Tencent Music Entertainment (TME) is China’s leading online music and audio entertainment platform. 2Q26 revenue increased 5.8% YoY to RMB8.93bn, with Ximalaya’s consolidation since 18 May contributing RMB407mn. Excluding the acquisition growth, legacy revenue grew by merely 1% YoY, indicating that organic growth momentum remained soft.

Music-related services continued to gain share: Revenue increased 11% YoY to RMB7.61bn, with its share of total revenue rising 3.9ppts YoY to 85.1%.

1). Expecting Higher SVIP penetration. Music membership revenue rose 8.1% YoY to RMB4.79bn and accounted for 53.6% of total revenue, supported by Ximalaya consolidation and continued SVIP growth. Management believed that subscription growth slowed excluding Ximalaya, with competitive pressure concentrated among mass-market and light users. ByteDance’s Qishui Music continues to attract younger users through Douyin traffic and algorithm-driven discovery, weighing on TME’s user acquisition and retention. In contrast, high-value SVIP users remain relatively resilient in retention and spending, providing a stable subscription base. Looking ahead, membership growth is expected to come from the full contribution of Ximalaya and higher SVIP penetration and ARPPU, driven by richer IP and long-form audio benefits.

2). Increasing contribution from offline events. Marketing and consumer services revenue increased 16.2% YoY to RMB2.81bn, representing 31.5% of total revenue and becoming the company’s strongest organic growth driver. Growth was led by live performances, fan events, artist merchandise and other IP-related consumption. As traditional subscription growth slows, this segment could become an increasingly important growth engine by extending music IP beyond digital subscriptions into offline entertainment and physical consumption, thereby increasing monetization per IP and per core user.

Social entertainment remained under pressure. The segment revenue stood at RMB1.33bn in 2Q26, reducing its share of total revenue to 14.9%. It is facing a structural decline, while the revenue continues to shift toward music subscriptions and IP-related consumption.

Cash Strength Provides Downside Support. GPM edged down to 44.2% from 44.4% in 2Q25, mainly due to the rising mix of relatively higher-cost live entertainment and artist management businesses, as well as higher long-form audio content costs. This was partly offset by lower social entertainment revenue-sharing costs and the positive margin contribution from Ximalaya. Operating expenses rose 12% YoY to RMB1.3bn, with the OPEX ratio increasing to 14.5% from 13.7%, mainly reflecting Ximalaya consolidation and acquisition-related intangible amortization. Sales and marketing expenses increased only 9.3% YoY, well below the 36% growth in 1Q26, as the company tightened channel spending, shifted toward ROI-driven acquisition and increased use of traffic within the Tencent ecosystem. Hence, attributable profit rose 2.6% YoY to RMB2.47bn. Moreover, operating cash flow improved significantly, rising 74.8% YoY to RMB2.86bn, equivalent to 1.12x net profit. At end-June, TME‘s net cash position stood at about RMB31.1bn, representing about 1/3 of its market cap.

Our View: We believe TME’s near-term growth will come from the full consolidation of Ximalaya, while organic growth in the legacy music business remains constrained by competition. The acquisition of Ximalaya, China’s leading long-form audio and podcast platform, further strengthens TME’s “music + audio” ecosystem and should broaden subscription and monetization opportunities through complementary content, deeper membership integration and higher user engagement.

In the meantime, competition from Qishui Music continues to hinder MAU and standard membership growth. In contrast, high-value SVIP users remain resilient in both engagement and spending. TME is increasingly using offline IP events, artist management and merchandising to increase monetization of these core users, while gradually shifting its competitive advantage from pure music rights toward artist relationships and high-value fan operations. However, compared with the high barriers created by exclusive music rights in the past, this model is more execution-intensive and its competitive durability and earnings quality still need to be proven.

Meanwhile, TME is strengthening integration across the Tencent ecosystem. The company has begun operating music services for WeChat Channels and has established a direct traffic funnel into Tencent Music apps, while strengthening content cooperation with Tencent Video and gaming businesses. This should help reduce external acquisition costs and improve IP creation and distribution efficiency. Additionally, the company has repurchased about US$400mn of shares in 2Q26, completing roughly 40% of its US$1bn shareholder return program. The counter is trading at 11x FY26E P/E and with a 2.8% dividend yield. (Research Department)