August 2, 2018
Cussion Pang
Chief Executive Officer
Tencent Music Entertainment Group
17/F, Malata Building, Kejizhongyi Road
Nanshan District, Shenzhen, 518057
People's Republic of China
Re: Tencent Music Entertainment Group
Draft Registration Statement on Form F-1
Submitted July 6, 2018
CIK No. 0001744676
Dear Mr. Pang:
We have reviewed your draft registration statement and have the
following comments. In
some of our comments, we may ask you to provide us with information so we may
better
understand your disclosure.
Please respond to this letter by providing the requested information and
either submitting
an amended draft registration statement or publicly filing your registration
statement on
EDGAR. If you do not believe our comments apply to your facts and circumstances
or do not
believe an amendment is appropriate, please tell us why in your response.
After reviewing the information you provide in response to these comments
and your
amended draft registration statement or filed registration statement, we may
have additional
comments.
DRS Form F-1 submitted July 6, 2018
Our Platform, page 1
1. Please provide greater detail regarding your platform. Clarify whether
this term is used to
collectively refer to your four flagship brands or whether your platform
entails a separate
technological structure, entity, network, etc.
2. Please provide a definition for your use of "daily active user" in your
statement that "[o]ur
users are highly engaged, with each daily active user on average
spending over 70 minutes
per day on our platform in the first quarter of 2018."
Cussion Pang
FirstName LastNameCussion Pang
Tencent Music Entertainment Group
Comapany2018
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August 2, 2018 Page 2
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Prospectus Summary
Overview, page 1
3. Please clarify whether substantially all of your operations and
customers are located in the
PRC, or whether you have material international operations or
customers, or intentions to
expand outside the PRC.
4. Please revise your disclosure in the beginning of the prospectus
summary to clarify that
the registrant, a Cayman Islands holding company, does not directly
own substantially all
of your business operations in the PRC and the businesses you are
describing are the
businesses of your variable interest entities.
5. We note that Tencent Holdings owns or operates music streaming apps
such as Joox and
Gaana outside of the PRC. Please discuss here and throughout your
filing whether you
expect to compete with these apps, and whether you believe the
existence of these apps
could impede or discourage you from operating overseas.
Market Opportunity, page 2
6. To provide context to your disclosure about China's online music
services paying ratio,
please disclose the "leading global player" that is used as a
comparison.
Our Strengths, page 3
7. The discussion of your music entertainment products on page 3 is
followed by a statement
that your platform "integrates these products seemlessly..." Please
discuss how your four
flagship products are integrated with each other.
8. We note your statement on page 3 that "[o]ur online karaoke social
community, primarily
WeSing, enables users to have fun by singing and interacting with
friends, with most
activities taking place between users already connected on
Weixin/WeChat or QQ." We
also note your statement that QQ Music was launched as a standalone
online music
service brand. Please clarify the degree to which WeSing or QQ Music
users need to
download and use Weixin/WeChat or QQ to fully utilize the
functionality of the apps. For
example, in order for a user to interact with friends on WeSing, does
the user need to also
use Weixin/WeChat (or QQ) to facilitate that interaction? Please also
clarify the degree to
which Kuguo and Kuwo have the same level of connectivity and
integration with
Weixin/WeChat, QQ, or other applications.
9. In your discussion of monetization on page 4, disclose the percentage
of revenues derived
from online music services and music-centric social entertainment
services, respectively,
in 2017 and the first quarter of 2018.
10. You state on page 4 that you "benefit from unique access to Tencent's
massive user base"
which in turn "facilitates the organic growth of our user base." You
also state that you
"benefit from opportunities to collaborate with other platforms in the
Tencent
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Tencent Music Entertainment Group
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ecosystem." To provide balance, disclose that your business
constituted only a small
portion of Tencent's ecosystem and Tencent may make strategic business
decisions, or
suffer adverse trends, that may disrupt or discontinue your
collaborations or access to
Tencent's user base.
Our Challenges, page 5
11. Please disclose that your PRC operating entities do not have all of
their required PRC
operating permits and licenses pertaining to their online services. We
refer to the
disclosure under your risk factor on page 25 entitled, "China's
internet and music
entertainment industries are highly regulated. Our failure to obtain
and maintain requisite
licenses or permits applicable or to respond to any changes in
government policies, laws
or regulations may materially and adversely impact our business,
financial condition and
results of operation."
