Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

<p><strong><em>*Results Deteriorating As Distractions Mount: </em></strong>Tencent Holdings’ (700.HK) [Tencent] 2Q21 GAAP net income declined CNY 5.2 bn (10.8%) on a linked quarter basis – and were of poor quality. Results were challenged by the following: cost of revenue increase; operating expense increase; losses in associates; higher impairment charges; and weaker online games. Were it not for the artificially lower tax rate, results would have been even more challenged; and     </p><p><strong><em>*Elephants In The Room: </em></strong>Mainland China's crackdown on capital markets has rapidly expanded under the broad narrative of "financial stability". We have already witnessed fines at Tencent, new user WeChat suspensions,  and Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, there no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. Its pretty surprising that Tencent refuses to discuss these matters.   </p>

*Results Deteriorating As Distractions Mount: Tencent Holdings’ (700.HK) [Tencent] 2Q21 GAAP net income declined CNY 5.2 bn (10.8%) on a linked quarter basis – and were of poor quality. Results were challenged by the following: cost of revenue increase; operating expense increase; losses in associates; higher impairment charges; and weaker online games. Were it not for the artificially lower tax rate, results would have been even more challenged; and     *Elephants In The Room: Mainland China's crackdown on capital markets has rapidly expanded under the broad narrative of "financial stability". We have already witnessed fines at Tencent, new user WeChat suspensions,  and Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, there no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. Its pretty surprising that Tencent refuses to discuss these matters.   

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

<ul>
<li>The real main business, social entertainment, grew by only 7.4% YoY.</li>
<li>The paying user base continued shrinking.</li>
<li>Compared to Kuaishou, we believe the stock has a downside of 22%.</li>
<li>About the minor business, music, please see <a href="https://www.smartkarma.com/insights/tencent-music-tme-penalty-not-fatal-but-music-market-bad-enough" target="_blank" data-smartkarma-citation="insights:55447" rel="noopener">Tencent Music (TME): Penalty Not Fatal, But Music Market Bad Enough</a>.</li>
</ul>


The real main business, social entertainment, grew by only 7.4% YoY.
The paying user base continued shrinking.
Compared to Kuaishou, we believe the stock has a downside of 22%.
About the minor business, music, please see Tencent Music (TME): Penalty Not Fatal, But Music Market Bad Enough.


Tencent Music (TME): 2Q21, Slow Main Business

Equity Analyst, LightStream Research

Shifara Samsudeen, ACMA, CGMA

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<p><a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)</a> reported its 2Q2021 results on Monday (16<sup>th</sup> August) which saw revenues growing 15.5% YoY driven by increases in revenue from both Online Music Services and Social Entertainment Services. The adjusted operating profit for the second quarter dropped 31.3% YoY to RMB760m due to a 39.2% YoY increase in general and administrative expenses during the period.</p><p>In our previous insight <a href="https://www.smartkarma.com/insights/tencent-all-bets-are-off" target="_blank" data-smartkarma-citation="insights:55269" rel="noopener">Tencent: All Bets Are Off</a> , we discussed about the ongoing regulatory probe on TME and the regulatory order to give-up its exclusive music licensing agreements. Refer the extract below from our previous insight:</p><div class="content-highlight"><p>TME has been ordered to relinquish its exclusive licensing agreements with world’s leading music labels including Warner Music Group (WMG), Universal Music Group (UMG) and Sony Music. TME is allowed to keep its exclusive deals with independent artists with a period of about 3-years. According to news media outlets, TME is given a period of 30 days to end these deals.</p></div><p>In its 2Q2021 earnings announcement, TME has said that the regulatory order above will have some impact on its business operations, but we have observed that the company’s user matrices and ARPPU have already come under pressure.</p>

Tencent Music (TME US) reported its 2Q2021 results on Monday (16th August) which saw revenues growing 15.5% YoY driven by increases in revenue from both Online Music Services and Social Entertainment Services. The adjusted operating profit for the second quarter dropped 31.3% YoY to RMB760m due to a 39.2% YoY increase in general and administrative expenses during the period.In our previous insight Tencent: All Bets Are Off , we discussed about the ongoing regulatory probe on TME and the regulatory order to give-up its exclusive music licensing agreements. Refer the extract below from our previous insight:TME has been ordered to relinquish its exclusive licensing agreements with world’s leading music labels including Warner Music Group (WMG), Universal Music Group (UMG) and Sony Music. TME is allowed to keep its exclusive deals with independent artists with a period of about 3-years. According to news media outlets, TME is given a period of 30 days to end these deals.In its 2Q2021 earnings announcement, TME has said that the regulatory order above will have some impact on its business operations, but we have observed that the company’s user matrices and ARPPU have already come under pressure.

