TME 1Q26 results in line; transition toward a diversified music ecosystem; Goldman Sachs maintains Buy

Overview

This report is Goldman Sachs' company research and earnings review of Tencent Music Entertainment Group following 1Q26 results. The report believes the company's results were in line with expectations, but the market is concerned about slower subscription growth, Soda Music price competition, Kugou user losses, and AI disruption. Even so, Goldman Sachs emphasizes that TME still has the backing of its integrated music platform positioning, artist and IP assets, non-subscription monetization capabilities, and its ability to enhance shareholder returns through buybacks and dividends, and therefore maintains a Buy rating.

Core views

The core view is: first, the subscription business is under short-term pressure, especially from Soda Music leveraging Douyin traffic and aggressive price competition, which has led to price-sensitive user churn, and there is still no clear inflection point visible in 2H26; second, the non-subscription business remains healthy, with other online music services up 28% yoy in 1Q26, while offline performance-related revenue and advertising revenue are the main drivers; third, if the Ximalaya acquisition is completed, it could enrich long-audio content and membership benefits, while bringing membership ecosystem synergies and improved cost efficiency; fourth, the company's more active buyback and dividend policies provide downside support for the stock; fifth, on valuation, Goldman Sachs lowered the China music business 2026E target P/E to 14x and reduced the 12-month target price to US$15/HK$59, but still keeps the Buy view.

Analysis framework

The report uses a post-earnings bull-bear breakdown, forecast revisions, SOTP valuation, and risk scenario analysis. Goldman Sachs first compares the 1Q26 results with the market reaction, then separately evaluates the non-subscription business, M&A synergies, shareholder returns, and subscription competition pressure, before cutting 2026E-2028E revenue and profit forecasts and calculating the target price using the China music business target P/E plus the value of minority investments.

Methodology notes

• Valuation methodsSOTP

  sum-of-the-parts valuation

  The 12-month target price is based on the SOTP method: the China music business uses a 14x 2026E target P/E, and minority investments include Spotify, Universal Music Group and SM Entertainment.

• Valuation methodstarget_pe

  target price-to-earnings ratio

  Goldman Sachs reduced the China music business 2026E target P/E from 17x to 14x to reflect intensifying peer competition and slower subscription growth.

• risk_scoringM&A Rank

  M&A probability ranking

  The report discloses TME's M&A Rank as 3, indicating a relatively low probability of being acquired and typically excluded from the target price.

• factor_analysisGS Factor Profile

  Goldman Sachs factor profile

  The GS Factor Profile compares individual stocks with the market and industry peers across growth, financial returns, valuation multiples and composite factors to provide investment context.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Tencent Music Entertainment Group (TME.US / 1698.HK)

  Covered name; Goldman Sachs maintains a Buy rating

  Strengths

  Integrated music platform positioning, artist and IP assets, non-subscription business growth, potential long-audio synergies, buyback and dividend support.

  Weaknesses

  Slower subscription growth, loss of price-sensitive users, Kugou affected by competition, and the 2H26 subscription inflection remains unclear.

  Comparison

  Compared with the China Games, Entertainment & Healthcare Tech coverage group for rating and factor comparison; the China music business target P/E was cut to 14x, close to the internet sector average.

  Risks

  Intensifying competition, AI disruption, rising content costs, non-subscription business expansion below expectations, and social entertainment decline worse than expected.

• Ximalaya Inc.

  Potential acquisition target; SAMR has granted conditional approval

  Strengths

  If the transaction is completed, it could add long-audio content and membership benefits, creating room for membership ecosystem synergies and cost efficiency improvements.

  Weaknesses

  Uncertainty remains around deal completion, integration effectiveness and cost synergies.

  Comparison

  The report links this to TME's past experience in industry M&A integration and believes the company has operating and integration capabilities.

  Risks

  Regulatory conditions, integration execution, user conversion and cost synergies falling short of expectations.

