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This article delves into Tencent Music's Q2 2026 earnings report.

Author | Ma Duoduo

Editor | Hu Zhanjia

Operations | Chen Jiahui

Produced by | Zero State LT (ID: LingTai_LT)

Header Image | Publicly sourced online image

On August 11, as Hong Kong stocks concluded trading, Tencent Music was quoted at HK$38.56, marking a 2.55% increase. The day was uneventful, with the Hang Seng Index declining by 1.1%, yet Tencent Music maintained its stability amidst a sluggish market.

That evening, Tencent Music unveiled its Q2 earnings: total revenue of RMB 8.93 billion, a 5.8% year-over-year (YoY) rise; adjusted net profit of RMB 2.78 billion, up 5.3% YoY. The figures were not dazzling, but they were far from disappointing. Several hours later, at 9:30 AM Eastern Time, U.S. stocks commenced trading. The previous day's closing price of $9.90 could not be sustained, with the stock plummeting to a low of $8.21 before concluding the day down 11.92%. The following day, Hong Kong stocks followed suit with a 12.55% drop, closing at HK$33.72. By then, the company's stock price had plummeted more than half from its year-high of HK$70.9.

That night, Chinese stocks generally declined—the Nasdaq Golden Dragon China Index fell 2.94%, JD.com dropped 4.63%, and Bilibili tumbled over 5%. However, Tencent Music bore the brunt of the impact. CLSA subsequently reduced its valuation price-to-earnings (P/E) ratio from 15x to 10x, Daiwa slashed its EPS forecasts for the next three years by 8%-12%, and Citigroup and Morgan Stanley synchronously lowered their target prices.

Why did a report showcasing revenue and profit growth lead to such an outcome?

RMB 407 Million and the Crucial Subtraction

The answer lies in a subtraction.

In Q2, Tencent Music's YoY revenue increase amounted to RMB 491 million. Himalaya, acquired on May 18, contributed RMB 407 million in just one and a half months. Excluding this consolidated revenue as pure incremental growth, the organic growth of existing businesses was roughly 1%.

This was not Himalaya's first time in the limelight.

According to comprehensive media information from Tianyancha, as China's largest online audio platform, Himalaya held a 40%-50% market share in China's online audio streaming market in 2024, with approximately 300 million monthly active users across all scenarios. It boasted over 520 million audio content pieces and 3.2 million active creators, with its in-car version pre-installed in vehicles from over 80 automakers.

To acquire Himalaya, Tencent Music paid $1.26 billion in cash and up to 5.2% of its total Class A ordinary shares. Based on pre-transaction pricing, the total consideration was approximately RMB 18.6 billion—the largest deal in the company's history.

However, the deal took a full year from signing to closing. Following the agreement on June 10, 2025, antitrust filing materials were deemed incomplete and required supplementation. The State Administration for Market Regulation initiated preliminary and further reviews, extending the review period twice before granting conditional approval on May 12, 2026.

Upon approval, the administration imposed five restrictive commitments: no price hikes, no reduction in free content, termination of exclusive licensing agreements, prohibition of in-car bundling, and no restrictions on creators multi-homing—all valid for five years, with semi-annual compliance reporting required.

The intent was clear: the three common tactics post-internet mergers and acquisitions (M&A)—price hikes, exclusivity, and bundling—were preemptively neutralized. The prohibition on in-car bundling was particularly noteworthy—it precisely targeted Tencent Music's most desired scenario, where ByteDance's Cheers Music was making rapid inroads: TikTok-saved background music (BGM) syncs directly to in-car systems, continuing the short-video swiping habit for song switching, and cost-effectively acquiring young car owners.

Another unexplained detail emerged in the earnings report.

Based on Himalaya's 2023 annual revenue of RMB 6.16 billion, one and a half months should have contributed RMB 700-800 million in consolidated revenue, but only RMB 407 million was reported. The earnings report and conference call offered no explanation. Amortization of intangible assets from the acquisition pushed the company's operating expense ratio from 13.7% to 14.5%.

"Rather than watching it wither slowly, it's better to acquire it while it still has value," an industry insider tracking the online audio sector analyzed for Cailian Press. Tencent Music had invested in Himalaya early on; allowing continued losses would have impaired its existing investments. Completing the integration at a relatively low valuation was both damage control and strategic positioning. However, financially, this RMB 18.6 billion deal primarily bought a month of reported growth.

The Moat Dilemma

To understand why the market refused to factor in this "growth" from the deal, we must examine the company's competitive moat.

