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Rating Action:

Moody's affirms Tencent Music's A2 ratings; outlook stable

03 Jun 2021

Hong Kong, June 03, 2021 -- Moody's Investors Service has affirmed Tencent Music Entertainment Group's (Tencent Music) A2 issuer and senior unsecured ratings.

The rating outlook remains stable.

"The affirmation of Tencent Music's A2 ratings reflects its solid market position, strong operating performance and consistent net cash position," says Ying Wang, a Moody's Vice President and Lead Analyst for Tencent Music.

The rating affirmation also reflects Moody's expectation that parental support from Tencent Holdings Limited (Tencent, A1 stable) will remain intact.

Moody's expects Tencent Music to maintain a strong balance sheet along with a prudent approach to investments and acquisitions. These factors could provide it with a buffer against regulatory uncertainties, which have heightened due to recent antitrust regulations introduced by the State Administration for Market Regulation (SAMR). Moody's will continue to monitor the development and assess the impact as needed.

RATINGS RATIONALE

Tencent Music's A2 rating considers the company's underlying credit strength and a two-notch uplift based on Moody's expectation of support from its parent, Tencent, in times of need.

Tencent Music's underlying credit strength reflects its solid market position in China with established operations, proven monetization ability and consistent free cash flow generation. This is despite rising industry competition in China's online music industry and heightened regulatory risks.

Moody's expectation of a two-notch parental uplift considers (1) Tencent's tight management and financial control over Tencent Music, as reflected in the parent group's direct appointment of key senior management at Tencent Music, (2) Tencent Music's position as Tencent's sole platform to develop music business in the long run, and (3) Tencent's low tolerance to potential reputational risks given they share the brand names and certain operating licenses.

In 2020, Tencent Music's revenue grew 15% to RMB29.2 billion, underpinned by a 31% sales increase from its online music services segment and 8% increase for social entertainment. The stronger online music services revenue was largely driven by higher subscriptions and a greater contribution from advertising. Growth in social entertainment sales was attributable to increases in online karaoke and livestreaming services.

Moody's projects the company's revenue will rise 15%-20% in 2021, supported by a gradual increase in the ratio of paying customers from its large user base of more than 800 million as of March 2021. Revenue growth will also come from continued investment in new products and its content library.

Tencent Music's EBITDA margin decreased to 19% in 2020, compared with 20% a year earlier. A weaker margin was expected because its investments increased to develop new products, such as longform audio, to enrich its library content. Moody's expects the investments to generate long-term benefits such as increased user stickiness and revenue diversification.

Moody's forecasts Tencent Music's EBITDA margin will be stable at around 17%-18% in 2021, supported by strong growth in music subscriptions and new product rollouts.

Moody's expects Tencent Music to maintain low leverage of around 1.0x over the next 12-18 months, with stable cash flow generation and limited debt addition. As of 31 December 2020, Tencent Music's total reported debt increased to RMB5.5 billion from RMB147 million a year earlier, after the company issued US$800 million bonds in the second half of 2020. The company's leverage, as measured by adjusted debt/EBITDA, remained low at 1.0x as of the end of 2020.

Tencent Music's liquidity is excellent. As of 31 March 2021, it had cash on hand of RMB21.0 billion, including time deposits, which is more than sufficient to cover its likely capital spending and dividend payments for the next 12-18 months. The company's net cash stood at RMB15.5 billion as if the end of March 2021.

Tencent Music's issuer rating takes into consideration the following environmental, social and governance (ESG) factors.

In terms of social risk, Moody's has considered the operational and financial risks associated with any failure to comply with regulations regarding copyright and the potential sharing of illegal content by users. This risk is partially tempered by the presence of a legal team at Tencent Music and its proprietary technology infrastructure to detect illegal or sensitive content on its platforms. In addition, the company has established relationships with large and reputable music labels globally.

Recent antitrust regulations introduced by SAMR have heightened regulatory risks. The regulations aim to encourage competition and could limit large online music platforms, potentially affecting Tencent Music's revenue and earnings growth.

In terms of governance risk, Moody's has considered the high concentration of ownership and voting rights in the company's majority shareholder, Tencent. This risk is partially tempered by Tencent's long track record as a listed and regulated entity, and its adherence to prudent financial policies.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Tencent Music's stable outlook reflects Moody's expectation that it will maintain its strong position in China's online music market and will pursue growth prudently, while maintaining a solid financial profile.

Moody's could upgrade the ratings if Tencent's ability to support its subsidiary strengthens, which would be illustrated by an upgrade of Tencent's rating; and if Tencent Music's underlying credit strength improves.

Tencent Music's underlying credit strength could improve if it maintains its solid market position and further expands its business scale and scope significantly, while keeping a prudent financial profile featuring low debt leverage, positive free cash flow and a net cash position.

Downward rating pressure could arise if the company (1) fails to fend off competition and experiences a substantial reduction in revenue and cash flow generation on a sustained basis; (2) deviates from its prudent financial policy and grows its user base, business scope or content library at the expense of its strong financial profile; or (3) engages in aggressive acquisitions that strain its balance sheet liquidity or weaken its overall risk profile.

Specifically, the ratings could be downgraded if (1) Tencent Music's debt/EBITDA rises above 2.0x-2.5x, or (2) the company records a sustained and large net debt position.

Moody's will also monitor for any sustained declines in the company's retained cash flow coverage of debt, which has been above 100% over the past few years.

Furthermore, adverse developments in China's regulatory regime, which could affect the company's operations or business model, would be negative for the ratings. Evidence of weaker credit linkage with Tencent or support assessment could also pressure the rating.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Tencent Music is a leading online music service provider in China. The company's business operations originated from Tencent's online music services tracing back to 2003. Tencent Music is the result of a merger between Tencent's online music operations in China and China Music Group in 2016. Tencent Music was listed in the New York Stock Exchange in December 2018.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Ying Wang
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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