiate themselves from each other. there is.
Last July, Tencent Music launched the “TME Producer Alliance” program, allowing artists to independently price and release their digital albums on an open platform. By the fourth quarter of last year, indie musicians had made over 2.3 million tracks on the platform, and last year nearly 1,000 of his tracks earned over his 100 million views.
Tencent Music has also dabbled in AIGC. His subsidiary QQ Music has launched an AI drawing function that generates binary his images and dedicated his BGM for users, and uses the “AI lyric poster” and “AI vinyl player” functions to create visual effects. I am raising it. Last year, the company released its first single and also announced the debut of Lucy, the first virtual girlfriend idol who can communicate with fans in the Metaverse.
As the global sensation ChatGPT takes AI to a new level, Tencent Music continues to explore ways to use AI to create more new business opportunities in areas such as graphics, video and music It says it will. In short, we should keep an eye on new AI music from this industry, which is firmly established in this industry.
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