Tencent Music's dominance was built on copyrights. According to comprehensive media information from Tianyancha, in 2016, QQ Music merged with Kugou and Kuwo to form Tencent Music Entertainment Group. Over the next few years, it leveraged exclusive copyrights as a weapon, securing exclusive distribution rights from the world's three major record labels and holding the ultimate trump card of Chinese pop—Jay Chou. At its peak, over 80% of top-tier music libraries were in its hands.

It was a nearly unbeatable strategy: if you wanted to hear certain songs, you had no choice but to come here.

The turning point came in July 2021.

The State Administration for Market Regulation ordered Tencent Music to terminate exclusive copyright agreements, removing its foundational advantage. Over the next few years, platforms' music libraries gradually converged, and Jay Chou's songs were no longer exclusive to QQ Music. The copyright moat transformed—when everyone had it, it was no longer scarce.

Around the same time, the copyright logic faltered, and a new paradigm emerged on Douyin (TikTok's Chinese version).

Cheers Music, launched in 2022, operated differently: users hearing a song's climax in a short video could instantly jump to Cheers for the full version; Douyin drove songs to viral status, then funneled listeners back to the music platform, creating an internal traffic loop with near-zero acquisition costs. Its annual membership cost just RMB 8, with advertising revenue accounting for about 70% and subscriptions only 30%—a stark contrast to Tencent Music's structure, where 60-70% of revenue came from subscriptions.

QuestMobile data shows that by June this year, Cheers Music had 167 million monthly active users, up 68.7% YoY. After surpassing NetEase Cloud Music in March, it was closing in on QQ Music.

Tencent Music was not idle.

According to comprehensive media information from Tianyancha, in Q2, it integrated with WeChat's Xiaowei AI assistant, launching AI-powered personalized playlist generators on QQ Music and Kugou. Management revealed during earnings calls that its music AI agent, developed using Tencent's Hunyuan large model, significantly boosted retention among high-value, high-engagement users.

The AI agent's commercialization path is clear, but user data trends were unmistakable: QQ Music's MAUs fell 0.7% YoY, Kugou dropped 10.7%, Kuwo declined 18.5%, WeSing fell nearly 30%, and newly acquired Himalaya's MAUs also slid 21.7%. Since Q1 this year, Tencent Music has stopped disclosing user numbers.

During the earnings call, a Goldman Sachs analyst posed the question bluntly: Excluding Himalaya, subscription revenue growth has slowed. How much growth can we expect in the second half?

Management didn't evade the issue: Membership revenue is indeed facing competitive pressure, primarily on the traffic side—high-value users and SVIPs remain relatively stable, but casual users are taking a bigger hit.

The Cards in Cussion Peng's Hand

Despite the pressure, Executive Chairman Cussion Peng remained composed in his earnings statement. He attributed Q2's performance to the ongoing success of the "Content + Platform" dual-engine strategy, highlighting that concerts, merchandise, and other IP-derived experiences had once again driven robust growth in marketing and consumer services revenue.

This was indeed a rare bright spot in the report.

In Q2, marketing and consumer services revenue—comprising advertising, live events, artist merchandise, and physical albums—reached RMB 2.81 billion, up 16.2% YoY, double the growth rate of membership revenue, and accounting for 31% of total revenue. The execution was intensive: Lay Zhang's digital album Monkey King generated over RMB 30 million in sales within five days; Zhou Shen's second physical album Anti-Deep Lexicon exceeded RMB 40 million in three minutes; GAI's tour upgraded from stadiums to arenas; SMTR25 held three fan meetings in Macau with over 10,000 attendees; the company also completed a strategic investment in South Korean label THE BLACK LABEL.

After the 2021 dissolution of exclusive copyrights, Tencent Music spent five years shifting its business focus from streaming rights to artist IP, inch by inch.

Another card is the Tencent ecosystem.

The earnings report revealed efforts to strengthen music content distribution capabilities on WeChat Channels and collaborate with WeChat Pay to drive traffic to lightweight apps. CEO Ross Liang emphasized building a comprehensive ecosystem centered on music and audio experiences.

The most tangible card is cash.

As of Q2's end, the company held RMB 44.22 billion in cash, cash equivalents, time deposits, and short-term investments. In Q2, it repurchased 43.5 million American Depositary Shares (ADSs) for approximately $400 million in cash. Some argue that avoiding price wars, not burning cash, and focusing on core users with rising average revenue per paying user (ARPPU) while allocating cash to repurchases, dividends, and integration is a rational response under current constraints—we may mock its stock price, but it's hard to prove that counterattacks would yield better results.

