Posts / TME / #POST-253720

TME fell 65% in a year while net profit grew 66%. I valued it 3 ways — it looks absurdly cheap. Tell me what I'm missing.

Sep 29, 2026 · 15:10

R/VALUEINVESTING

↗ https://reddit.com/r/ValueInvesting/comments/1wtcpay/tme_fell_65_in_a_year_while_net_profit_grew_66_i/

Tencent Music (TME) is down \~65% from its 52-week high of $24.25, currently sitting at $8.37 — basically at its 52-week low of $7.70. Meanwhile FY2025: revenue +15.8% to RMB32.9B, net profit attributable +66% to RMB11.1B, operating profit +53%, RMB38B in cash against \~RMB3.5B of debt, and it pays a dividend.

Either the market knows something I don't, or this is the cheapest profitable streaming business on earth. I ran a full three-method valuation by hand — all assumptions below. Roast it.

**The punchline first:**

|Method|Value/ADS|
|:-|:-|
|DCF (11% discount, 3% terminal)|\~$16.50|
|Owner earnings capitalized|\~$18.85|
|Relative (14x normalized EPS)|\~$14.00|
|**Average**|**\~$16.50**|
|Current price (Sep 28 close)|$8.37|

All figures converted at \~7.0 RMB/USD. All calculations are my own hand-built estimates.

# The business in 30 seconds

China's dominant music streaming platform (QQ Music, Kugou, Kuwo). 127.4M paying users (+5.3% YoY), ARPPU RMB11.9 (+7.2%), online music revenue +22.9% to RMB26.7B — now 81% of total revenue. The legacy social-entertainment segment is shrinking but the high-margin subscription engine is carrying everything. Q4 gross margin hit 44.7%.

The catch you already see: total MAUs *declined* from 556M to 528M. Fewer users overall, better monetization of the ones who pay. And it's a Chinese ADR with a VIE structure — the discount-rate section prices that in explicitly.

# Method 1: DCF — ~$16.50

**Discount rate build (this is where China risk lives):**

|Component|Value|
|:-|:-|
|10Y US Treasury (Sep 25, 2026)|5.2%|
|Beta|0.75|
|Equity risk premium|4.5%|
|Cost of equity (5.2 + 0.75 × 4.5)|8.6%|
|**+ China/ADR regulatory risk premium**|**+2.5%**|
|**Discount rate**|**11.0%**|

The 2.5% add-on is my honest haircut for VIE structure, delisting overhang, and regulatory risk (remember 2021, when regulators forced TME to give up exclusive music licensing). No debt to speak of, so WACC ≈ cost of equity.

**Free cash flow forecast (RMB millions):**

2025 base FCF = operating cash flow 10,231 − capex 1,188 = **9,043**. Note how capital-light this is: capex is 3.6% of revenue. Content licensing runs through COGS, not capex.

|Year|FCF|Growth|PV @ 11%|
|:-|:-|:-|:-|
|2025A|9,043|—|—|
|2026E|10,128|12%|9,124|
|2027E|11,141|10%|9,043|
|2028E|12,032|8%|8,798|
|2029E|12,754|6%|8,401|
|2030E|13,392|5%|7,948|

Growth decelerates as the subscriber base matures — 12% grading down to 5%, roughly tracking the subscription-revenue trajectory.

**Terminal math:** 13,392 × 1.03 / (0.11 − 0.03) = 172,422 → PV = 102,322. Explicit-period PV sums to 43,314. Enterprise value = 145,636.

Then: + net cash (38,040 cash − \~3,500 debt − leases ≈ 34,200) = **179,836** equity value ÷ 1.55B ADS = RMB116.0 = **\~$16.50/ADS**.

(ADS count cross-check: FY2025 dividend was $0.24/ADS on \~$368M total payout → \~1.53B ADS. Consistent.)

# Method 2: Owner earnings — ~$18.85

|RMB millions|
|:-|
|Net income attributable (2025)|11,060|
|\+ D&A (\~1.4B est. from H1 run-rate)|1,400|
|− maintenance capex (conservative)|(1,000)|
|**Owner earnings**|**11,460**|
|÷ 1.55B ADS|RMB7.39 = **$1.06/ADS**|

Capitalize at (11% discount − 4% perpetual growth): $1.06 × 1.04 / 0.07 = **$15.69** operating value. Add net cash of $3.15/ADS sitting on the balance sheet → **\~$18.85/ADS**.

Yes, nearly 40% of the market cap is net cash. That's not a typo.

# Method 3: Relative check — ~$14.00

TME grows faster than Spotify and is far more profitable, yet trades at one-fifth the multiple — the entire discount is China/ADR risk. Against its direct domestic peer (NetEase Cloud Music at \~9×), TME arguably deserves a premium: higher margins, larger scale, net cash.

Justified multiple: **14×** normalized EPS of $1.02 (2025 diluted EPS/ADS ≈ RMB7.1). That's a steep discount to Spotify's 43× and a modest premium to the China peer — i.e., I'm paying for the ADR risk, not ignoring it. 14 × $1.02 = **\~$14.00**.

# Sensitivity: what breaks the thesis

|Scenario|DCF value|
|:-|:-|
|Bull case (9% discount — China risk fades)|\~$21.10|
|**Base case (11%)**|**$16.50**|
|China risk repriced (13% discount)|\~$13.80|
|**Zero FCF growth forever, 2% terminal**|**\~$11.80**|

That last row matters most: even if free cash flow *never grows again*, the DCF says $11.80 — 41% above today's price. The margin of safety is the cash pile plus the growth being free.

**Honest bear cases I can't model away:**

1. **Subscriber growth stalls.** Paying-user growth already decelerated to +5.3%, and total MAUs are shrinking. If ARPPU growth (+7.2%) reverses under competition, the growth story dies.
2. **Regulatory.** The 2021 exclusive-licensing crackdown is precedent, not ancient history. Another probe into pricing or copyright would hit the multiple, not just earnings.
3. **Delisting/VIE.** If US-China audit or listing tensions escalate, the ADR discount widens and no DCF matters — you're holding a stub the market won't touch.
4. **RMB depreciation** quietly eats USD-ADR returns even if the RMB numbers hold up.
5. **Value trap dynamics.** Down 65% with 8× earnings and a growing dividend… sometimes the market is early, sometimes it's right. The derating started *before* any fundamental deterioration, which smells like macro/regulatory derisking rather than business failure — but "the market can stay irrational" applies double to Chinese ADRs.

# My question to you

The numbers say \~$16.50 average fair value vs $8.37 — roughly double. The market says "China ADR, hard pass." Am I underpricing the regulatory/delisting risk at only +2.5%? Is 14× too generous for a company whose user base is shrinking even as monetization improves? Where's the flaw?