TME: Says Order on Music Rights Have Some Impact but User No’s and ARPPU Already Under Pressure

Equity Capital Markets

<p>The users for online music entertainment in China continue to grow driven by increasing demand for online entertainment, growing awareness of copyrights, popularisation of mobile internet and growing internet penetration. China’s online music entertainment market is largely dominated by <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)</a> with a market share of 72.8% followed by <a href="https://www.smartkarma.com/entities/cloud-village-inc" target="_blank" data-smartkarma-citation="entities:33412:1" rel="noopener">Cloud Village (CLV HK)</a>  with a share of 20.5%.</p><p>Having access to exclusive music licensing agreements helped TME dominate the Chinese online music entertainment market, however, the Chinese regulators have ordered TME to give-up on exclusive rights to labels which should offer a more level playing field for other players in the market including Cloud Village.</p><p>In this insight, we compare and contrast Cloud Village against its closest peer TME as the former prepares for its most anticipated HKEx debut.</p>

The users for online music entertainment in China continue to grow driven by increasing demand for online entertainment, growing awareness of copyrights, popularisation of mobile internet and growing internet penetration. China’s online music entertainment market is largely dominated by Tencent Music (TME US) with a market share of 72.8% followed by Cloud Village (CLV HK)  with a share of 20.5%.Having access to exclusive music licensing agreements helped TME dominate the Chinese online music entertainment market, however, the Chinese regulators have ordered TME to give-up on exclusive rights to labels which should offer a more level playing field for other players in the market including Cloud Village.In this insight, we compare and contrast Cloud Village against its closest peer TME as the former prepares for its most anticipated HKEx debut.

CV Vs TME: Improving Financials and Outspending TME on Content Cost - Reason for Absence of Profits

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<div>
<p><a href="https://www.smartkarma.com/entities/cloud-village-inc" target="_blank" data-smartkarma-citation="entities:33412:1" rel="noopener">Cloud Village (CLV HK)</a> is the second-largest online music platform after <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)</a> as measured by users and revenue in China. The cornerstone product is <em>NetEase Cloud Music</em> that delivers diverse music and music-inspired content and provides interactive community features. Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 billion, according to press reports. </p>
<p>In <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-ipo-initiation-musical-shares" target="_blank" data-smartkarma-citation="insights:52266" rel="noopener">Cloud Village (NetEase Music) IPO Initiation: Musical Shares</a>, we stated that at first sight, Cloud Village performance seems poor as its high growth has come at the cost of negative gross margin and cash burn. However, Cloud Village is on the cusp of turning around its performance due to a fundamental change in its cost structure. We concluded that Cloud Village has the potential to shed its underdog status vs the much larger Tencent Music.  </p>
<p>In <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-ipo-play-list" target="_blank" data-smartkarma-citation="insights:55506" rel="noopener">Cloud Village (NetEase Music) IPO: Play List</a>, we examined the 1Q21 results and the recent developments disclosed in the PHIP. We noted that while Cloud Village expects to remain unprofitable over the next three years, the 1Q21 results and the recent SAMR ruling on Tencent Music support our view that Cloud Village is on track to combine its high growth with an improving cost structure. </p>
</div><div><div><div class="content-highlight"><p>In this note, we present our forecasts and take the first look at Cloud Village's potential valuation range. </p></div></div></div>


Cloud Village (CLV HK) is the second-largest online music platform after Tencent Music (TME US) as measured by users and revenue in China. The cornerstone product is NetEase Cloud Music that delivers diverse music and music-inspired content and provides interactive community features. Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 billion, according to press reports. 
In Cloud Village (NetEase Music) IPO Initiation: Musical Shares, we stated that at first sight, Cloud Village performance seems poor as its high growth has come at the cost of negative gross margin and cash burn. However, Cloud Village is on the cusp of turning around its performance due to a fundamental change in its cost structure. We concluded that Cloud Village has the potential to shed its underdog status vs the much larger Tencent Music.  
In Cloud Village (NetEase Music) IPO: Play List, we examined the 1Q21 results and the recent developments disclosed in the PHIP. We noted that while Cloud Village expects to remain unprofitable over the next three years, the 1Q21 results and the recent SAMR ruling on Tencent Music support our view that Cloud Village is on track to combine its high growth with an improving cost structure. 
In this note, we present our forecasts and take the first look at Cloud Village's potential valuation range. 

Cloud Village (NetEase Music) IPO: Valuation First-Look

China

Tencent Music Entertainment operates an online music entertainment platform in China. The Company offers platform that comprises of online music, recording, music-centric live streaming enabling users to discover, listen, sing, watch, perform, and socialize music.

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Tencent Music (TME US)

Tencent Holdings – Pig Piling

TENCENT: Tencent's QOQ 2Q21 income declined 10.8% due to cost of revenue and opex increases; associate losses; higher impairments; and weak online...

Thomas J. Monaco

Tencent Music (TME): 2Q21, Slow Main Business

The real main business, social entertainment, grew by only 7.4% YoY. The paying user base continued shrinking. Compared to Kuaishou, we believe the...

Ming Lu

TME: Says Order on Music Rights Have Some Impact but User No’s and ARPPU Already Under Pressure

TME has said that the regulatory order to give-up music rights will have some impact on its business operations, but we have observed that the...

Shifara Samsudeen, ACMA, CGMA

CV Vs TME: Improving Financials and Outspending TME on Content Cost - Reason for Absence of Profits

Having access to exclusive music licensing helped TME dominate market, however, TME having to give-up on exclusive rights should offer a more level...

Shifara Samsudeen, ACMA, CGMA

Cloud Village (NetEase Music) IPO: Valuation First-Look

Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 bn. In this note, we present our forecasts...

Arun George

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