RISK FACTORS

Prospective purchasers of the Notes should carefully consider the risks described below in this prospectus supplement, in the accompanying prospectus and in the documents incorporated by reference into this prospectus supplement before deciding to purchase any Notes. Our business, results of operations, financial condition or prospects could be negatively affected if any of these risks occurs, and as a result, the trading price of the Notes could decline and you could lose all or part of your investment.

Risks Relating to the Notes

The Notes will be structurally subordinated to all obligations of our existing and future subsidiaries and consolidated affiliated entities.

The Notes will not be guaranteed by any of our existing or future subsidiaries and consolidated affiliated entities, who together hold substantially all of our operating assets and conduct substantially all of our business. Our subsidiaries and consolidated affiliated entities will have no obligation, contingent or otherwise, to pay amounts due under the Notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment. The Notes will be structurally subordinated to all indebtedness and other obligations of our subsidiaries and consolidated affiliated entities such that in the event of the insolvency, liquidation, reorganization, dissolution or other winding up of any of our subsidiaries or consolidated affiliated entities, all of that subsidiary’s or consolidated affiliated entity’s creditors (including trade creditors) and any holders of preferred stock would be entitled to payment in full out of that subsidiary’s or consolidated affiliated entity’s assets before any remaining assets would be available to Tencent Music Entertainment Group to make payments due on the Notes.

In addition, the indenture governing the Notes will, subject to some limitations, permit these subsidiaries and consolidated affiliated entities to incur additional obligations and will not contain any limitation on the amount of indebtedness or other liabilities, such as trade payables, that may be incurred by these subsidiaries and consolidated affiliated entities.

The indenture does not restrict the amount of additional debt that we may incur.

The Notes and the indenture under which the Notes will be issued do not limit the amount of unsecured debt that may be incurred by us or our subsidiaries or consolidated affiliated entities, and they permit us and certain of our subsidiaries and consolidated affiliated entities to incur secured debt without equally and ratably securing the Notes under specified circumstances. As of June 30, 2020, we did not have any debt. After the completion of this offering, we and our subsidiaries and consolidated affiliated entities may incur additional debt, including RMB denominated borrowings or debt securities in China. Our and our subsidiaries’ and consolidated affiliated entities’ incurrence of additional debt may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes, a loss in the market value of your Notes and a risk that the credit rating of the Notes is lowered or withdrawn.

The Notes will be effectively subordinated to any of our secured obligations to the extent of the value of the property securing those obligations.

The Notes will not be secured by any of our assets. As a result, the Notes will be effectively subordinated to any of our secured obligations with respect to the assets that secure those obligations. The effect of this subordination is that upon a default in payment on, or the acceleration of, any of our secured obligations, or in the event of our bankruptcy, insolvency, liquidation, dissolution or reorganization, the proceeds from the sale of assets securing our secured obligations will be available to pay obligations on the Notes only after all such secured obligations have been paid in full. As a result, the holders of the Notes may receive less, ratably, than the holders of secured debt in the event of our bankruptcy, insolvency, liquidation, dissolution or reorganization.

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We may not be able to repurchase the Notes upon a Triggering Event.

Upon the occurrence of a Triggering Event described in “Description of the Notes—Repurchase Upon Triggering Event,” we will be required to offer to repurchase all outstanding Notes at 101% of their principal amount, plus accrued and unpaid interest, if any, to (but not including) the date of repurchase. The source of funds for any purchase of the Notes would be our available cash or cash generated from our subsidiaries’ or consolidated affiliated entities’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the Notes upon a Triggering Event because we may not have sufficient financial resources to purchase all of the debt securities that are tendered upon a Triggering Event and repay our other indebtedness that may become due. We may require additional financing from third parties to fund any such purchases, and we may be unable to obtain financing on satisfactory terms or at all. Further, our ability to repurchase the Notes may be limited by law.

Holders of the Notes may not be able to determine when a Triggering Event giving rise to their right to have the Notes repurchased has occurred.

The definition of Triggering Event in the indenture that will govern the Notes includes a phrase relating to operating “substantially all” or deriving “substantially all” of the economic benefits from the business operations conducted by the Group. There is no precise established definition of the phrase “substantially all” under New York law. Accordingly, the ability of a holder of the Notes to require us to repurchase its Notes as a result of a Triggering Event may be uncertain.

The terms of the indenture and the Notes provide only limited protection against significant corporate events that could adversely impact your investment in the Notes.

