Fitch Ratings has affirmed
The Outlook is Stable.
The affirmation reflects the company's strong linkage with its parent,
Key Rating Drivers
Strong Linkage: We believe
TME's operations are deeply integrated with that of
Solid Market Position: TME's SCP is underpinned by its market position as
Small Decline in Revenue: We expect 2023 revenue to decline by 2%-3%, before recovering by 2%-3% in 2024 (2022: 9% decline), due to lower revenue from TME's social entertainment services - which contribute 40%-46% of group revenue. However, TME's online music services should expand by 15%-21% in 2023-2024 (2022: 9%), driven by rising paying users and upgrades to pricier subscription packages as the company adds more privileges to these packages.
We believe online music services will be the company's key revenue driver in the medium term. This should mitigate our expected 10%-20% drop in social entertainment service revenue, as TME removes content that may not comply with regulations on host behaviour and users' virtual gifting in live streaming.
EBITDA Margin to Improve: We expect TME's Fitch-defined EBITDA margin to improve to 21%-22% in 2023-2024 (2022: 19%) on better monetisation of music subscription services, a recovery in advertising revenue along with tight operating cost control. We expect the company to keep its selling and marketing expenses low, at around 4% of revenue in 2023-2024 (2022: 4%; 2021: 9%), as it targets growth in paying users rather than promotions to further acquire customers, including free users.
Long-Form Audio Potential: TME is well-positioned to capture the rapid growth in long-form audio services in
Solid
Manageable Regulatory Risk: TME's IDRs reflect our expectation that the company will continue its healthy relationship with the Chinese government and regulatory authorities. Any change in this position could affect TME's credit strength, due to government restrictions on foreign ownership of domestic internet companies. TME does not have equity control over its onshore operating companies, such as
TME has an ESG Relevance Score of '4' for Exposure to Social Impacts due to heightened regulatory risk as the Chinese government is focusing on antitrust enforcement and strengthening control of content and behaviour on the internet, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg1.4
Derivation Summary
TME's SCP is underpinned by its leading market position in
TME warrants a better business risk profile assessment than
TME's SCP is weaker than that of
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Continued market leadership in
Revenue to decline by 2%-3% in 2023, before recovering by 2%-3% in 2024
Fitch-defined EBIT margin to widen to 17%-18% in 2023-2025 (2022: 15%) on better monetisation of the music subscription and long-form audio businesses and tighter control over operating expenses
Capex/sales ratio of 4% in 2023-2025 (2022: 4%)
No cash dividends in the medium term
Share repurchase of around
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on
Strengthened incentives for
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on
Weakened incentives for
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: We expect TME to maintain a large net cash position for the next few years. It had readily available cash of about
Issuer Profile
TME is majority owned by and deeply integrated with
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Fitch rates TME on a top-down basis one notch below
ESG Considerations
TME has an ESG Relevance Score of '4' for Exposure to Social Impacts, due to regulatory risk, as the Chinese government is focused on antitrust enforcement and strengthening its control over content and behaviour on the internet. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores
(C) 2023 Electronic News Publishing, source