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Tencent Music Entertains New Notes


Senior Market Analyst at Interactive Brokers

Chinese online music platform Tencent Music Entertainment Group (NYSE: TME) said Monday it will sell new senior unsecured notes, while lingering uncertainties continue to plague China’s corporate debt markets, and geopolitical tensions remain on the rise.

Shenzhen-based Tencent Music said it will conduct its public debt offering in one or more tranches, subject to market conditions and other factors, with net proceeds from the sale intended to be used for general corporate purposes.  

A series of fixed-income investor calls began Monday, according to Bloomberg.

The proposed deal falls hot on the heels of the release of the company’s second quarter of 2020 unaudited financial results, which appear to have met most analysts’ estimates.

Among the metrics, paying users for its online music platform grew by nearly 52% year-over-year to 47.1 million, with average revenue per paying user (ARPPU) having risen by just north of 8% over the same period.

Tencent Music also said it generated total revenue of almost RMB 7bn (US$981m), an increase of 17.5% year-over-year, with online music subscription revenues up by 64.7% over the same prior-year quarter to RMB 1.31bn (US$186m).

Tencent Music CEO Cussion Pang said that as “the industry leader of China’s online music market,” the company’s Q2 2020 online music revenues jumped 42.2% year-over-year—accelerating from 27.4% in the first quarter— which was mainly attributable to a nearly 65% year-over-year growth in music subscription revenues, as well as “strong performance from our digital album sales.”

Pang continued that with “our content leadership, a well-executed paywall strategy, and enhanced recommendation capabilities, we have significantly improved our online music paying ratio to 7.2%, up from 4.8% in the same quarter of last year.”

TME online music metrics

He further highlighted that the company’s “social entertainment services performed steadily in the second quarter, registering sequential growth as the COVID-19 situation continued to improve in China.”

Pang added that Tencent Music “will continue to invest in and ramp up our long-form audio services, and expect to achieve significant synergies across all aspects of our businesses and further boost our long-term sustainable growth,” which he said is supported by “our strong financial position and cash flow generation.”

As of June 30, 2020, the combined balance of the company’s cash, cash equivalents and term deposits amounted to roughly RMB 22.3bn billion (US$3.16bn), compared to RMB 21.9bn as of March 31, 2020.

The company said the increase was primarily due to its RMB 1.44bn (US$204m) cash flow generated from operations. However, this was partially offset by investments, as well as exchange rate fluctuations in RMB to USD, which on June 30, 2020, was 7.0651 to 1.

Up notes

S&P Global Ratings, which has assigned an investment-grade ‘A’ rating to Tencent Music’s proposed note offering, said it expects the company to “invest prudently in proprietary music content or self-produced variety shows, and maintain a measured approach toward
acquisitions over the next two years.”

S&P observed that the firm’s “strong cash flow and big cash balance should be sufficient to absorb its investment needs.”

Tencent ADRs

The company has a high cash flow conversion, with 100% of EBITDA flowing through to free operating cash flow over the past two years – driven by working capital inflows from user prepayments and low capital expenditure.

S&P analyst Xin Hui Zu also noted that Tencent Music’s total mobile monthly active users (MAUs) of more than 880 million is one of the highest within Tencent Holdings – its parent company, which is also the owner of social messaging app WeChat.

Zu added that the company’s “contribution to user experience and time spent within Tencent’s ecosystem outweighs its direct financial contribution to the group.”

According to S&P’s estimates, Tencent Music accounted for less than 5% of its parent’s EBITDA and 7% of its revenue in 2019.

Other credit rating agencies have assigned similar investment-grade credit ratings to Tencent Music’s announced note sale, with Moody’s Investors Service and Fitch Ratings having given the deal an ‘A2’ and ‘A’ rating, respectively.

Tencent Music said the notes, registered under the U.S. Securities Act of 1933, are expected to be listed on the Hong Kong Stock Exchange.

The offering is being jointly lead-managed by BofA Securities, J.P. Morgan Securities, Goldman Sachs (Asia), Morgan Stanley, Bank of China (Hong Kong), Credit Suisse, Deutsche Bank, HSBC and Mizuho Securities.

Down notes

Meanwhile, Tencent Music’s proposed sale falls against a backdrop of growing unease about increasing levels of Chinese corporate bond issuance, as well as how a long list of geopolitical issues may impact the country’s ability to honor its future debt obligations.

By some measures, corporate credit in China spiked around 10% year-on-year at the end of the first quarter of 2020  – the highest level in three years – as the novel coronavirus spurred Chinese regulators to support liquidity and accelerate economic growth.

Onshore corporate bond sales soared close to 35% in Q1 2020 to more than CNY 3tn, with March and April each hitting monthly record highs.

While monetary easing appears to have helped boost Chinese corporate debt levels, the country continues to face geopolitical threats to its sovereign credit profile.

Fitch Ratings recently noted that tensions between China and a number of major economies, including the U.S., have “escalated sharply across a spectrum of issues, including the pandemic, policies towards Hong Kong, territorial claims and a protracted trade dispute.”

Fitch said it believes these tensions will persist, “even while China’s vast global supply-chain linkages and the extensiveness of global business interests operating in the country will impose a moderating force on them.

In the short term, heightened tensions have not had an impact on China’s credit fundamentals, and the degree to which they translate into policies that are supportive, neutral, or detrimental to the sovereign rating will only become evident over time.”

Other analysts have also placed China on their emerging markets (EM) risk radar.

Nuveen analysts Bill Martin and John Miller, for example, noted that while EM debt performance is likely to be supported in the near term by factors such as the global economic recovery, excess liquidity provided by major central banks, and investors’ willingness to deploy still-high levels of cash, selectivity “among sovereign, corporate and local-currency markets, as well as individual issuers, will be critical.”

Martin and Miller added that rising U.S./China tensions are “on our radar,” as “the Trump administration continues to blame China for the coronavirus outbreak, while China’s diplomatic corps is becoming increasingly hawkish. Adding to the volatile mix are Beijing’s crackdown on Hong Kong and uncertainty about the impact of U.S. elections in November.”

High notes

While uncertainties over China’s ability to fulfill its debt obligations linger, perceptions about the country’s creditworthiness appear to have improved over the past three months, with spreads on its five-year credit default swaps having tightened by around 19.5 basis points to a little more than 39 bps.

Over the same period, U.S. 5-year CDS spreads have tightened about 1.5 bps to 23.3 bps.

It appears certain Chinese companies, such as Tencent, have enjoyed an upswing in their share prices, as well as the value of some their existing bonds.

Tencent had experienced a recent lift after reports circulated that the U.S.’s purported proposed ban on its messaging app WeChat wouldn’t inflict as much harm on U.S. businesses as many had feared.

Tencent music entertainments ADRs maintain upward momentum

American Depositary Receipts (ADRs) of Tencent Holdings (OTC: TCEHY) were last up about 1% to US$70.24, a climb of 46.43% year-to-date. The OAS on its 2.39% bonds due 2030 were last 2 bps tighter at 136 bps – the yield on the bond has fallen by around 51.7 bps to 1.96% since hitting a 52-week low of 2.477% on June 5.

Also, Tencent Music Entertainment’s ADRs have climbed about 28.75% year-to-date to US$15.19, and the iShares MSCI China ETF (Nasdaq: MCHI), which has among its top holdings Alibaba Group (NYSE: BABA) and Tencent, has gained 16.28% year-to-date to US$75.35.

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Disclosure: Interactive Brokers

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