Dolphin Research, which has long tracked the company, offers a nuanced view: Himalaya's one-month consolidation did mask some issues in the original music business, but expanding long-form audio content strengthens content barriers, and cost optimizations from the acquisition are already visible.

Two Faces, One Valuation Anchor Reset

One earnings report, two trading days, two faces. The +2.55% on August 11 daytime trading and the -11.92% that night differed not in numbers but in the yardstick the market used to evaluate the company.

For years, Tencent Music was priced as a "streaming growth stock." The allure of subscriptions lay in the imagination of perpetual growth: as long as paying users or ARPPU kept rising, profits would compound, justifying 20-30x P/E ratios. However, Q2 laid two issues bare—subscription net additions hit roughly 600,000, near historic lows; user numbers were no longer disclosed.

Once growth expectations vanished, valuation logic had to shift: from "how big can it grow?" to "how much can it earn steadily each year?" CLSA's P/E ratio cut from 15x to 10x epitomized this transition.

What does 10x mean? It's the valuation range for traditional utilities and mature consumer companies—the market no longer believes in streaming; it only believes in cash.

Ironically, by cash metrics, the company looks cheap. As of Q2's end, Tencent Music held RMB 44.22 billion in cash, time deposits, and short-term investments (~$6.15 billion), while its post-plunge market cap stood at ~HK$106.1 billion (~$13.6 billion)—cash assets accounted for over 40% of its market value.

Now consider repurchases: In Q2 alone, it bought back 43.5 million ADSs for $400 million. At this pace, annualized repurchases would reach ~$1.6 billion, yielding an annual return exceeding 10% on a $13.6 billion market cap—and that's before dividends. The essence of the bull-bear debate becomes clear: as a growth stock, it's expensive; as a cash cow, it's cheap. This plunge represents a transfer of pricing power from growth to cash, not a single-day evaporation of company value

Data from MIDiA Research reveals that by 2025, the number of paid subscribers to global music streaming services will have reached 921.6 million. However, the growth momentum has notably diminished, with subscription saturation becoming a widespread issue across the globe. In recent years, Spotify, the global leader in this sector, has responded by raising prices and diversifying its content offerings, including podcasts, audiobooks, and video content, as a strategy to combat subscription saturation. Tencent Music's approach, focusing on long-form audio, intellectual property (IP), and live events, essentially mirrors Spotify's path but is tailored to the Chinese market. The key difference lies in their timing: Spotify implemented price increases during periods of user growth, whereas Tencent Music attempted this amid a user decline. Administering the same strategy at different stages raises questions about its effectiveness. This underscores why management repeatedly emphasizes Super VIP (SVIP) memberships and AI-driven personalization: enhancing the value derived from each existing user is the only feasible aspect of this strategy.

So, where does Tencent Music's 18.6 billion yuan acquisition of Ximalaya lead?

Based on publicly available information, three potential scenarios can be outlined. The optimistic scenario envisions the creation of a closed loop between in-car entertainment and long-form audio content. Ximalaya's in-car platform already pre-installs its services in vehicles from over 80 automotive companies. If this system can be seamlessly integrated with QQ Music's membership and music library, long-form audio could emerge as the second subscription revenue stream after music subscriptions, offering users a synergistic '1+1>2' experience.

The neutral scenario centers on cost-side integration, aiming to reduce content acquisition and customer acquisition costs, stabilize profits, and maintain steady revenue growth. In this case, Tencent Music would evolve into a slow-growth yet profitable entity—a long-term outcome that aligns with the synergies highlighted by Morgan Stanley.

What the market genuinely fears is the third scenario: regulatory measures restrict monetization avenues such as price hikes, exclusivity deals, and bundling strategies, while users continue to migrate to Qishui Music's in-car and mobile platforms. In this case, the 18.6 billion yuan investment might merely serve as a temporary delay to the inevitable decline. The divergence among these three outcomes hinges not on financial reports but on the speed of integration.

Ultimately, the question Tencent Music must address is no longer whether it can still generate profits—its 44.2 billion yuan in cash reserves and quarterly operating cash flow of 2.6 billion yuan have already provided an affirmative answer.

Instead, it must demonstrate that its revenue-generating methods can continue to evolve. After subscription growth peaks, can IP development, long-form audio, AI-driven personalization, or in-car entertainment scenarios create a second wave of growth?

On the evening of August 11, following the close of the U.S. stock market, Tencent Music's stock price stood at $8.72. Simultaneously, on countless in-car screens worldwide, playlists continued to scroll uninterrupted.

The capital markets cast their votes on the company's future in a single day, but the factors that will ultimately determine the outcome lie not in the next financial report—they rest in which app those scrolling playlists ultimately settle on.