Financials

Financials - what the numbers say

Tencent Music's reported financials no longer describe the business it listed in 2018. What was a 64%-social-entertainment / 36%-music revenue mix at FY2021 peak is now an 81%-music / 19%-social entertainment platform, and that re-mixing — not topline growth — is what re-rated the income statement [1]. Revenue grew 15.8% in FY2025 to RMB 32,902 million (US$4,705 million) but operating profit grew 53.4% to RMB 13,364 million as gross margin expanded to 44.2% and operating expenses fell to 14.8% of revenue [2]. The balance sheet has compounded into a RMB 38.0 billion (US$5.4 billion) cash-and-investments fortress against just RMB 3.5 billion of bond debt [3] [4], with management distributing it through a first-ever dividend declared in 2024 and stepped up 75% for FY2025 [5].

Source: FY2025 20-F Item 5 Operating and Financial Review [6] and Q4 / FY2025 results press release Financial Review [2] [3]. All figures in ¥ (RMB); TME files in RMB and trades as a USD ADR on NYSE under TME and HKD ordinary shares on HKEX under 1698.

The dual-engine pivot — where the 53% profit jump actually came from

You cannot read FY2025's income statement without understanding the segment re-mix that has been underway for four years. Online music services revenue grew from RMB 11,467 million in FY2021 to RMB 26,726 million in FY2025 (+133% over four years), while social entertainment and other revenue collapsed from RMB 19,777 million to RMB 6,176 million (−69%) [7] [1]. Total revenue is roughly flat over the period — but social-entertainment live-streaming carried lower gross margins and faced both regulatory pressure and competition from short video, so its retreat lifted blended profitability while subscription, advertising, offline concert and artist-related merchandise income filled the hole [2].

Source: FY2025 20-F Consolidated Income Statements for FY2023-FY2025 [7]; FY2022 prior-year column read from the FY2022 20-F; FY2016-FY2020 from the IPO prospectus selected financial data [8] and subsequently filed annual reports.

Source: derived from segment revenues per the FY2025, FY2022 and IPO-vintage 20-F filings; online-music share of FY2025 confirmed at 81.2% [1].

The mechanic. Music subscription revenue alone reached RMB 17.7 billion in FY2025, up 16% year on year, while music revenue outside subscriptions (advertising, offline performance, artist-related merchandise, sublicensing) grew 41% year on year in Q4 [9] [10]. Management is explicit that this diversification of music monetization is now the growth engine, with the SVIP user base ending 2025 above 20 million members and ARPPU "trending steadily upward" [11].

Standard year-wise financials — IFRS, as reported

The four most recent fiscal years are presented in RMB as filed; FY2021 is included from the FY2022 20-F so readers see the segment-mix inflection (the year social entertainment peaked).

Source: FY2025 20-F Consolidated Income Statements, Balance Sheets and Statements of Cash Flows [7] [12]; notes payable summary [4]; FY2021 prior-year column read from the FY2022 20-F. "Cash + Term + ST Inv." sums cash & equivalents, term deposits and short-term investments per management's combined-balance metric (RMB 38.04 billion at end-2025) [3].

Two features of this table dominate everything that follows:

• Margin expansion is real, not optical. Gross margin lifted 14 percentage points (FY2022 31.0% → FY2025 44.2%); operating margin more than doubled from 12.4% to 29.6% over the same window [6]. Cost of revenue actually fell from RMB 19,566 million in FY2022 to RMB 18,367 million in FY2025 despite revenue growth, because revenue-sharing payments to live-streaming performers contracted as that segment shrank [7].
• Topline is not the story. Reported revenue in FY2025 (RMB 32.9B) is only modestly higher than FY2021 (RMB 31.2B). What changed is what is inside that number and how much of it falls to operating profit.

Revenue, margin and profit trajectory — past the headline

Source: FY2025 20-F Consolidated Income Statements [7].

Source: derived from reported FY2022-FY2025 IFRS income statements [7]; the 33.6% FY2025 net margin is flattered by a RMB 2.37 billion non-cash gain on deemed disposal of an associate (UMG distribution-in-kind) [13].

