Key Takeaways
Tencent Music Entertainment Group agreed to acquire podcast and audiobook platform Ximalaya for approximately $2.7 billion, a major move to consolidate its dominance in China’s increasingly competitive online audio market.
"The acquisition will enhance Tencent Music Entertainment Group’s gross margin but dilute its operating margin," CLSA analysts said in a research report, maintaining an Outperform rating on the stock.
The deal comprises $1.26 billion in cash and about 175 million of TME's Class A ordinary shares. Ximalaya reported adjusted net profit of RMB 224 million on nearly RMB 4 billion in subscription and advertising revenue in 2023. TME's Hong Kong-listed shares rose 5.1 percent after the announcement.
The acquisition combines TME’s massive music-streaming user base with Ximalaya’s leadership in long-form audio, creating significant cross-selling opportunities. However, the deal's success hinges on integrating Ximalaya’s heavy sales and marketing investments without eroding the combined entity's profitability in the long term.
CLSA noted that the impact on TME's earnings per share is expected to be neutral. While Ximalaya’s high-margin audio content, with subscription and advertising revenues of RMB 2.49 billion and RMB 1.42 billion respectively in 2023, will boost TME's gross margin, its profitability is slimmer. Ximalaya recorded a 3.6% adjusted net margin in 2023, though mainland media outlet LatePost reported its net profit could exceed RMB 500 million in 2024. The dilution in operating margin stems from Ximalaya's significant spending on sales and marketing to compete for users.
While Ximalaya will continue to operate its app independently, TME plans to leverage several synergies. The company expects to expand content distribution through its parent Tencent's WeChat Channels, utilize AIGC for production, and apply its expertise in premium intellectual property operations. CLSA has set a price target of HKD 60.3 for TME's Hong Kong shares and USD 15.4 for its U.S.-listed shares, reflecting confidence in the long-term strategic value of the merger.
This article is for informational purposes only and does not constitute investment advice.
