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Tencent Music Applies for US Listing: IPO ETFs in Focus

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China’s largest music streaming company, Tencent Music Entertainment Group, has filed for an IPO in the United States.  The company has set a placeholder target of $1 billion, reaching its valuation to the range of $25-$30 billion, per the SEC filing. With the ticker name ‘TME’, the listing will be either on Nasdaq or New York Stock Exchange (see: all Total Market (U.S.) ETFs).

This year, about $7.5 billion has been raised through IPOs filed by Chinese companies. This could turn out to be the third-largest Chinese contingent IPO to list in the United States since the beginning of 2018, per Dealogic. The top two were a video streaming company, iQiyi (IQ - Free Report) ($2.4 billion) and a social shopping app, Pinduoduo (PDD - Free Report) ($1.63 billion) (read: ETFs to Add After SurveyMonkey Blockbuster IPO).

The company reported profits in the last two years. For the first six months of this year, the company has reported a profit of $263 million on revenues of $1.3 billion. In 2017, the company had earned $199 million on revenues of $1.7 billion. Nearly 70% of 2017 revenues were generated from music-centric social media services, which include virtual gifts and premium memberships.

Tencent Music is the owner of the four largest music apps in China — streaming apps QQ Music, Kugou Music and Kuwo Music, and karaoke app WeSing. Per filing, the company had more than 800 million active monthly users in Q2.

The IPO comes at an opportune time with the global music industry being on a recovery mode from the harm caused by piracy in the last few years. Nowadays, an increasing number of people are streaming music online. Tencent Music provides streaming option to more than 20 million tracks from both international and domestic music labels. Millions of users tune into the karaoke app WeSing on a daily basis.

"We are pioneering the way people enjoy online music and music-centric social entertainment services,” per the filing and according to which the number of people that pay for music in China will "more than quadruple between 2017 and 2023."

Warner Music Group and Sony Music Entertainment have acquired shares in the company for approximately $200 million in cash. Tencent Music could be compared to Spotify Technology SA (SPOT - Free Report) or Pandora Media . Spotify has a cross shareholding deal with Tencent and owns a 9% share.

The Parent company, Tencent owns 58% of the music division. Being part of the Tencent family gives Tencent Music access to more than 1 billion Wechat users. This saves marketing expenses and results in more stable operating margins compared to peers.

This IPO has the potential to be much in demand as very few profitable Chinese consumer play companies have applied for listing over the past year. This filing brings the following IPO ETFs into consideration (read: Another Tech IPO Soars: ETFs in Focus):

First Trust US IPO Index Fund (FPX - Free Report)

This ETF focuses on the largest, best-performing and most-liquid U.S. IPOs and follows the IPOX-100 U.S. Index. New companies can find entry into the fund’s holding after trading for a minimum of 100 days. It tracks the IPOX-100 U.S. Index. PayPal Holdings Inc (PYPL - Free Report) (8.65%) is the top-weight holder in the fund. AUM is $1.19 billion and expense ratio is 0.59%. It has returned 8.3% year to date.

Renaissance IPO ETF (IPO - Free Report)

This fund provides exposure to the largest and most-liquid newly listed companies by tracking the Renaissance IPO Index. New companies seek inclusion on a fast-entry basis on the fifth day of trading. Companies that have been public for two years are removed at the next quarterly review. Spotify Technology SA holds the top-weight of nearly 6%. AUM is $19.5 million and expense ratio is 0.6%. It has returned nearly 4.5% year to date.

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