• Soda Music / Douyin ecosystem

  Competitive variable

  Strengths

  Soda Music has expanded rapidly by leveraging traffic from Douyin and attracting users through price competition.

  Weaknesses

  For TME, it creates subscription user losses and ARPU pressure.

  Comparison

  The report specifically notes that Soda Music competition caused TME to lose price-sensitive users, with a more pronounced impact on Kugou Music.

  Risks

  If price competition continues, the recovery of TME subscription revenue and member growth could be delayed further.

Key data

• RatingBuyThe report maintains a Buy rating on TME ADR and H shares.
• 12-month target priceUS$15 / HK$59Lowered from US$17.6/HK$69.
• Current priceUS$9.19 / HK$36.16Price shown on the report cover.
• Upside63.2%Implied upside shown in the report for the ADR and H-share target prices.
• Market capUS$14.3bnMarket cap shown in the report.
• Enterprise valueUS$8.8bnEnterprise value shown in the report.
• Other online music services growth+28% yoyOther online music services business grew 28% yoy in 1Q26.
• 2026E-2028E revenue forecast revision-2%~-3%Goldman Sachs cut revenue forecasts on slower subscription growth.
• 2026E-2028E net profit forecast revision-1%~-4%Goldman Sachs correspondingly lowered net profit forecasts.
• 2026E target P/E14xThe China music business target P/E was cut from 17x to 14x.
• 2026E revenueRmb35,120mnNew forecast shown in the key adjustment table.
• 2026E adjusted net profitRmb9,900mnNew forecast shown in the key adjustment table.
• 2027E expected SVIP subscribers26.8mnGoldman Sachs expects the proportion of SVIP members in total paying subscribers to rise from 13% in 2025 to 20%.
• 2026E SVIP/basic member monthly ARPURmb19.5 / Rmb10.4Forecast monthly ARPU for SVIP and basic members.
• Buyback authorizationUS$1bnThe company committed to use the existing buyback program authorization, which runs through March 2027.
• 2025 dividendUS$0.24 per ADSCorresponds to an approximately 2.6% dividend yield.

Impact & implications

In terms of investment implications, the report maintains a Buy rating while lowering earnings and valuation assumptions, which suggests Goldman Sachs believes current valuation has already partially reflected subscription pressure and that growth in non-subscription business, artist/IP monetization, potential M&A synergies and shareholder returns can offset some of the negative impact. In the near term, the share price may continue to be pressured by subscription growth, the competitive landscape and the AI narrative; a medium- to long-term re-rating will depend on SVIP penetration, ARPU resilience, expansion in advertising and offline performance-related revenue, Ximalaya integration efficiency, and the pace of buyback execution.

Risks

• A worsening competitive landscape and AI disruption could prevent TME from maintaining its dominant market position or improving subscriptions and ARPU.
• Record company content pricing may be higher than expected, squeezing margins.
• Expansion in non-subscription online music services may be slower than expected.
• The social entertainment business may decline more than expected yoy.
• Soda Music may intensify user churn through Douyin traffic and low-price tactics, especially affecting price-sensitive Kugou Music users.
• Completion and integration synergies from the Ximalaya acquisition remain uncertain.
• Short-term volatility in the advertising business and some concerts being delayed to 2H26E may cause fluctuations in 2Q26E non-subscription business growth.

What to watch

• Whether the subscription business shows an inflection point in 2H26.
• The intensity of Soda Music price competition and the impact of Douyin traffic on TME paying users.
• SVIP penetration, retention and ARPU performance.
• QQ Music growth and the traffic conversion effect of TME cooperation with the Weixin ecosystem and Weixin Video Account.
• The sustainability of growth in other online music services, advertising, sponsored advertising and offline performance-related revenue.
• Final completion of the Ximalaya acquisition, regulatory conditions and post-merger cost synergies.
• The pace of execution, renewal arrangements and dividend policy of the US$1bn buyback plan.
• Whether there is further downside risk after the 2026E-2028E revenue and net profit cuts.