Profit +66%, Stock -66% from ATH. Spotify Trades at Four Times the Multiple.

Tencent Music Entertainment (1698.HK) earned RMB 10.3 billion in net profit for FY2025, up +66% from the prior year. Revenue grew +15.8%. Gross margin expanded from 35.3% to 44.2% in two years. Paying subscribers reached 127.4 million at year-end. The stock closed at HKD 35 on April 30, 2026, down 66% from a 12-month high of HKD 104. Spotify, which runs the same business model in the United States and Europe, trades at roughly forty times its earnings before interest and tax. Tencent Music trades at roughly seven.

What Tencent Music Does

Tencent Music runs the four largest music subscription apps in China: QQ Music, Kugou, Kuwo, and a separate premium tier called Super VIP that crossed 20 million paying subscribers in late 2025. Across those apps the company counted 127.4 million paying subscribers at year-end (+5.3% year-on-year). The total monthly active user base sits above 850 million. Conversion of free users to paid runs at roughly 15%. Spotify converts roughly 40% in its mature markets.

The company also runs a separate licensing business. Short-video platforms in China license music from Tencent Music's catalog. Every Douyin clip with a licensed track routes a fee back to the company. That non-subscription music services segment grew +39.2% in 2025 to RMB 9.07 billion, or 27.6% of total revenue. The legacy social entertainment business (online karaoke, live-streaming) is being deprioritised. Its revenue fell −5% in Q4 2025. The exit from that lower-margin segment is the structural reason gross margin expanded by nine points in two years.

Why the Price Fell

Three factors kept the price down through 2025. The China tech sector has been broadly out of favour with international investors since 2022, and Hong Kong-listed Chinese tech is the most discounted corner of that universe. UBS downgraded the stock in early 2026. And the market priced in a competitive threat from Soda Music, ByteDance's dedicated music streaming app, which reached 120 million monthly active users in September 2025 at +90% year-on-year growth.

Soda Music is a real competitor with real scale. What is not yet known is how many of those monthly users actually pay. ByteDance has not disclosed paying subscriber numbers for the app. The market priced the threat as if conversion were already a given. The data is still missing.

The competitor licenses the music. The market prices the licensee like the casualty.

Three Things the Current Price Has Not Processed

Three facts visible in the FY2025 filing that the April price has not absorbed.

1. 01 Gross margin expanded nine points in two years on a structural mix shift. From 35.3% in 2023 to 42.3% in 2024 to 44.2% in 2025. The driver is a deliberate exit from social entertainment and a shift toward music subscription. Q4 2025 earnings language confirms it: "strong growth in music subscription and advertising revenues, alongside lower revenue sharing ratio in social entertainment services." The trajectory is structural, not cyclical.
2. 02 Subscribers and per-user revenue are both still rising. Q4 2025 paying subscribers reached 127.4 million (+5.3% YoY). Monthly per-user revenue reached RMB 11.9 (+7.2%). Super VIP, the premium tier priced at roughly twice the standard rate, crossed 20 million subscribers. The most cited bear scenario, that a competitor would force per-user revenue down, has not materialised. Both metrics grew through every quarter of 2025.
3. 03 The competitor is also a paying customer. ByteDance is simultaneously a subscription competitor (through Soda Music) and a licensing customer (through Douyin). The non-subscription music services line, which captures the licensing fees from Douyin and other short-video platforms, grew +39.2% in 2025 to RMB 9.07 billion. The licensing half is growing faster than any reasonable substitution scenario.

What the Business Is Worth at This Price

At HKD 35, the company carries a market value of HKD 108.4 billion. Net cash of HKD 7.1 billion gives an enterprise value of HKD 101.3 billion. Forward earnings before interest and tax for FY2025 work out to approximately HKD 14.8 billion at a 25% effective tax rate. That puts forward EV/EBIT at roughly 6.8×.

Spotify trades at approximately 40×. NetEase Cloud Music, the closest direct competitor in China, trades at roughly 20×. The peer median for global music streaming sits near 25×. Tencent Music trades at less than one-third of that median.

Reaching the full peer median requires the market to value Tencent Music as a normal global streaming franchise. That is the structural argument. Reaching half the peer median requires only that the stock leave the deepest part of the China tech discount. The 12-broker consensus target of HKD 71.75 sits between those two cases.

Capital is being returned at the current price. The board approved a US$1 billion share repurchase programme over twenty-four months from March 2025, following a US$500 million programme completed in 2025. Q1 2025 deployed US$64.5 million at an average of US$10.80 per ADS, and after the March 2026 drop the programme is buying at materially lower prices. The annual dividend rose 35% to roughly US$368 million for FY2025. Combined capital return runs at roughly US$450 to 570 million a year against a US$9 to 11 billion market value.

The Risks We Are Not Minimising

Three risks are documented and real.

The Decision

Written at HKD 35 on April 30, 2026.

The thesis rests on five observable facts. Net profit grew +66% in 2025. Gross margin expanded by nine points in two years on a structural mix shift. The board is buying back stock under a US$1 billion authorisation that began in March 2025, alongside a 35%-larger dividend. The forward valuation multiple is roughly one-fifth of Spotify's. ByteDance owns both Soda Music (the competitor) and Douyin (a paying licensing customer); the licensing line grew +39% in 2025, faster than any plausible rate at which Soda Music could shrink the paying subscriber base.

The downside is bounded by the valuation already on the screen. Even a 35% impairment of net profit under a competitive pressure scenario implies a price floor in the HKD 22 to 30 range. The upside path is visible in the peer table: half the streaming peer median implies HKD 62. The 12-broker consensus target of HKD 71.75 sits above that. The next data release is May 12, 2026. From Q1 2026 onward, the quarterly subscriber and per-user disclosures end.

Track live price and position performance → Scorecard

Three signals would change the conclusion: music subscription revenue declining year-on-year for two consecutive reads; ByteDance announcing a music subscription tier at CNY 6 to 8; or content licensing costs to the major labels rising more than 20% and reversing the gross margin expansion.

Spotify trades at forty times its earnings. The same business in China trades at eight. Last year that business grew profit by two-thirds.