Maintain Buy: Content Ecosystem and Shareholder Returns Support Long-Term Value, While Near-Term Growth and Margins Remain Under Pressure

Overview

Tencent Music's 2Q26 results were in line with expectations. Investor attention focused on the slowdown in subscription revenue excluding Ximalaya, competition for advertising traffic, and gross margin pressure from changes in revenue mix. Goldman Sachs expects subscription and advertising growth to continue slowing in 2H26, but non-subscription businesses such as live performance sponsorships and artist merchandise are expected to provide a partial offset. Over the long term, Tencent ecosystem synergies, long-form audio expansion, and IP commercialization will strengthen the company's differentiated positioning.

Core views

Positive factors include: integration with Weixin Video Account to open traffic pathways, which is expected to ease customer acquisition pressure from Soda Music; Ximalaya adds children's content, online literature, and audiobooks, while broadening reach among white-collar and female users in higher-tier cities; live performances and artist merchandise maintain strong growth, forming a closed loop of IP monetization with SVIP benefits; accelerated buybacks and dividends support valuation. Negative factors include: near-term pressure on subscription and advertising growth, weakness in the social entertainment business, a rising share of offline low-gross-margin businesses, and higher marketing and administrative expenses related to Ximalaya integration.

Analysis framework

The report is based on 2Q26 results and management guidance, breaking down trends in subscriptions, advertising, social entertainment, live performances, merchandise, and long-form audio businesses; it revises 2026E to 2028E revenue and profit forecasts based on traffic data from competing platforms and uses a sum-of-the-parts valuation methodology to calculate 12-month target prices for the ADR and Hong Kong shares.

Methodology notes

• Valuation MethodSum-of-the-Parts Valuation (SOTP)

  Separately assess and sum the value of the China music business and minority equity investments.

  The China music business is valued at an 11x 2026E target P/E multiple, while minority equity investments include Spotify, UMG, and SM Entertainment, resulting in 12-month target prices for TME of US$11.70 and HK$46.00.

• Factor AnalysisGoldman Sachs Factor Profile

  Compare the company with the market and industry peers across growth, financial returns, valuation multiples, and composite indicators.

  Growth metrics refer to forward revenue, EBITDA, and EPS growth; financial returns refer to ROE, ROCE, and CROCI; valuation refers to P/E, P/B, dividend yield, and enterprise value multiples, among others.

Asset mapping & comparison

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

• TME.US

  Core recommended asset, Tencent Music ADR

  Strengths

  Rich content and IP resources, more than 500mn monthly active users, faster growth in non-subscription businesses, stable free cash flow, and enhanced shareholder returns.

  Weaknesses

  Slowing subscription and advertising growth, pressure on social entertainment, and near-term declines in gross margin and net margin.

  Comparison

  Compared with competing platforms such as Soda Music, TME is more differentiated in integrated music and audio content, paid ecosystem, and IP commercialization, but its free-user traffic share is being challenged.

  Risks

  Intensifying competition, AI disruption, rising content costs, non-subscription business expansion falling short of expectations, and a larger decline in social entertainment.

• 1698.HK

  Tencent Music's Hong Kong-listed security

  Strengths

  Shares the same fundamentals as the ADR and benefits from content ecosystem expansion, share repurchases, and dividend returns.

  Weaknesses

  Also faces pressure on subscriptions, advertising, social entertainment, and margins.

  Comparison

  The report applies a consistent Buy view and sum-of-the-parts valuation framework to both the ADR and Hong Kong shares.

  Risks

  Fundamental risks are consistent with the ADR, with additional attention needed on liquidity and valuation differences across markets.

Key data

• 2Q26 ResultsBroadly in line with expectationsThe market is focused on slowing subscription revenue and gross margin pressure.
• TME Target PriceUS$11.70Previously US$13.40; upside from the current price of US$9.90 is 18.2%.
• 1698.HK Target PriceHK$46.00Previously HK$52.00; upside from the current price of HK$38.56 is 19.3%.
• 2026E to 2028E Revenue Forecast RevisionsReduced by 3% to 7%Reflects weakness in social entertainment, softer advertising, and slower music subscription growth.
• 2026E to 2028E Net Profit Forecast RevisionsReduced by 3% to 8%Mainly considers net margin pressure caused by changes in revenue mix.
• Live Performance and Artist Merchandise Revenue2Q26 YoY growth of approximately 70% to 80%1Q26 YoY growth exceeded 100%, and management said the 2H26 project pipeline remains healthy.
• 2Q26 Share RepurchaseApproximately US$400mnApproximately US$600mn remains under the existing US$1bn authorization, valid through March 2027.
• Shareholder Total Return YieldClose to 10%Includes share repurchases and dividends.
• 2026E ValuationApproximately 10x P/EThe report believes the current valuation and shareholder returns together provide downside protection.
• 2027E SVIP Member Forecast24.8mnExpected to rise from 13% of paying members in 2025 to 17%.
• Soda Music User ScaleJune 2026 DAU 60mn, MAU 167mnIts DAU surpassed QQ Music in April 2026, reflecting intensified traffic competition.

Impact & implications

The forecast and target price cuts reflect that market competition, subscription slowdown, and margin pressure have been incorporated into the valuation framework. If Tencent ecosystem traffic referrals, Ximalaya integration, and IP commercialization progress as planned, non-subscription revenue is expected to become a new growth pillar and improve SVIP value and user monetization. The main near-term support for the share price comes from low valuation, stable free cash flow, dividends, and accelerated buybacks; medium-term re-rating will depend on stabilization in subscription growth and realization of integration synergies.

Risks

• Deterioration in the competitive landscape or AI disruption could prevent the company from maintaining its leading position and limit growth in subscriber numbers and ARPU.
• Record label content pricing may exceed expectations, driving up content costs and compressing gross margin.
• Expansion of non-subscription online music services may be slower than expected.
• The YoY decline in the social entertainment business may be greater than expected.
• Platforms such as Soda Music may divert free users, continuing to suppress advertising traffic and monetization.
• Ximalaya integration costs may be higher than expected, and synergy realization may be delayed.

What to watch

• Whether paying members, subscription revenue, and ARPU can stabilize in 2H26.
• Customer acquisition results after traffic pathways between Weixin Video Account and QQ Music are opened.
• Soda Music's DAU, MAU, and its impact on TME's advertising traffic share.
• Sustainability of growth in live performances, artist merchandise, and other non-subscription revenue.
• SVIP member count, penetration rate, and the effect of IP benefits on paid conversion.
• Post-integration cost control, user synergies, and margin improvement for Ximalaya.
• Execution pace of the remaining US$600mn repurchase authorization and any new buyback authorization.
• Gross margin, net margin, and the decline in the social entertainment business.