![\"\"](\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/08\/001_2020-0824_Tencent-Bond-2030-1100x619.jpg\")
<\/figure>\n\n\n\nThe proposed deal falls hot on the heels of the release of the company\u2019s second quarter of 2020 unaudited financial results, which appear to have met most analysts\u2019 estimates.<\/p>\n\n\n\n
Among the metrics, paying users for its online music platform grew by nearly 52% year-over-year to 47.1 million, with average revenue per paying user (ARPPU) having risen by just north of 8% over the same period.<\/p>\n\n\n\n
Tencent Music also said it generated total revenue of almost RMB 7bn (US$981m), an increase of 17.5% year-over-year, with online music subscription revenues up by 64.7% over the same prior-year quarter to RMB 1.31bn (US$186m).<\/p>\n\n\n\n
Tencent Music CEO Cussion Pang said that as “the industry leader of China’s online music market,\u201d the company\u2019s Q2 2020 online music revenues jumped 42.2% year-over-year\u2014accelerating from 27.4% in the first quarter\u2014 which was mainly attributable to a nearly 65% year-over-year growth in music subscription revenues, as well as \u201cstrong performance from our digital album sales.\u201d<\/p>\n\n\n\n
Pang continued that with \u201cour content leadership, a well-executed paywall strategy, and enhanced recommendation capabilities, we have significantly improved our online music paying ratio to 7.2%, up from 4.8% in the same quarter of last year.”<\/p>\n\n\n\n He further highlighted that the company\u2019s \u201csocial entertainment services performed steadily in the second quarter, registering sequential growth as the COVID-19 situation continued to improve in China.\u201d<\/p>\n\n\n\n Pang added that Tencent Music \u201cwill continue to invest in and ramp up our long-form audio services, and expect to achieve significant synergies across all aspects of our businesses and further boost our long-term sustainable growth,\u201d which he said is supported by \u201cour strong financial position and cash flow generation.\u201d<\/p>\n\n\n\n As of June 30, 2020, the combined balance of the company’s cash, cash equivalents and term deposits amounted to roughly RMB 22.3bn billion (US$3.16bn), compared to RMB 21.9bn as of March 31, 2020.<\/p>\n\n\n\n The company said the increase was primarily due to its RMB 1.44bn (US$204m) cash flow generated from operations. However, this was partially offset by investments, as well as exchange rate fluctuations in RMB to USD, which on June 30, 2020, was 7.0651 to 1.<\/p>\n\n\n\n S&P Global Ratings, which has assigned an investment-grade \u2018A\u2019 rating to Tencent Music\u2019s proposed note offering, said it expects the company to \u201cinvest prudently in proprietary music content or self-produced variety shows, and maintain a measured approach toward S&P observed that the firm\u2019s \u201cstrong cash flow and big cash balance should be sufficient to absorb its investment needs.\u201d<\/p>\n\n\n\n The company has a high cash flow conversion, with 100% of EBITDA flowing through to free operating cash flow over the past two years \u2013 driven by working capital inflows from user prepayments and low capital expenditure.<\/p>\n\n\n\n S&P analyst Xin Hui Zu also noted that Tencent Music\u2019s total mobile monthly active users (MAUs) of more than 880 million is one of the highest within Tencent Holdings \u2013 its parent company, which is also the owner of social messaging app WeChat.<\/p>\n\n\n\n Zu added that the company’s \u201ccontribution to user experience and time spent within Tencent’s ecosystem outweighs its direct financial contribution to the group.\u201d<\/p>\n\n\n\n According to S&P\u2019s estimates, Tencent Music accounted for less than 5% of its parent\u2019s EBITDA and 7% of its revenue in 2019.<\/p>\n\n\n\n Other credit rating agencies have assigned similar investment-grade credit ratings to Tencent Music\u2019s announced note sale, with Moody\u2019s Investors Service and Fitch Ratings having given the deal an \u2018A2\u2019 and \u2018A\u2019 rating, respectively.<\/p>\n\n\n\n Tencent Music said the notes, registered under the U.S. Securities Act of 1933, are expected to be listed on the Hong Kong Stock Exchange.