A nuance every investor should hold in their head. FY2025 net profit of RMB 11.06 billion contains a non-cash, non-operating gain of RMB 2,373 million from the deemed disposal of TME's stake in an associate when it received a 2% direct interest in Universal Music Group as a distribution-in-kind in March 2025 [13]. Management's own non-IFRS net profit, which strips out this gain, share-based compensation and acquisition amortization, was RMB 9.92 billion (+22% YoY) — a more honest read of how fast cash earnings are compounding [14]. Use 22%, not 60%, as the underlying earnings-growth number.

Quarterly trajectory — what just happened

Source: Q4 FY2025 results press release Consolidated Income Statements [15]; Q1 FY2026 results press release Consolidated Income Statements [16].

Q1 FY2026 revenue grew 7.3% year on year to RMB 7,895 million — a deceleration from the +15.8% full-year FY2025 print — while gross margin nudged up again to 44.9% [17]. The Executive Chairman framed the quarter as "steady results" against "an increasingly competitive landscape," and renamed "online music services" to "music related services" to capture concert, merchandise and IP income [18]. That growth rate is the most important number to track from here: every dollar of valuation hangs on whether the dual-engine model is decelerating into a 7-8% topline or pausing for one quarter.

Earnings quality — does the income statement convert to cash?

Cash conversion is the single best test of earnings quality, and TME passes it cleanly. Operating cash flow has run near or above net income since FY2022, and free cash flow margins have held above 22% for four consecutive years thanks to a capex-light platform model [12] [19].

Source: FY2025 20-F Consolidated Statements of Cash Flows for FY2023-FY2025 [12] and FY2022 cash flow statement from the FY2022 20-F; FCF defined as operating cash flow less capital expenditures of RMB 1,164 / 1,032 / 1,188 million for FY2023-FY2025 [19].

Source: derived from FY2025 20-F cash flow statement and capex disclosure [12] [19].

Read the FCF-to-NI ratio carefully. It looks like cash conversion fell in FY2025 (FCF / NI = 82% vs 139% in FY2024), but that's a denominator effect: the RMB 2.37 billion non-cash UMG gain inflated net income without bringing cash with it. Comparing FCF to non-IFRS net profit (RMB 9.92B) gives 91% cash conversion, which is the apples-to-apples number. Capex stays remarkably light at 3.6% of revenue — there is no infrastructure hidden under the music app [19].

The one watchpoint inside the cash flow statement: operating cash flow actually went sideways in FY2025 (RMB 10,231M vs RMB 10,275M in FY2024) [12]. Income taxes paid jumped from RMB 1,355M to RMB 1,821M, and growth in receivables, prepayments and content contracts absorbed working capital as offline performance and artist merchandise scaled. The cash earnings are still there — they just stopped compounding for one year.

Balance sheet — a fortress that is hard to over-state

Source: FY2025 20-F Consolidated Balance Sheets [20] and Note 25 Notes payable [4]. Long-term term deposits broken out from Note 21 starting FY2024.

Source: Q4 and Full-Year 2025 results press release for the combined RMB 38.04 billion balance at end-FY2025 [3]; Q1 FY2026 results press release for the RMB 41.00 billion balance at end-Q1 2026 [21]; bond detail from Note 25 [4].

What you are looking at. At year-end 2025 the only material debt on the balance sheet was US$500 million of 2030 senior unsecured notes at a 2.000% coupon — the US$300 million 1.375% 2025 Notes were retired on schedule during FY2025 [4]. Against that the company holds RMB 38.0 billion (US$5.4 billion) of combined cash, term deposits and short-term investments — roughly 11x the bond balance — and reported a 2.22x current ratio with effectively no quick-ratio drag (inventory is RMB 41 million on RMB 32.9B revenue) [20]. Subsequent-events disclosure notes a wholly-owned subsidiary drew down RMB 3.0 billion in new bank facilities in early 2026 for general corporate purposes — the first incremental debt in years, plausibly Ximalaya-related working capital, but a marginal change against the cash hoard [22].

