Investors and analysts are feeling more skeptical about Tencent Music Entertainment’s future since the Chinese government regulatory crackdown began
“a tsunami of uncertainties.” Investors have reacted by pricing their uncertainty into Tencent Music’s stock price. Its shares currently trade at 27.1 times forward price-to-earnings compared to 44.2 on March 31, according to Refinitiv. At its all-time high price, Tencent’s market capitalization almost equal with that of Spotify. Now, at roughly $17 billion, Tencent Music is worth 41% of Spotify’s roughly $41 billion market capitalization.
The problems began in July when China’s State Administration for Market Regulation aimed to reduce Tencent Music’s market dominance bythe company to end its practice of entering exclusive licensing deals with record labels. In addition, regulators will require the company to secure approval for such preferential licensing deals"without justifiable reasons.” In regulatory filing with the U.S.
China has targeted a wide range of issues such as foreign-listed corporations, monopolistic behaviors, culture of working long hours and cybersecurity. For example, Tencent, whichTencent Music in 2018, will be required to use facial recognition technology to adhere to new rules that prohibit minors from playing online games from 10 p.m. to 8 a.m. And Ali Baba, China’s e-commerce giant, has also drawn the ire of regulators, leading to a $2.8 billion fine for abusing its dominant market position.
The current uncertainties are also affecting music companies that own stakes in Tencent and Tencent Music -- and vice versa. Spotify owns 9% of Tencent Music while Warner Music Group and Sony Music Entertainment each have smaller stakes. Universal Music Group, fewer than six weeks from listing on the Euronext Amsterdam exchange on September 21, owns a 1% stake in Tencent Music; Tencent and a consortium of investors, meanwhile, owns 20% of Universal Music Group.
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