Corporate Structure, page 7
12. Please clarify here and on page 73 which VIEs control each of QQ Sing,
WeSing, Kuguo,
and Kuwo.
13. Please provide more information regarding the purpose of the Xizang
Qiming VIE.
14. We note that neither the company nor Tencent Holdings currently has a
dual-class
structure. Please discuss why you are instituting a dual-class
structure in connection with
the offering.
15. Please disclose why you do not directly own your operations in China,
but use contractual
arrangements with VIEs instead. Disclose that, if your PRC VIEs and
their shareholders
fail to perform their obligations under the contractual arrangements,
you could be limited
in your ability to enforce the contractual arrangements that give you
effective control.
Further, if you are unable to maintain effective control, you would
not be able to continue
to consolidate the VIEs' financial results with your financial
results. Disclose the
percentage of revenues in your consolidated financial statements that
are derived from
your VIEs. Disclose that you rely on dividends and other distributions
paid to you by
PRC subsidiary, which in turn depends on the service fees paid to your
PRC subsidiary.
Disclose the amount of dividends and fees that you expect to collect.
Disclose that this
does not mean that you are able to have unfettered access to your PRC
subsidiary's and
VIEs' revenues due to PRC legal restrictions on the payment of
dividends by PRC
companies, foreign exchange control restrictions, and the restrictions
on foreign
investment, among others.
16. Please provide greater detail regarding the shareholders of your VIEs.
While we note that
you identify the shareholders of these entities, please also disclose
their percentage
ownership in the VIEs and whether they have any relationship with the
company or the
company's affiliates such as Tencent Holdings.
Cussion Pang
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Tencent Music Entertainment Group
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Conventions Which Apply to this Prospectus, page 9
17. Clarify whether "users" as discussed in the definition of the
iResearch "paying ratio"
includes non-mobile users or whether it refers to mobile-only users.
The Offering
Use of Proceeds, page 13
18. Please clarify here and throughout your filing that you will not be
receiving any proceeds
from the Assured Entitlement Distribution. If this is not the case,
please clarify and
provide additional detail.
Assured Entitlement Distribution, page 14
19. Please clarify when the company intends to set the terms of and carry
out the Assured
Entitlement Distribution. It is unclear from current disclosures
whether this will take
place before the offering or simultaneously with it. Please also
clarify whether TME will
absorb any of the costs associated with undertaking this distribution,
including
professional fees and the actual cost of the anticipated cash
distributions. If you anticipate
that Tencent Holdings will fund the distribution and its associated
costs please disclose
that fact. Also disclose whether any proceeds from this offering will
be used to pay for or
facilitate the Assured Entitlement Distribution.
Use of Proceeds, page 63
20. We note that you intend to use the net offering proceeds for purposes
that relate to your
operations conducted in the PRC. We also note that you are only
permitted under PRC
laws and regulations to provide funding to your PRC subsidiaries
through loans and
capital contributions and to your VIEs through loans, subject to
applicable government
registration and approval requirements. To provide context, please
quantify how much of
your net offering proceeds would likely be available for investment in
your PRC
operations. For example, quantify the current statutory limits on your
ability to loan or
make capital contributions to your PRC subsidiaries and to make loans
to your VIEs. Also
disclose, if true, that you expect the IPO proceeds to be used in
China in the form of RMB
and, therefore, your PRC subsidiary, VIEs and their subsidiaries will
need to convert any
capital contributions or loans from U.S. dollars to RMB. Lastly,
discuss how long it would
take and how likely it would be that you would receive the necessary
approvals to use the
proceeds for the intended purposes.
Corporate History and Structure, page 72
21. You state that you acquired a 100% equity interest in Ultimate Music,
Inc., "a provider of
online music services to smart devices." Please provide more
information regarding what
these online music services entail.
Cussion Pang
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Tencent Music Entertainment Group
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Our Relationship with Tencent, page 77
22. We note your statement that you "will continue to operate
independently from Tencent"
after you become a public company. Please qualify this statement by
addressing areas in
which you will continue to be dependent upon Tencent, such as linkages
with Tencent's
social, communication, and payments apps and systems.
