<div id="readability-page-1"><div><div>While short videos are all the rage lately, Tencent Music's latest acquisition bolsters its position in the strategically important market for long-form audio content<h4>Key Takeaways:</h4><ul> <li>Tencent Music will pay $1.26 billion for Ximalaya, China's leading audio platform that boasts more than 600 million users</li> <li>Ximalaya's products have been included in the onboard audio offerings of more than 80 carmakers, including Tesla and Nio</li> </ul>By Lee Shih TaIn today's increasingly video-dominated media world, predictions of the death of audio formats like podcasts and audio novels may be slightly premature.Tencent Music Entertainment Group (TME.US; 1698.HK), China's leading online music streaming platform, gave the audio format a major vote of confidence last week with announcement of its plan to acquire Ximalaya Inc., using the purchase to fill an important gap in its long-form audio segment.Tencent Music said it will pay $1.26 billion in cash and stock accounting for up to 5.2% of its share capital for Ximalaya, a leading audio site whose name means Himalaya, according to its announcement of the deal. Another tranche of shares equal to 0.37% of Tencent Music's total will go to Ximalaya's founding shareholders if the company meets certain performance goals.Ximalaya said it would restructure some of its existing operations once the transaction is complete but vowed to maintain its current brand and continue to independently operate its existing products, with its core management team and strategic development focus intact.&#34;Rather than fight alone, it is much better to share resources and pursue joint R&amp;D efforts so that more energy can be devoted to improving user experience and content creators' income,&#34; wrote Ximalaya founder Yu Jianjun and co-CEO Chen Xiaoyu in an internal letter. They added that the &#34;partnership enables each party to travel farther and better.&#34;Launched in 2013, Ximalaya is one of China's oldest online audio platforms, and was valued as high as $5 billion at one point. It tried to list four times as a standalone company, starting in May 2021 when it filed for a New York IPO. But it quickly withdrew that application after ride-hailing service DiDi Global was forced to delist from New York after running afoul of Chinese data security regulations, prompting Ximalaya to worry that it too could run into similar problems.The company later moved its sights to Hong Kong and submitted listing applications in 2021, 2022 and 2024. But all of those were eventually abandoned.Its most recent application said Ximalaya accounted for 25% of China's online audio market in 2023 based on online audio revenue. It said its user base rose above the 600 million mark last year, with 318 million active monthly users accessing its material using their smartphones, making it the biggest online audio platform in China.The company registered combined losses of 3.17 billion yuan ($440 million) in the five years between 2018 and 2022, but turned a profit of 3.74 billion yuan in 2023, mostly thanks to large-scale staff layoffs and cutbacks in its marketing and promotional spending. It cut 1,705 employees between 2021 and 2023, equal to nearly 40% of its total payroll.Following those cuts, the company's revenue growth slowed from 43.7% in 2021 to just 1.7% in 2023. Its subscription revenue growth also slowed from 15.9% to 8.4% over that time, while growth of mobile user base tumbled from 24.4% to just 3.9%. The deteriorating metrics raised questions about the sustainability of Ximalaya's profits, as it continued to face intense competition.Tencent Music reportedly reached out to Ximalaya about a potential merger as early as 2022, but the talks ultimately collapsed over differences on matters such as brand independence and management. However, speculation that a potential acquisition was still possible returned this April after a Ximalaya unit sharply raised its registered capital to 2.8 billion yuan. That turned out to indeed be the case.<h4>In-vehicle audio entry</h4>Tencent Music shut down its own Penguin FM service in 2023 and its &#34;Lazy Men&#34; audio book platform purchased in 2021 has only limited market presence, with offerings confined to web literature. The new acquisition will significantly shore up Tencent Music's weak flank in the long-form audio segment with the addition of more than 5.2 million audio books and 240,000 podcast shows.Ximalaya will also give Tencent Music an opening into the car audio market, since the former's products are now included in the onboard audio offerings of more than 80 auto companies, such as Tesla and Nio. Ximalaya's extensive library will also provide content for a smart in-vehicle platform that Tencent Music is developing.Tencent Music's strong financials will also give it the necessary resources to pay for the purchase. The company generated 7.36 billion yuan in revenue in this year's first quarter, up 8.7% year-on-year, while its net profit rose 22.8% to 2.23 billion yuan. But the report also contained a major blemish, as the company lost 20 million monthly active users in the quarter.While short videos are all the rage right now, the audio market is still very much on the mind of ByteDance, parent of short video sensation TikTok. The company's Novel FM has expanded rapidly using a free-service model, and has gained a foothold in the low-cost audio book market. The app's Listening to TikTok function has also diverted lots of traffic from traditional audio platforms with its ability to easily convert short videos into audios. Other audio apps like Dedao, WeChat Reading and Xiaoyuzhou are also fighting for the bits and pieces of time when many users often listen to audio.Tencent Music's U.S. stock opened up 8% the day the deal was announced but then moved steadily downward to close down 0.92% for the day, showing investors have mixed feelings about the purchase. The company's Hong Kong stock also fell 1.43% after the announcement. Such investor caution might owe partly to an earlier Tencent Music tussle with China's anti-trust regulator over anti-competitive behavior, and concerns of similar scrutiny over the Ximilaya deal.From a strategic perspective, the deal will help to beef up Tencent Music's content offerings and could boost its profits. Investment bank CICC pointed out that once the deal is done, diversified content from Ximalaya will enable Tencent Music to better serve its paying users, helping to sustain its revenue growth over the long run. It maintained its &#34;overperform&#34; rating on the company, with target prices of HK$80 for its Hong Kong shares and $20.70 for its U.S. shares, both more than 10% above each ticker's latest price. Tencent Music currently trades at a price-to-earnings (P/E) ratio of around 21.8 times, lower than but reasonably close to NetEase Cloud Music's (9899.HK) 28.9 times, showing the former still has some investor appeal. A successful integration of Ximalaya's rich content library and creator community, as well as integration of its in-vehicle audio connections, might mark the start of a new growth era for the company, paving the way for some valuation upside.</div></div></div>

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Tencent Music has announced its acquisition of Ximalaya for $1.26 billion, enhancing its position in the long-form audio market. Ximalaya, with over 600 million users, will maintain its brand and operations post-acquisition. This deal allows Tencent Music to enter the in-vehicle audio market, as Ximalaya's products are integrated with over 80 car manufacturers, including Tesla. Despite past financial struggles, Ximalaya turned a profit in 2023, and Tencent Music's strong financials support the acquisition.

- Tencent Music plans to acquire Ximalaya for $1.26 billion, enhancing its position in the long-form audio market.  
- Ximalaya, with over 600 million users, will provide Tencent Music access to a vast library of audio content and in-vehicle audio offerings.  
- Despite mixed investor reactions, the acquisition is expected to bolster Tencent Music's content diversity and long-term revenue growth.  

Tencent Music Taps Into In-Vehicle Audio Market With Ximalaya Deal