Broker: UOB Kay Hian
Date of Report: Wednesday, 13 August 2025

Tencent Music Entertainment Delivers Robust Q2 2025 Results: Fan Economy and SVIP Penetration Set to Drive Growth

Overview: A Strong Quarter and Strategic Upgrades

Tencent Music Entertainment Group (TME), the world’s largest online music platform by monthly average users and market share, has posted impressive second quarter 2025 results. Both revenue and profit figures surpassed expectations, leading UOB Kay Hian to reaffirm its BUY rating and raise the target price for TME shares to HK\$105.00, suggesting a potential upside of 18.9%. The company’s innovative focus on the fan economy and SVIP (Super VIP) penetration is expected to further accelerate its growth trajectory.

Company Snapshot: Market Leadership and Platform Strength

• Stock Ticker: 1698 HK
• Share Price (as of report): HK\$88.30
• Market Cap: HK\$273.5 billion (US\$34.85 billion)
• Major Shareholders: Spotify Technology S.A. (16.0%), Tencent Holdings (1.1%), PineBridge Investments LP (0.1%)
• Key Platforms: QQ Music, Kugou Music, Kuwo Music, WeSing
• Market Share: Approximately 70% in China
• 52-Week Range: HK\$36.25 – HK\$89.15

Q2 2025 Financial Highlights: Earnings Beat Across the Board

TME’s Q2 2025 financial performance exceeded both internal and market expectations:

• Total Revenue: Rmb8.44 billion, up 17.9% year-on-year and 6% above consensus
• Non-GAAP Operating Profit: Rmb3.21 billion, up 31.4% year-on-year
• Operating Margins: 38%, up 4 percentage points year-on-year
• Non-GAAP Net Profit: Rmb2.64 billion, up 33% year-on-year and 16% above expectations
• Net Margins: 31%, up 4 percentage points year-on-year
• Online Music Service Revenue: Rmb6.85 billion, up 26.4% year-on-year
• Social Entertainment/Other Revenue: Rmb1.59 billion, down 8.5% year-on-year due to compliance adjustments

Detailed Financial Table: Q2 2025 vs Q1 2025 and Q2 2024

Growth Drivers: Fan Economy, SVIP Penetration, and Diversification

Accelerating Online Music Revenue

• Subscription revenue grew 17.1% year-on-year to Rmb4.38 billion.
• Online music paying users reached 124.4 million (+6.3% YoY).
• SVIP subscribers surpassed 15 million, driving monthly ARPU to Rmb11.7 (+9.3% YoY).
• Advertising revenue surged due to a diversified product portfolio and innovative formats.
• TME expects both subscription and advertising momentum to continue through 2H25.

Fan Economy Initiatives: Launch of “Bubble” and Bundling

• TME partnered with DearU to launch “Bubble” on QQ Music at Rmb28/month, offering exclusive, customized artist-fan engagement.
• Bubble has seen strong adoption among K-pop fans and will soon include Chinese artists, broadening its reach and impact in Greater China.
• Bundled offerings of Bubble with subscriptions and SVIP are expected to become key growth drivers for future SVIP expansion and monetization.

Strategic Expansion and Efficiency Initiatives

• Long-term subscription goal: 150 million subscribers and ARPPU of Rmb15.
• Focus on optimizing revenue share ratios and improving gross margin, especially in core online music services.
• Rmb2.7 billion acquisition of Himalaya aims to expand the user base and increase paid conversion; financial impact expected from 3Q25.
• SVIP annual membership program for artist merchandise to be introduced, modeled after successful e-commerce memberships, to enhance merchandise profitability.

Margin Expansion and Cost Management

• Gross margin expanded by 2 percentage points to 44% in Q2 2025.
• Non-GAAP operating margin rose to 38% (+4 ppt YoY).
• Non-GAAP net margin grew to 31% (+4 ppt YoY).
• Short-term margin pressure from new initiatives (Fan Economy, Earthlight Concept) is anticipated, but TME remains confident of a long-term upward trend, supported by subscriber growth and higher ad revenue.

Financial Outlook: Upward Revisions and Key Metrics

UOB Kay Hian raised Q3 2025 and full-year 2025 revenue estimates by 2-3%, now forecasting 12-13% YoY growth. Non-GAAP net profit forecasts for these periods were also increased by 7-8%, implying robust 33% and 22% YoY growth, with a sustained net margin of 31%.

Key Financials Table (Rmbm)

Risks and Valuation

Risks

• Potential increases in content costs from label companies
• Slower net user growth or reduced retention as ARPPU rises
• Wider-than-expected decline in social entertainment/livestreaming revenues
• Lack of shareholder returns

Valuation and Recommendation

• TME’s target price is set at HK\$105.00, based on 26x 2026F PE, aligning with sector peers.
• Current valuation stands at 22x 2026F PE, below the historical mean of 25.3x, offering a favorable risk-reward profile.

Share Price Catalysts

• Better-than-expected music services revenue, driven by ARPPU hikes
• Upward earnings revisions, benefiting from operating leverage in higher-margin music subscription and advertising segments

Conclusion: Innovation and Expansion Powering Tencent Music Entertainment’s Next Phase

Tencent Music Entertainment’s Q2 2025 results highlight its successful pivot towards premium services, fan-driven monetization, and ongoing innovation in content and engagement strategies. With robust financials, new product rollouts like Bubble, and a clear roadmap for margin expansion, TME stands well-positioned to sustain its market leadership and deliver value for shareholders in the years ahead.