Goodwill caveat. The balance sheet still carries RMB 20.5 billion of goodwill (~20% of total assets), almost all from the 2016 merger that created TME and the more recent long-form audio acquisition [23]. The auditor flagged goodwill impairment as a critical audit matter for FY2025 — management is using a five-year DCF with revenue-growth assumptions of "not more than 7%" (down from "not more than 9%" in 2024) and a 15% pre-tax discount rate, so headroom is thinner than the reported balance suggests if growth disappoints [23] [24].

Capital allocation — TME just became a yield story

Source: FY2025 20-F Note 34 Dividends — RMB 1,508M paid for FY2023 and RMB 1,974M paid for FY2024, with the FY2025 declaration of US$0.24 per ADS / ~US$370M paid in April 2026 [25] [5]; buyback cash outflows from the consolidated statement of cash flows [12].

The capital-allocation story is the single biggest change in TME's investability since the 2018 IPO:

• First-ever dividend declared May 2024 (US$0.0685 per ordinary share, US$0.137 per ADS, for FY2023), then stepped up 75% for FY2025 to US$0.12 per ordinary share / US$0.24 per ADS — an aggregate US$370 million paid in April 2026 [26] [21]. At the US$8.73 ADS price, the FY2025 declared dividend works out to a roughly 2.7% trailing yield.
• 2025 Share Repurchase Program authorized US$1 billion in March 2025, twice the size of the 2023 programme that ran from March 2023 to March 2025; the 2023 programme was fully utilized [27]. Actual FY2025 buyback spend was modest at US$64 million — the company throttled back as it set up the new programme and the Ximalaya deal [28].
• Ximalaya merger agreement signed June 2025: US$1.26 billion cash plus up to 5.57% of TME's outstanding shares issued to Ximalaya shareholders (5.20% to investors + up to 0.37% to founder shareholders) [29] [30]. At current prices the total consideration is roughly US$2.0-2.5 billion — fundable from cash twice over, but issuing 5%+ of equity at a depressed multiple for a long-form audio platform whose financials are not in TME's public record is the most contestable capital decision in TME's recent history.

In the four years 2022-2025 the company spent roughly US$0.7 billion on buybacks (cash outflows on the statement of cash flows) and US$540 million on its first two cash dividends, while building combined liquidity from RMB 20.9B to RMB 38.0B [3]. This is a company that has been accumulating cash much faster than it has returned it — which is precisely why the dividend step-up and US$1B buyback authorization are read by investors as a signal of changed capital-return policy.

Returns on capital

Source: derived from FY2022-FY2025 reported IFRS financials [7] [20]. Return on equity is flattered in FY2025 by the UMG gain; on a non-IFRS net-profit basis ROE is around 12%.

ROE of 13.8% and ROCE of 11.1% are healthy for a Chinese internet platform but are themselves dragged down by the gigantic cash balance — the operating business earns much higher returns on the deployed capital. The right way to read this is: TME's operating model generates high incremental returns, but the consolidated returns are diluted by the fortress. The dividend and buyback step-up is the first signal management is acknowledging that the excess cash is a return-on-equity headwind, not a margin of safety to be permanently held.

Peer positioning

The peer set Tencent Music actually names in its own filings is short: NetEase Cloud Music (the directly-cited China competitor) and Spotify (a co-shareholder and the global subscription-music model peer); other "peers" in the screening data run businesses that compete for adjacent attention pools (Kuaishou, Bilibili, Hello Group) rather than for music dollars [31] [32].

Source: TME FY2025 Consolidated Income Statements [7]; NetEase Cloud Music FY2025 Financial and Business Highlights [33]; Spotify FY2025 Consolidated Statement of Operations and Free Cash Flow disclosure [34] [35]; Kuaishou FY2024 management discussion (FY2025 filing not yet in corpus) [36]; Bilibili FY2025 operating and financial review [37]; Hello Group FY2025 business overview [38]. Margins not reported in directly comparable form are left blank rather than estimated.