23. You state that you have historically cooperated with Tencent Holdings
in a number of
areas including "user acquisition." Please disclose if you have any
plans to continue this
specific area of cooperation moving forward and discuss how the user
acquisition relationship will function in practice.
Selected Consolidated Financial Data, page 78
24. We note that your historical results of operations for 2016 do not
include the results of
CMC prior to the acquisition on July 12, 2016. We also note that CMC
had net revenues
of RMB1.9 million for the period through July 12, 2016 and the
revenues for the registrant
were RMB4.4 million for 2016, including CMC subsequent to July 12,
2016. Based on
the significance of CMC prior to the acquisition, it appears that CMC
is a predecessor to
the registrant. Please expand the disclosure in Selected Financial
Data to provide
predecessor financial information, pro forma financial information
using the guidance in
Article 11 of Regulation S-X and expand the notes to the Selected
Consolidated Financial
Data to include sufficient detail of CMC historical results of
operations to facilitate
comparison of the periods presented. Also revise the presentation in
MD&A and
elsewhere in the document.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview, page 81
25. We note that you discuss in the Overview the revenue changes from 2016
to 2017 without
quantifying the impact of your acquisition of CMC in 2016. Please
expand the disclosures
on page 81 and elsewhere in the document to provide a balanced
discussion that includes
changes due to the acquisition in contrast to organic growth from
period to period. Also,
provide a discussion of pro forma results of operations with equal
prominence to the
discussion of historical results due to the significance of the impact
of CMC on your
operations. Please also revise the disclosure on page 113 and
throughout the document
accordingly.
26. We note your statement that your services are "predominately accessed
via mobile
devices." Please discuss whether you have a material amount of, or
generate a material
amount of revenue from, non-mobile users. We note the inclusion of PC
MAUs in your
total unique MAUs figure. If there are any material differences
between the economics of
mobile and non-mobile users, please discuss them here along with any
other technical
differences in the user experience such as reduced/enhanced features,
interfaces, etc.
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Tencent Music Entertainment Group
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Specific Factors Affecting Our Results of Operations, page 82
27. We note your discussion of encouraging users to use multiple services
across your
platform. Please discuss whether such usage is prevalent at this time,
where the usage of
multiple services has trended for the periods discussed, and where you
expect this to trend
in the future.
28. You state that your "ability to generate revenue is affected by the
number of our users and
the level of their engagement" and your "results of operations depend
largely on our
ability to convert our vast user base into paying users." Please
discuss whether you use
any additional metrics, other than MAUs, paying users, and paying
ratio, to measure or
track user engagement and assess where you are converting users into
paying users across
your applications. For example, you might discuss average revenue per
user, the number
of programs streamed, the number of music downloaded, virtual gifts
sent, and the
monetary amount of virtual gifts sent.
29. We note that the number of mobile MAUs, paying users, and paying ratio
has been
increasing for both your online music services and social
entertainment services over the
past two years. We also note that the much smaller number of mobile
MAUs and paying
users for your social entertainment services appear to generate the
majority of your
revenues despite having only a slightly higher paying ratio.
Furthermore, while the larger
online music user base generates less revenue, it appears to be a
larger center of cost
relative to social entertainment services. Please discuss this trend
in more detail,
including the reasons for this trend, its impact on your results of
operations, and whether
you expect this trend to continue.
30. You state that you plan on investing in "long-tail content." Please
briefly describe this
kind of content and the economics of it in relation to its general
popularity and the number
of users who download and listen to this category of content. Please
also discuss any risks
associated with the purchase or licensing of this category of content
given its expected
value and utility, if material.
31. Explain how your "online music services user base serves as a funnel
for driving user
adoption" of your social entertainment services. Please discuss the
specific means or
incentives that you use to encourage the use of the latter services.
Key Components of Results of Operations
Revenues, page 84
32. So that investors can better understand how your business strategies
and key operating
metrics affect your results of operations, please discuss the relative
contributions of each
source of revenue generated from your online music services. For
example, it would be
meaningful to understand how much revenue is generated from content
sublicensing as
opposed to paid music, as revenues from content sublicensing are not
derived from your
users and therefore are not reflective of your increased user base and
conversion to paying
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Tencent Music Entertainment Group
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users.
