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Tencent streaming music arm files for $1bn US listing

Chinese market leader sets in motion IPO on heels of group restructuring

Chinese internet group Tencent, whose services include QQ Music, runs China's largest online music platform.   © Other Provider(90days)

HONG KONG -- The streaming music arm of Chinese internet group Tencent Holdings filed documents on Oct. 2 for a U.S. initial public offering, seeking to secure its market lead amid Beijing's crackdown on pirated songs.

Tencent Music Entertainment, China's biggest online music service, set a proposed amount of $1 billion to indicate the size of the IPO. The amount though is placeholder and the company may seek more funds.

Earlier reports indicated that the company sought to raise as much as $4 billion through the IPO.

Tencent Music stands to become the first listed Chinese music streaming business. The listing will give a much-needed boost to parent Tencent, whose revenue and share price have been hit by regulatory headwinds in the company's core video game business in recent months.

The IPO filing comes after the Shenzhen-based group -- which also includes WeChat, China's biggest social media app -- announced its first restructuring in six years. The share sale is being led by Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, JPMorgan Chase and Morgan Stanley.

Tencent Music becomes the latest among a list of Chinese companies that have flocked to the U.S. for IPOs as the domestic stock market languishes. Last month, Shanghai-based electric vehicle maker NIO raised $1 billion in an offering on the New York Stock Exchange, while e-commerce group Pinduoduo went public on Nasdaq in July with a $1.63 billion share sale.

Tencent Music reported a $320 million profit on revenue of $1.3 billion for the six months ended June 30 in its filing with the U.S. Securities and Exchange Commission, its first detailed financial report. Revenue for the period grew 92% on the year.

Western peers such as Spotify have struggled to break even. The Swedish company, which has a cross-shareholding deal with Tencent, lost 90 million euros ($104 million) in the second quarter of 2018 on revenue of 1.3 billion euros.

Tencent Music runs three major streaming apps -- QQ Music, Kugou and Kuwo -- and controls roughly 70% of China's online music market by sales revenue, according to a 2017 report published by the International Federation of the Phonographic Industry.

The company has 800 million unique monthly average users, including through online karaoke app WeSing, according to Tencent Music's prospectus. Of those, 23.3 million were paying users in the second quarter of 2018, up from 16.6 million a year earlier.

While the paid user base remains low, Tencent Music is working to profit from interaction among music fans. WeSing users can buy each other virtual gifts, for example, with Tencent earning a share of the transaction.

Tencent Music is also tapping into offline sales of music-related products such as microphones and headphones. In addition, the company has placed fee-based mini karaoke boxes in shopping malls across the country.

Yet more funding is needed. With Beijing clamping down on pirated music, Tencent and its rivals will have to spend more on purchasing copyrights for the songs they stream. A similar weight has depressed earnings at Spotify, which saw revenue increase 40% in 2017 yet still suffered an annual loss.

Beijing-based market research company iResearch estimated that the Chinese online music market reached 58 billion yuan ($8.44 billion) in 2017, up from 44 billion yuan four years ago.

"China's per capita spending on recorded music is expected to more than quadruple between 2017 and 2023," Tencent Music said in the prospectus.

Fellow Tencent spinoff China Literature raised $1.1 billion in a Hong Kong IPO last year.

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