Going Against the Flow, Tencent Raises Music Unit’s IPO Target

*Tencent raised the fundraising target of its music arm’s upcoming New York listing by over 20% to a maximum of around $1.23 billion

*The profitable unit’s revenue growth slowed in the third quarter of the year, going from a 92% year-on—year increase in the first half of 2018 to a 70% rise

(Beijing) — The music arm of internet giant Tencent Holdings Ltd. boosted the fundraising target for its upcoming U.S. listing by more than 20%, as it released updated financial information that showed slowing growth for its profitable business.

The raising of Tencent Music Entertainment Group’s fundraising target contrasts with other recent offshore IPOs by Chinese internet and technology firms, most of which have cut back their goals after meeting with lukewarm investor demand. But while most of those other offerings were from money-losing companies, Tencent Music is highly profitable, even though that growth is slowing as the company gains size, according to an amended prospectus filed in the U.S. on Monday.

Tencent Music first announced its plan to go public in October, saying it aimed to raise up to $1 billion. The updated prospectus said the company now plans to 82 million American depositary shares (ADSs) at a price of between $13 and $15 each, equaling a maximum possible fundraising of $1.23 billion. Actual funds could reach as much as $1.4 billion if the deal’s underwriters exercise an overallotment option.

The listing would be the second such major offering for a Tencent spinoff over the last 13 months, following the listing of its online literature unit China Literature Ltd. last November. Tencent also owns about 7.5% of recently listed Swedish online music service Spotify Technology SA, which in turn owns about 9.1% of Tencent Music, following a strategic tie-up between the pair last year.

In addition to its new fundraising target, Tencent Music’s updated prospectus also included new financial information that showed its profit and revenue growth slowed in this year’s third quarter as its size grows.

The company’s revenue rose 70% in the third quarter to 4.94 billion yuan ($722 million), according to calculations by Caixin, slower than 92% growth in the first half of the year to about 8.62 billion yuan. Similarly the company’s more than doubling of profit in the third quarter to 964 million yuan marked a sharp slowdown from a four-fold rise in first-half.

The company did not provide specific explanation for the slowing growth in the latest quarter.

Tencent Music’s strong performance comes at a time when China’s music industry and other entertainment services have boomed as consumer are increasingly willing to pay for content. Part of that shift has been driven by industry and government efforts to crack down on copyright infringement, which used to be rampant in China and was a constant complaint among Western movie and music copyright owners.

Still, only 3.6% of Tencent Music’s users paid for its music downloading services. By comparison, nearly half of the 180 million subscribers to Spotify are paying. Instead, Tencent Music’s major revenue sources came from online entertainment services, such as online karaoke, gaming and sales of music-related merchandise.

Contact reporter Yang Ge (geyang@caixin.com)