 Global Research 29 July 2019 China Online Music Industry Equities Live streaming and short video are changing the China music industry Internet Services Zhijing Liu Analyst Significant growth opportunities—but new disruptors are emerging S1460515120001 zhijing.liu@ubssecurities.com We believe online media consumers in China—like their counterparts in developed +86-213-866 8847 markets—are increasingly wil ing to pay (report). However, there are two key Jerry Liu differences in China's music industry. First, live streaming (including online karaoke) wil Analyst remain a key growth driver in China. In 2018, live-streaming revenue was about 10x jerry.liu@ubs.com music subscription revenue, and we forecast a 2018-23 live streaming revenue CAGR +852-2971 7493 of 29% compared to 26% for subscriptions. Second, short video apps, especial y Tik Eric J. Sheridan Tok, have become the leading music discovery platforms. Analyst eric.sheridan@ubs.com Subscriptions growth will be measured but ad-based music could drive upside +1-212-713 9310 China's music industry is at an inflection point similar to those in movies in 2002 and Richard Eary online video in 2015. But we think music subscriber penetration growth wil be mild Analyst (from 2.8% in 2018 to 8.6% in 2023E) compared to long-form video (from 1.5% to richard.eary@ubs.com 30% over 2015-18). New shows drive video, but legacy content libraries are more +44-20-7568 8011 important for music. Platforms wil have to slowly degrade their free services to drive Curtis Li music listeners to pay. We also believe ad-based music could be a major driver of Associate Analyst monetisation. In three to five years we estimate it wil generate revenue 3x greater than curtis.li@ubs.com 2018 music subscription revenue (under conservative assumptions), especially as +852-2971 5526 Chinese music listeners have been conditioned by years of not paying for music and stil Navin Killa pay little for long-form video. Analyst navin.kil a@ubs.com Tik Tok is disrupting how the music industry works +852-2971 7594 In the past two years, Tik Tok has been the largest emerging traffic pool in China's Corrine Hu, CFA mobile internet space. We view music as a deeply rooted element of Tik Tok. It has Analyst already transformed China’s music value chain by becoming the largest marketing S1460518100003 channel, and is reportedly planning to enter the music streaming business overseas. Our corrine.hu@ubssecurities.com analysis indicates 40-70% of top-ranked music becomes popular due to exposure on +86-213-866 8875 Tik Tok, and we estimate it is 20x more influential than leading music and video apps Angela Xu, CFA like QQ Music and iQiyi, in terms of the number of music clips played. Analyst angela.xu@ubssecurities.com Initiated coverage of TME (Neutral) balancing growth and competition +86-213-866 8813 We think Tencent Music Entertainment (TME), China’s largest music platform by monthly active users (MAU) and subscriber base, has significant long-term upside potential. However, that is offset by near-term margin pressure due to competition and licensing fees (see our initiation of coverage). Figure 1: China internet media and global music media valuations Above data as of 26 July 2019. Source: UBS estimate, Eikon 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. Contents Zhijing Liu Analyst S1460515120001 OUR THESIS IN PICTURES ................................................................... 5 zhijing.liu@ubssecurities.com PIVOTAL QUESTIONS ......................................................................... 7 +86-213-866 8847 Jerry Liu Q: Can China's music subscription revenue double in three years? .............. 7 Analyst jerry.liu@ubs.com Q: Will the rise of Tik Tok be a disruptive force for China's existing music +852-2971 7493 channels and labels? ..

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