<\/p>\n\n\n\n The offering is being jointly lead-managed by BofA Securities, J.P. Morgan Securities, Goldman Sachs (Asia), Morgan Stanley, Bank of China (Hong Kong), Credit Suisse, Deutsche Bank, HSBC and Mizuho Securities.<\/p>\n\n\n\n Meanwhile, Tencent Music\u2019s proposed sale falls against a backdrop of growing unease about increasing levels of Chinese corporate bond issuance, as well as how a long list of geopolitical issues may impact the country\u2019s ability to honor its future debt obligations.<\/p>\n\n\n\n By some measures, corporate credit in China spiked around 10% year-on-year at the end of the first quarter of 2020 – the highest level in three years \u2013 as the novel coronavirus spurred Chinese regulators to support liquidity and accelerate economic growth.<\/p>\n\n\n\n Onshore corporate bond sales soared close to 35% in Q1 2020 to more than CNY 3tn, with March and April each hitting monthly record highs.<\/p>\n\n\n\n While monetary easing appears to have helped boost Chinese corporate debt levels, the country continues to face geopolitical threats to its sovereign credit profile.<\/p>\n\n\n\n Fitch Ratings recently noted that tensions between China and a number of major economies, including the U.S., have \u201cescalated sharply across a spectrum of issues, including the pandemic, policies towards Hong Kong, territorial claims and a protracted trade dispute.\u201d<\/p>\n\n\n\n Fitch said it believes these tensions will persist, \u201ceven while China’s vast global supply-chain linkages and the extensiveness of global business interests operating in the country will impose a moderating force on them.<\/p>\n\n\n\n In the short term, heightened tensions have not had an impact on China’s credit fundamentals, and the degree to which they translate into policies that are supportive, neutral, or detrimental to the sovereign rating will only become evident over time.\u201d<\/p>\n\n\n\n Other analysts have also placed China on their emerging markets (EM) risk radar.<\/p>\n\n\n\n Nuveen analysts Bill Martin and John Miller, for example, noted that while EM debt performance is likely to be supported in the near term by factors such as the global economic recovery, excess liquidity provided by major central banks, and investors\u2019 willingness to deploy still-high levels of cash, selectivity \u201camong sovereign, corporate and local-currency markets, as well as individual issuers, will be critical.\u201d<\/p>\n\n\n\n Martin and Miller added that rising U.S.\/China tensions are \u201con our radar,\u201d as \u201cthe Trump administration continues to blame China for the coronavirus outbreak, while China\u2019s diplomatic corps is becoming increasingly hawkish. Adding to the volatile mix are Beijing\u2019s crackdown on Hong Kong and uncertainty about the impact of U.S. elections in November.\u201d<\/p>\n\n\n\n While uncertainties over China\u2019s ability to fulfill its debt obligations linger, perceptions about the country\u2019s creditworthiness appear to have improved over the past three months, with spreads on its five-year credit default swaps having tightened by around 19.5 basis points to a little more than 39 bps.<\/p>\n\n\n\n Over the same period, U.S. 5-year CDS spreads have tightened about 1.5 bps to 23.3 bps.<\/p>\n\n\n\n It appears certain Chinese companies, such as Tencent, have enjoyed an upswing in their share prices, as well as the value of some their existing bonds.<\/p>\n\n\n\n![\"TME](\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/08\/002_2020-0824_TME-Metrics-1100x619.jpg\")
<\/figure>\n\n\n\nUp notes<\/strong><\/h2>\n\n\n\n
acquisitions over the next two years.\u201d<\/p>\n\n\n\n![\"Tencent](\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/08\/004_2020-0824_TME-ADRs-1100x619.jpg\")
<\/figure>\n\n\n\nDown notes<\/strong><\/h2>\n\n\n\n
High notes<\/strong><\/h2>\n\n\n\n
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<\/figure>\n\n\n\n![\"IBKR](\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/08\/LAST_Bond-Scanner-Navigation-1100x619.jpg\")
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