Tencent Music's Margin Magic: How Cost Control Could Spark a Profit Revolution in Music Streaming

Tencent Music Entertainment Group (NYSE: TME, HKEX: 1698) is undergoing a quiet but transformative shift from a growth-at-all-costs mindset to a profit-driven strategy. Despite flat revenue in Q1 2025, the company’s 16.6% year-over-year rise in music subscription revenue and 24.6% jump in non-IFRS net profit signal a mastery of operational efficiency. This article argues that Tencent Music’s margin expansion is no fluke—it’s a deliberate strategy to thrive in a maturing music streaming market, and the stock is primed for a valuation re-rating.

The Cost-Control Playbook: From Growth to Profit

Tencent Music’s Q1 results highlight two critical levers of margin expansion:
1. Reduced Revenue Sharing Fees: By cutting ties with lower-margin social entertainment services (which saw an 11.9% revenue decline), the company slashed costs faster than revenue dropped. This optimization pushed gross margins to 44.1%, up from 40.9% a year ago.
2. Disciplined Operational Spending: Total operating expenses stayed flat at RMB1.14 billion, even as revenue grew. This discipline allowed operating expenses to shrink to 15.5% of revenue, down from 16.8% in 2024.

The result? A 201.8% surge in net profit to RMB4.29 billion, driven not by top-line growth but by smarter cost management.

Why Margin Expansion Will Stick (Even as Growth Slows)

The music streaming market in China is maturing, with subscriber growth slowing to 8.3% year-over-year in Q1. But Tencent Music isn’t betting on endless expansion—it’s focusing on high-margin segments:
- Premium Subscriptions: SVIP memberships, offering exclusive audio quality (e.g., Dolby Atmos) and concert access, now account for 50% of paying users. This has boosted ARPPU by 7.5% to RMB11.4.
- Own Content Dominance: Investments in original content (e.g., collaborations with Sony’s 360 Reality Audio) reduce reliance on costly third-party licenses, lowering content acquisition costs.

Is the Stock Undervalued? The Case for a Buy

Tencent Music’s stock trades at 14.3x forward P/E, well below its historical average of 20x. Meanwhile, the consensus price target of $16.18 implies a 12.9% upside, but this may still underestimate the margin story.

Consider this:
- Structural Improvements: The company’s shift to subscription and premium content could sustain margins even as macro headwinds persist.
- Balance Sheet Strength: With RMB37.67 billion in cash, TME has room to invest in high-ROI initiatives (e.g., AI-driven personalization) without diluting shareholders.
- Undervalued by Metrics: At 0.5x P/S, the stock is priced for stagnation, not the margin gains already materializing.

Risks and the Catalyst for Re-Rating

Bearish arguments focus on slowing subscriber growth and regulatory risks. But Tencent Music’s Q1 results show it’s already navigating these headwinds. The upcoming acquisition of Ximalaya (if finalized) could supercharge its audio ecosystem, adding podcast monetization—a higher-margin business—to its arsenal.

The key catalyst? Margin expansion visibility. If Q1’s 44.1% gross margin becomes the new normal, analysts could revise earnings estimates higher, triggering a valuation re-rating.

Final Verdict: Buy Now, Reap Later

Tencent Music is transitioning from a growth story to a profit powerhouse. With cost controls in place, premium services driving margins, and a stock undervalued relative to its potential, this is a buy for investors seeking a leveraged play on margin expansion. Act before the market catches on—and before the company’s $2.4 billion Ximalaya deal adds another tailwind.

The music streaming world is evolving. For investors, Tencent Music’s margin magic could be the next great earnings story—and the time to capitalize is now.