Tencent Music Entertainment Group (TME) Report Interpretation

Overview

Nomura reviews Tencent Music Entertainment’s 2Q26 results, which exceeded consensus primarily because Ximalaya was consolidated earlier than expected. While music-related services remained resilient, softer social-entertainment expectations and margin pressure led management’s 3Q26E and FY26E guidance below prior consensus; Nomura nevertheless maintains Buy and a USD12.50 target price.

Core views

TME’s 2Q26 revenue increased 5.8% year on year to CNY8.9bn, 2% above Bloomberg consensus. Nomura attributes the beat principally to the earlier-than-expected consolidation of Ximalaya on 18 May 2026, which contributed CNY407mn of quarterly revenue. Excluding that contribution, organic revenue rose only 1% year on year. Social entertainment services and other revenue fell 16%, while music-related services rose 5% organically after excluding both Ximalaya and social entertainment. The latter performance was supported by an estimated roughly 60% increase in offline performance-related services, partly offsetting competitive pressure on VIP memberships and advertising. Management said the SVIP programme continued to show healthy user-base, ARPPU, time-spent and retention trends. Profitability was broadly in line at the gross-profit level but showed pressure below it. Gross margin fell 0.2 percentage points year on year to 44.2% as lower-margin offline performance-related services became a larger part of revenue. Non-IFRS operating margin declined 0.8 percentage points to 31.7%, as Ximalaya consolidation increased the operating-expense ratio. Even so, non-IFRS net profit rose 4.4% year on year to CNY2.7bn, 7% above consensus, aided by the revenue beat; non-IFRS diluted EPS was CNY1.70, 7.4% above consensus. The outlook is softer because of social entertainment. Management guided 3Q26E total revenue to CNY9.1bn, up 8% year on year and 1% below pre-results consensus. Nomura attributes this mainly to social-entertainment revenue expected at CNY1.3bn, 11% below consensus because of fewer WeSing paying users and lower advertising pricing. By contrast, music-related-services revenue is expected to rise 12.5% to CNY7.8bn, with membership revenue up 8.5% and marketing and consumption services revenue up 20%. However, expected 3Q26E gross profit of CNY3.9bn and a 42.7% gross margin are each 3% below consensus, while non-IFRS net profit guidance of CNY2.34bn and a 25.6% net margin are 8% below consensus, also reflecting lower interest income. For FY26E, management expects revenue growth of 7%, versus the prior consensus expectation of 8%, as social-entertainment revenue is expected at CNY5.4bn versus CNY5.8bn consensus. Membership revenue is expected to grow 7%, above consensus partly because of Ximalaya consolidation, while marketing and consumption services are expected to grow 22%, below the 24% consensus forecast. Gross profit is guided at CNY15.4bn, up 6%, with gross margin at 43.7%, down 0.5 percentage points year on year and 2% below consensus. Adjusted net profit is expected to rise 2% to CNY9.8bn, with net margin declining 1.4 percentage points to 27.7%, 4% below consensus. Nomura maintains its Buy rating and USD12.50 target price. Its SOTP valuation assigns USD4.7bn to the online music subscription business at 6x FY26F P/E, USD8.7bn to non-subscription music at 20x FY26F P/E, and USD804mn to social entertainment at 3x FY26F P/E. The report notes that the stock traded at 10x FY26F P/E based on CNY6.77 FY26F EPS. Capital returns remain a supportive element: TME returned USD770mn in 1H26, including USD400mn of share repurchases and USD370mn of dividends, and had USD600mn of repurchase authorization remaining through March 2027.

Analysis framework

Nomura compares reported quarterly revenue, segment mix and profitability with Bloomberg consensus, then separates the effect of Ximalaya consolidation from underlying organic trends. It evaluates management’s 3Q26E and FY26E guidance against prior consensus, assesses segment drivers and margins, and values TME through a sum-of-the-parts framework using FY26F P/E multiples for subscription music, non-subscription music and social entertainment.

Methodology notes

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Sum-of-the-parts valuation using separate FY26F P/E multiples for TME’s business lines.

  Nomura values subscription music, non-subscription music and social entertainment separately, then combines the component values to derive its USD12.50 target price.

• Industry AnalysisVolume-price decomposition

  Segment-level revenue analysis separating membership, marketing and consumption services, and social entertainment.

  The report links revenue outcomes to user growth, advertising pricing, offline performance-related services and the Ximalaya consolidation effect.

Asset mapping & comparison

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

• Tencent Music Entertainment Group (TME)

  Primary covered company; music-related-services growth and shareholder returns support the maintained Buy rating, while social-entertainment weakness drives softer guidance.

  Strengths

  Resilient music-related-services growth, healthy SVIP operating indicators, and USD770mn of 1H26 capital returns.

  Weaknesses

  Social-entertainment revenue declined 16% year on year in 2Q26; margins are pressured by lower-margin offline services and Ximalaya-related operating expenses.

  Comparison

  2Q26 revenue was 2% above consensus, whereas 3Q26E and FY26E guidance is below prior consensus on revenue and profit measures.

  Risks

  Higher user-time churn, weaker paid-user growth, lower SVIP penetration, and tighter monetization regulation.

Key data

• 2Q26 revenueCNY8.933bnUp 5.8% year on year and 2.0% above Bloomberg consensus.
• Ximalaya contributionCNY407mnRevenue contribution in 2Q26 following consolidation on 18 May 2026.
• 2Q26 non-IFRS net profitCNY2.686bnUp 4.4% year on year and 6.7% above consensus.
• 3Q26E revenue guidanceCNY9.1bnUp 8% year on year and 1% below pre-results consensus.
• 3Q26E non-IFRS net profit guidanceCNY2.34bnNet margin of 25.6%; 8% below consensus.
• FY26E adjusted net profit guidanceCNY9.8bnUp 2% year on year; net margin of 27.7%, down 1.4 percentage points and 4% below consensus.
• 1H26 capital returnUSD770mnUSD400mn buybacks plus USD370mn dividends; equal to 4.7% of market capitalization.

Impact & implications

The report portrays TME’s earnings beat as acquisition-timing assisted rather than broadly strong organic growth. Music-related-services momentum and ongoing capital returns support Nomura’s maintained Buy view, but weaker social entertainment, lower margins and below-consensus forward profit guidance temper near-term expectations.

Risks

• Online-music user time spent could churn more than expected.
• Growth in paying users for online music services could be weaker than expected.
• Penetration of higher-priced SVIP subscriptions could be lower than expected.
• Regulation of monetization initiatives, including advertising and livestreaming, could tighten further.

What to watch

• Execution against 3Q26E social-entertainment revenue guidance, including WeSing paying-user trends and advertising pricing.
• Growth in music-related-services membership and marketing and consumption services.
• Gross-margin and operating-expense effects from the revenue mix and Ximalaya consolidation.
• Progress on the remaining USD600mn share-repurchase authorization before its March 2027 expiry.