Critical Accounting Policies, Judgments and Estimates
Share-based Compensation Expense, page 90
33. Please expand the note (1) on pages 92 and 93 to quantify adjustments
to the number of
awards outstanding, the applicable exercise price and the number of
shares available for
issuance under share incentive plans to address the dilutive effect of
the share dividend in
May 2018, if material.
Liquidity and Capital Resources, page 102
34. We note that your content royalties amounts represent the minimum
royalty payments that
you are obligated to pay under the various agreements you have entered
into. You state
elsewhere that you expect content costs to increase in the future. In
light of these
disclosures and the increased amount of content royalty costs shown
here, please
discuss in results of operations whether management expects there to
be materially
different economic trends between the fixed royalty costs and variable
royalty costs that
the company will pay in the future.
Holding Company Structure, page 103
35. Please discuss why the company and its wholly-owned subsidiaries
contained 66.4% of
the company's assets, but contributed only 0.3% of revenues in 2017.
In addition, where
material, please distinguish between your Cayman Islands holding
company, your Hong
Kong subsidiaries, your WFOEs based in the PRC, and your VIEs.
36. Disclose that the payment of dividends to you by your PRC subsidiaries
depends on
service fees paid to your PRC subsidiaries by your VIEs in China.
Disclose the amount of
services fees paid to your PRC subsidiaries from your VIEs in the last
two fiscal years.
Disclose whether you expect these levels to continue in the future.
Business
Our Strategies, page 115
37. We note your plans to reinforce your "content leadership" and "be the
partner of choice"
with "domestic and international music labels." Please supplement this
discussion to
address how your sublicensing of content under your licensing
agreements with major
music labels and arrangements with competitors intersect with your
ambitions to maintain
content leadership. Please describe any advantages, beyond
sublicensing fees, that you
believe being an original licensee confers regarding your content
strategy.
Our Brands and Products, page 117
38. Please provide context for your statement about how social
interactions are "deeply
ingrained" in your products and "help generate a strong network
effect" across your
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Tencent Music Entertainment Group
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platform given that Weixin/WeChat, QQ, etc. will be products of a
related party after the
offering.
Our Content, page 128
39. We note your statement that "[a]ll the tracks that we license from
music labels are
generally available to users across our different products." Please
clarify whether the
music that you license is also available on, and for use by, WeSing
and your other karaoke
applications. Discuss under what circumstances tracks are not
available across different
products.
40. You state that you supplement your music offerings with a library of
reviews and articles
"written or curated by our in-house editorial team." Please disclose
whether you have any
agreements with other Tencent entities, such as China Literature for
example, to provide
these reviews and articles.
How We Generate Revenue, page 130
41. Please expand your discussion of sublicensing to address the
relatively short duration of
these agreements.
42. Please provide more detailed information regarding your virtual gift
sales. We note
disclosures in your notes to the financial statements which make
reference to consumable,
time-based, and durable virtual gifts. Please explain exactly how the
virtual gift process
works in practice including the incentives for users to purchase and
give these gifts, how
TME actually earns revenue from user virtual gift purchases, and the
degree to which, if at
all, these gifts are a prerequisite for certain usage features in your
apps.
Management, page 153
43. We note that several of your directors are current officers or
employees of Tencent
Holdings. Please discuss the specific conflicts of interest this
presents, potential conflicts
which may arise, and the specific processes through which TME will (or
intends to)
address or oversee these conflicts.
Principal and Selling Shareholders, page 164
44. We note your discussion of the Tencent Voting Undertaking. Please
clarify why you have
only associated 50% of Spotify's shares with Tencent Holdings in this
chart.
45. Please clarify whether the post-offering columns will reflect the ADSs
issued per the
Assured Entitlement Distribution.
Description of Share Capital
Spotify Investor Agreement, page 181
46. Briefly disclose the purpose behind the Spotify transactions. In
addition, please disclose
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the limited exceptions pursuant to which Spotify may transfer ordinary
shares within the
three year period.
Underwriting, page 199
47. Please provide more detail regarding the exceptions to the lock-up
agreement.
Tencent Music Entertainment Group
Financial Statements for the Years Ended December 31, 2016 and 2017
Note 2 - Summary of significant accounting policies
2.5 Segment reporting, page F-23
48. We note that you have only one operating segment and that your CODMs
do not segregate
the Group's business by product or service lines. We also note on page
23 in Risk Factors
that minimum guarantees in licenses may limit your flexibility in
reacting to changes in
your business and "market segments in which" you operate. Please
expand your segment
disclosure to address these "market segments" and tell us why you
believe that operating
in different market segments does not constitute more than one
operating segment.
