Another Chinese concept stock returns.
On September 15, Tencent Music announced that it had received in-principle approval for a secondary listing on the Main Board of the Hong Kong Stock Exchange and had issued relevant listing documents. This time Tencent Music adopts the listing by way of introduction (Listing by Way of Introduction) method and does not involve the issuance of new shares or fund raising. It plans to start listing and trading on September 21, 2022, with the stock code 1698.
It is worth noting that in the first half of this year, Chinese concept companies such as Shell and NIO also used the introduction method to list on the Hong Kong stock market.
According to calculations by Huatai Securities, as of August 27, there were 35 Chinese concept stocks that met the conditions for secondary listing of Hong Kong stocks, with a total market value of approximately HK$1.18 trillion.
Be Prepared
The core reason for Tencent Music to return to Hong Kong for listing is the general environment.
Since the beginning of 2022, the number of Chinese companies listed in the United States has dropped sharply. In addition to the impact of the epidemic, the main reason is the repeated conflicts between China and the United States on the regulatory system for Chinese concept stocks.
At the end of 2021, the SEC (U.S. Securities and Exchange Commission) passed the revised rules of the "Foreign Company Accountability Act" and released the "Foreign Company Accountability Act Determination Report", and the United States comprehensively tightened the listing of Chinese concept stocks.
Since March 2022, about 150 Chinese concept stock companies have been included in the pre-delisting list, and the market’s expectations for accelerated regulatory tightening have gradually strengthened. On August 26, the Securities Regulatory Commission, the Ministry of Finance and the PCAOB (U.S. Public Company Accounting Oversight Board) signed a regulatory cooperation agreement, which eased market concerns.
The above-mentioned cooperation agreement is based on the laws and regulations of the two countries and in accordance with the principle of reciprocity and mutual benefit. It clearly stipulates that both parties will carry out supervisory supervision and investigation activities on relevant accounting affairs cooperation, forming an agreement that complies with the laws and regulations and regulatory requirements of both parties. Cooperation framework. This cooperation agreement has alleviated to a certain extent the market’s concerns about the extreme situation of delisting Chinese concept stocks, and also laid the foundation for China and the United States to carry out audit supervision cooperation in an equal and efficient manner.
However, this move is only the first step in a series of subsequent cooperation measures. The specific implementation status still needs to be formally reviewed by the PCAOB before further judgment can be made.
Tencent Music stated in its listing documents that if the PCAOB is unable to review or fully investigate its domestic auditors, its American depositary shares may be delisted and its American depositary shares may be prohibited from being present. Transactions on the foreign exchange market.
The possible enactment of the Accelerated Foreign Companies Accountability Act would reduce the number of non-examination years from three to two years, thereby resulting in our ADSs being prohibited from over-the-counter trading or delisting. period is shortened. If the bill is enacted, our American depositary shares may be delisted from exchanges in 2023 and prohibited from over-the-counter trading in the United States. Tencent Music said.
If the delisting comes true and it does not land on the Hong Kong stock market, Tencent Music will face huge cash pressure.
As a result, Tencent Music must go to Hong Kong for a secondary listing.
There are also many considerations in choosing the introduction form for listing. Introductory listing is a method of secondary listing. This time Tencent Music listed on the Hong Kong stock market through introductory listing. It does not need to issue new shares or sell shares held by existing shareholders during the listing, and does not involve IPO financing.
People close to Tencent said that Tencent Music has remained stable in terms of capital reserves and cash flow. This introduction of listing on the Hong Kong stock market will not only provide investors with more choices of trading locations and more flexibility The trading time does not dilute the interests of existing shareholders, which is conducive to the introduction of more investors, which is more beneficial to its long-term development overall.
Difficult growth
But on the other side, the difficulty of raising funds in the downturn of the market may also be an inducement.
On September 2, Lehua Entertainment announced the suspension of its Hong Kong IPO plan. An important factor was that the valuation was too low.
Upstream and downstream people, including people in the capital market and industry executives, lamented to reporters from the 21st Century Business Herald that due to multiple factors such as regulation and market, entertainment companies have increasingly limited attraction to capital, especially in Hong Kong stocks.
Many middle-level executives from newly listed film and television companies said frankly that under such circumstances, being able to go public is the greatest victory. In the current market, it can at least survive for a while. There is a middle level.
There are general environmental factors behind this, as well as problems in the entertainment industry itself. Specific to Tencent Music, it faces considerations of growth factors.
Listing documents show that in the second quarter of this year, the monthly activity of Tencent Music’s online music service mobile terminal fell by 480 million to 593 million year-on-year, and the monthly activity of the social entertainment mobile terminal fell by 2.06 billion year-on-year to 166 million.
In this regard, the company explained that as far as online music services are concerned, the year-on-year decline in monthly activity in the second quarter was mainly due to a reduction in marketing expenses. For social entertainment services, monthly activity decreased year-on-year, mainly due to increasing market competition.
In fact, the social entertainment business of Tencent Music’s cash cow segment is mainly based on business models such as live broadcasting. This segment has encountered policy restrictions and the strong expansion of Douyin. High-value consumption has significantly decreased. The founder of Youtou Live Broadcasting Platform told the 21st Century Business Herald reporter.
Affected by this, in the second quarter, Tencent Music’s total revenue decreased by 1.38 billion yuan from 8 billion yuan in the same period of 2021 to 6.9 billion yuan.
Among them, online music service revenue decreased by 2.4 billion yuan from 3 billion yuan in the same period of 2021 to 2.9 billion yuan. Specifically, as the number of paid users increased by 24.9, music subscription revenue was 2.1 billion yuan, a year-on-year increase of 17.6. However, due to the impact of industry adjustments on open-screen advertising and the impact of the epidemic, Tencent Music's advertising revenue declined year-on-year. Due to the re-signing of agreements with certain music copyright parties, sublicensing revenue also declined year-on-year.
At the same time, Tencent Music’s social entertainment services and other service revenue decreased by 2.04 billion yuan from 5.1 billion yuan in the second quarter of 2021 to 4 billion yuan in the same period of 2022.
For the current period, Tencent Music’s gross profit was 2.1 billion yuan, a year-on-year decrease of 15.3%. Gross profit margin slightly decreased by 0.5 from 30.4 to 29.9.
Given that the company is also controlling costs, in the end, in the second quarter, Tencent Music’s profit during the period was 892 million yuan, compared with 871 million yuan in the same period last year.
Objectively, this is an industry-wide problem. An executive from a leading music company admitted to a reporter from the 21st Century Business Herald that at present, he cannot see the increase in the platform, nor can he clearly see the next step in the music industry.
Of course, there is no need to be overly pessimistic, Tencent Music is trying.
For example, it recently launched the one-click function of releasing new songs overseas to help musicians distribute their music works in batches to more than 150 music streaming platforms around the world. As of the end of the second quarter, the service had brought 190,000 songs from more than 10,000 musicians to overseas music fans.
In the second quarter, TMElive held Wang Yuan’s online concert, and launched the ultra-clear restored version of Leslie Cheung’s 2000 Passion Concert and Jay Chou’s The Strongest Demon on Earth based on AI enhanced technology support. These two re-released concerts have received over 100 million unique visitors within the Tencent ecosystem, and the cumulative number of topic reads across the entire network has reached 6 billion times.
As of September 15, Eastern Time, Tencent Music closed at US$4.83 per share, an increase of 1.05, with a market value of approximately US$8.2 billion. When it went public in the United States in 2018, Tencent Music was priced at US$13.