Tencent Music Earnings Beat Expectations. Why the Stock Is Tumbling.

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Updated Aug. 17, 2021 2:55 p.m. ET / Original Aug. 17, 2021 12:26 p.m. ET

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Tencent Music is the music-streaming limb of Chinese tech behemoth Tencent.

Michael Nagle/Bloomberg

The music-streaming limb of Chinese exertion elephantine Tencent recorded mixed second-quarter results Tuesday including profits that bushed consensus.

Tencent Music Entertainment Group, which faces regulatory headwinds amid a wider crackdown crossed China’s tech sector, tumbled much than 13% successful New York . It outpaced declines seen by the U.S.-listed shares successful China’s Big Tech groups Alibaba, JD.com, and Tencent, which fell astir 3% to 5%.

The backmost story. Tencent’s music-streaming limb went nationalist successful 2018, and is tied to Spotify done a communal ownership stake—Spotify owns astir 9% of Tencent Music. Unlike its Swedish peer, which relies connected a basal of subscribers that wage for its premium service, astir Tencent Music users perceive for free. Tencent besides offers a wider array of products, including 4 hugely fashionable Chinese mobile euphony apps, including a high-margin karaoke app.

While Tencent Music has been posting beardown quarterly results, the banal has travel nether unit with the wider Chinese tech assemblage amid caller regulatory crackdowns. Over the past month, intense authorities scrutiny connected sectors including tech, education, healthcare, and spot has brought significant declines to Chinese stocks, including companies with U.S.-listed shares—like Tencent Music. In particular, the large headwind facing the euphony radical includes a ruling from July barring its genitor institution from holding exclusive musiclicensing deals with planetary labels.

Tencent Music banal has fallen much than 60% truthful acold successful 2021.

Also read: China Tightens Grip connected Its Tech Sector With New Rules. These Stocks Are Down.

What’s new. The music-streaming radical posted mixed but beardown results for the 2nd 4th of 2021 connected Tuesday, reporting full revenues of 8.01 cardinal Chinese yuan ($1.23 billion), somewhat beneath Wall Street estimates of RMB 8.1 billion. Earnings per stock of RMB 240,000 fell abbreviated of the RMB 560,000 expected, but, overall, nett income of RMB 871 cardinal bushed estimates of RMB 864 million.

Online music-service income grew astir 33% year-over-year, arsenic music-subscription gross soared much than 36% to RMB 1.79 billion. Tencent Music reached 66.2 cardinal online music-paying users, marking astir 41% yearly growth.

“We would similar to reiterate that TME sincerely accepts the determination issued successful July by the regulator pertaining to exclusive music-licensing arrangements,” said Cussion Pang, the enforcement seat of Tencent Music. 

“While we expect immoderate interaction to our concern operations arsenic a effect of this decision, we stay steadfast successful our ongoing goals of fostering innovation, fulfilling our societal responsibilities, providing users with amended services and promoting the long-term, steadfast improvement of the integer euphony industry,” Pang added.

Plus: Tencent Music Faces Chinese Regulatory Scrutiny. What Investors Need to Know.

Looking ahead. Tencent Music’s results were strong, but the timing was retired of tune. Another selloff deed the Chinese tech assemblage Tuesday, arsenic the country’s marketplace regulator issued draught rules aimed astatine tightening controls astir contention and the handling of idiosyncratic data. Shares successful Tencent Music, which is inactive reeling from a ruling connected copyright that volition interaction operations, took a beating connected the added pressure.

Analysts astatine Citi expect the group’s shares to stay “unexcitedly scope bound” owed to a fig of antagonistic outlook factors, including regulatory requirements. But the concern slope gives the banal a bargain rating, with a people terms connected the shares of $12. Trading astir $8 today, it could beryllium a buying opportunity—yet investors would beryllium close to workout caution, arsenic the regulatory representation remains uncertain successful China.

Write to Jack Denton astatine jack.denton@dowjones.com.

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