2.6 Foreign currency translation, page F-23
49. We note that the major operations of the Group are within the PRC but
that you state that
the functional currency is the U.S. Dollar. Please tell us the basis
for your conclusion that
the functional currency is the U.S. Dollar despite the use of the
Renmimbi in the PRC,
which is the primary economic environment in which you operate. Please
use the
guidance in IAS 21 in your response.
2.19 Employee benefits, page F-30
50. We note that you do not recognize employee entitlements to sick and
maternity leave until
the time of leave. Tell us the reason that these benefits are not
accrued based on historical
estimates and whether the amounts are material to your results of
operations.
2.22 Revenue Recognition, page F-32
51. Please help us better understand the nature of your cost per display
advertising
arrangements. In addition, tell us how you concluded that the revenue
should be
recognized ratably rather than when each advertisement is displayed.
Reference IFRS
15.31 through 45.
52. Please help us better understand the nature of the downloads provided
in your subscription
packages. Tell us how you considered whether these downloads should be
treated as
separate performance obligations. In addition, tell us how you
considered whether
revenue from the downloads should be recognized at a point in time.
Reference IFRS
15.27 through 30 and IFRS 15.38.
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53. Your disclosure on page F-67 suggests that content license agreements
have terms of up to
five years. Please tell us the length of your content sublicense
agreements. To the extent
the terms of these sublicense agreements are more than one year,
please tell us how you
considered disclosing the transaction price allocated to the remaining
sublicense
performance obligations. Refer to IFRS 15.120-122.
54. Please quantify the significance of advertising arrangements for which
you recognize
revenue gross of payments remitted to advertising agencies and those
which you
recognize revenue net of such amounts. Provide us more details
regarding the terms of
the arrangements where revenue is recognized on a net basis and
clarify why you do not
believe that amounts excluded from revenue are part of your
transaction price. Reference
IFRS 15.9 and IFRS 15.47.
55. Please tell us how you determined that sales of digital music singles
and albums to users
should be recognized over the expected service period. Tell us how you
considered
whether the revenue should be recognized when control of the digital
music is transferred
to the user. In addition, tell us how you considered whether the
streaming service is a
separate performance obligation. Reference IFRS 15.27 through 30 and
IFRS 15.38.
56. We note your disclosure that it is impractical to bifurcate the fees
between existing
content and new content in arrangements where you sublicense certain
of your music
content to other music platforms. Please further explain this
statement and tell us how it
has impacted your determination of performance obligations for these
arrangements. In
addition, it appears that not all of your content is sublicensed to
another music platform.
Tell us more about the terms of these arrangements. Reference IFRS
15.27 through 30.
57. Please quantify for us the costs associated with free virtual gifts
offered to customers and
explain how you classify these costs in your income statements.
58. Please tell us how you considered whether to further disaggregate
revenue from your
online music services and social entertainment services and other
services into additional
categories. It appears that the nature of certain services in the
current categories is
different from other services. Refer to IFRS 15.114 and IFRS 15
B87-B89.
Note 28 - Events occurring after the reporting period, page F-69
59. Please disclose the value of licensed content transactions with
certain strategic investors,
if material.
General
60. We note references to third-party market data throughout the
prospectus, including
references to the report you commissioned from iResearch. Please
provide us with copies
of any materials that support third-party statements, clearly
cross-referencing each
statement with the underlying factual support.
Cussion Pang
Tencent Music Entertainment Group
August 2, 2018
Page 11
You may contact Claire Delabar, Senior Staff Accountant, at (202)
551-3349 or Terry
French, Accounting Branch Chief, at (202) 551-3828 if you have questions
regarding comments
on the financial statements and related matters. Please contact William
Mastrianna, Attorney-
Adviser, at (202) 551-3778 or Kathleen Krebs, Special Counsel, at (202) 5513350
with any other
questions.
FirstName LastNameCussion Pang
Comapany NameTencent Music Entertainment Group
Division of
Corporation Finance
August 2, 2018 Page 11 Office of
Telecommunications
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