www.ubs.com/investmentresearch This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 48. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Global Research 29 July 2019 China Online Music Industry Live streaming and short video are changing the music industry Significant growth opportunities—but new disruptors are emerging We believe online media consumers in China—like their counterparts in developed markets—are increasingly willing to pay (report). However, there are two key differences in China's music industry. First, live streaming (including online karaoke) will remain a key growth driver in China. In 2018, live-streaming revenue was about 10x music subscription revenue, and we forecast a 2018-23 live streaming revenue CAGR of 29% compared to 26% for subscriptions. Second, short video apps, especially Tik Tok, have become the leading music discovery platforms. Subscriptions growth will be measured but ad-based music could drive upside China's music industry is at an inflection point similar to those in movies in 2002 and online video in 2015. But we think music subscriber penetration growth will be mild (from 2.8% in 2018 to 8.6% in 2023E) compared to long-form video (from 1.5% to 30% over 2015-18). New shows drive video, but legacy content libraries are more important for music. Platforms will have to slowly degrade their free services to drive music listeners to pay. We also believe ad-based music could be a major driver of monetisation. In three to five years we estimate it will generate revenue 3x greater than 2018 music subscription revenue (under conservative assumptions), especially as Chinese music listeners have been conditioned by years of not paying for music and still pay little for long-form video. Tik Tok is disrupting how the music industry works In the past two years, Tik Tok has been the largest emerging traffic pool in China's mobile internet space. We view music as a deeply rooted element of Tik Tok. It has already transformed China’s music value chain by becoming the largest marketing channel, and is reportedly planning to enter the music streaming business overseas. Our analysis indicates 40-70% of top-ranked music becomes popular due to exposure on Tik Tok, and we estimate it is 20x more influential than leading music and video apps like QQ Music and iQiyi, in terms of the number of music clips played. Initiated coverage of TME (Neutral) balancing growth and competition We think Tencent Music Entertainment (TME), China’s largest music platform by monthly active ...