What this peer table actually tells you. Against the two genuine music peers in the corpus:

• Spotify's revenue is 4-5x bigger in absolute terms (€17.2B vs RMB 32.9B / ~US$4.7B) and is the only peer with a similar profitability inflection — operating margin from a 3.4% loss in FY2023 to 12.8% in FY2025 [34]. But TME runs 12 percentage points higher gross margin and ~17pp higher operating margin than Spotify. That gap is the single most under-discussed financial fact about TME relative to the public music tape: the only listed music peer at scale earns much less per revenue dollar.
• NetEase Cloud Music's revenue contracted 2.4% in FY2025 to RMB 7.76 billion, with operating profit of RMB 1.62 billion and a 35.7% gross margin [33]. TME's online music revenue alone (RMB 26.7B) is roughly 3.4x NetEase Cloud Music's total revenue and growing 23% versus a peer in revenue decline. The China subscription-music race is not close.

The non-music peers (Kuaishou, Bilibili, Hello Group) compete with TME for attention, not directly for music revenue, and their structurally different business models (short video, video community, social live-video) mean cross-margin comparisons are not meaningful — included for completeness but not for relative valuation.

Valuation — the gap that defines the investment debate

Source: ADS price US$8.73 from internal price feed (last close 2026-06-18); FY2025 basic IFRS EPS of RMB 3.60 per ordinary share = RMB 7.21 per ADS (2 shares = 1 ADS) = US$1.03/ADS at the FY2025-end translation rate of RMB 6.9931 / US$1.00 [7] [39]; FY2026 consensus EPS RMB 6.49/ADS = ~US$0.93/ADS from staged analyst-estimates feed; dividend yield based on US$0.24 declared per ADS for FY2025 [5].

Source: staged analyst-estimates feed (price targets from 19-20 sell-side analysts as of mid-2026); the median 12-month target implies ~61% upside from the US$8.73 ADS price and even the lowest published target implies ~15% upside.

The valuation gap, named honestly. Three things are simultaneously true:

• Headline cheapness. A trailing P/E of ~8.5x and forward P/E of ~9.4x sits well below the level at which Spotify, comparable consumer-internet operators, or even larger Chinese internet majors trade. TME's market cap of roughly US$13.7 billion (1.57B ADS × US$8.73, on 3.15B ordinary shares outstanding at end-March 2026) sits against US$5.4 billion of net cash. Stripping cash, the operating business trades at roughly 5x trailing earnings.
• The discount has a name. The whole China-ADR cohort is depressed and the FY2025 20-F still spends roughly 50 pages on HFCAA delisting risk, VIE-structure risk, PRC enforcement risk, and dual-class voting structure risk that constrain ADS holders [40]. At the same time, the Ximalaya deal will issue ~5.6% of equity at a depressed multiple for a long-form audio business with no disclosed standalone profitability in TME's public record — meaningful equity dilution for an inorganic move into an adjacency the market has not priced in yet.
• The growth deceleration is the swing. FY2025 revenue grew 15.8%, Q1 FY2026 only 7.3% [17]. If 7.3% is the new run-rate, the consensus FY2026 revenue forecast of RMB 35.6B (+8.2%) is reasonable and the stock is genuinely cheap. If it is a one-quarter pothole — which is what management implied by calling the result "steady" — the gap to consensus targets closes faster.

The financials confirm the business has rebuilt earnings quality, balance-sheet flexibility and capital-return policy in three years. They do not tell you whether the discount the market is applying for the China-ADR / Ximalaya / growth-deceleration trio is appropriate or excessive; that is the investment debate you have to settle independently.

What the financials confirm and contradict

Confirmed. Margin structure has stepped up to a genuinely premium tier for the consumer-internet category; cash conversion is consistent with a high-quality, capex-light platform; the balance sheet provides multi-year strategic flexibility; capital return policy has shifted decisively from accumulation to distribution.

Contradicted. The "secular growth" framing the multiple would normally justify is undermined by the 7.3% Q1 FY2026 print and by management's own narrative about an "increasingly competitive landscape." The "Chinese music monopoly" framing is supported by the 3.4x revenue gap to NetEase Cloud Music; but the dilutive Ximalaya transaction signals management does not view the existing music perimeter as a sufficient growth runway alone.

The first financial metric to watch is the year-on-year revenue growth rate of "music related services" in Q2 and Q3 FY2026 — and whether it stays in the mid-teens (where margin expansion still earns its premium) or follows Q1's deceleration toward high single digits (where the cheapness has to do all the work).