While the indenture and the Notes contain terms intended to provide protection to holders of the Notes upon the occurrence of certain events involving significant corporate transactions, these terms are limited and may not be sufficient to protect your investment in the Notes. Certain important corporate events, such as merger or consolidation, sale of all or substantially all of our assets, liquidation or dissolution and leveraged recapitalizations, would not, under the indenture that will govern the Notes, constitute a Triggering Event that would require us to repurchase the Notes, even though those corporate events could adversely affect our capital structure, credit ratings or the value of the Notes. See “Description of the Notes—Repurchase Upon Triggering Event.”

The indenture for the Notes also does not:

As a result of the foregoing, when evaluating the terms of the Notes, you should be aware that the terms of the indenture and the Notes do not restrict our ability to engage in, or to otherwise be a party to, a variety of corporate transactions, circumstances and events that could have an adverse impact on your investment in the Notes.

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An active trading market for the Notes may not develop, and the trading price of the Notes could be materially and adversely affected.

The Notes are a new issue of securities for which there is currently no trading market. Application has been made for the listing and quotation of the Notes on the SEHK. However, there can be no assurance that we will be able to obtain or maintain that listing or that an active trading market will develop. If no active trading market develops, you may not be able to resell your Notes at their fair market value, or at all. Future trading prices of the Notes will depend on many factors, including prevailing interest rates, our operating results and the market for similar securities. We have been advised that the underwriters intend to make a market in the Notes, but the underwriters are not obligated to do so and may discontinue such market making activity at any time without notice. Therefore there can be no assurance that an active trading market for the Notes will develop or be sustained. If an active trading market for the Notes does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected. In addition, the Notes may trade at prices that are higher or lower than the price at which the Notes have been issued. The price at which the Notes trade depends on many factors, including:

almost all of which are beyond our control. As a result, there can be no assurance that you will be able to resell the Notes at attractive prices or at all.

We may be deemed a PRC “resident enterprise” under PRC tax laws, which could subject interest on the Notes to PRC withholding tax and gains on the sale or other transfer of the Notes to PRC income tax and could, under certain circumstances, permit us to redeem the Notes.

As described in our 2019 Form 20-F, we may be deemed a PRC “resident enterprise” under PRC tax laws. If we are considered a PRC resident enterprise under the PRC Enterprise Income Tax Law, holders of Notes who are non-resident enterprises may be subject to PRC withholding tax on interest or premium (if any) paid by us or PRC income tax on any gains realized from the transfer of Notes, if such income is considered to be derived from sources within the PRC, at a rate of 10%, provided that such non-resident enterprise investor (i) has no establishment or premises in the PRC, or (ii) has an establishment or premises in the PRC but its income derived from the PRC has no real connection with such establishment or premises. Furthermore, if we are considered a PRC resident enterprise and relevant PRC tax authorities consider interest or premium (if any) we pay with respect to the Notes or any gains realized from the transfer of Notes to be income derived from sources within the PRC, such interest or premium (if any) received by non-resident individuals may be subject to PRC withholding tax and such gain realized by non-resident individuals may be subject to PRC individual income tax, in each case at a rate of 20%. Any PRC tax liability on interest, or premium (if any) or gain described above may be reduced under applicable tax treaties. However, it is unclear whether in practice non-resident holders would be able to obtain the benefits of income tax treaties entered into between PRC and their countries. In addition, if we are considered a PRC resident enterprise, interest payable by us to non-resident holders of the Notes may be subject to PRC value-added tax at a rate of 6% and related local levies, including educational surtax and urban maintenance and construction tax at a rate of up to 0.72%. See “Taxation—PRC Taxation.”

If we are deemed a PRC resident enterprise under the PRC Enterprise Income Tax Law and required to withhold tax on interest and premium (if any) on the Notes, we will be required to pay additional amounts, subject to certain exceptions, as described under “Description of the Notes—Payment of Additional Amounts.” The requirement to pay additional amounts will have an adverse impact on our cash flows. In addition, as

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described under “Description of Debt Securities—Tax Redemption” in the accompanying prospectus, we may be able to redeem the Notes in whole at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest if the requirement to pay additional amounts results from a change in the laws or regulations of the PRC (or a change in the official application or interpretation of, or the stating of an official position with respect to, such laws or regulations).

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and to satisfy our obligations under the Notes.

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our company in the Cayman Islands may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our wholly foreign-owned subsidiaries in China are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by our shareholders or the ultimate shareholders of our corporate shareholders who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to satisfy our obligations under the Notes.

Redemption may adversely affect your return on the Notes.

We have the right to redeem some or all of the Notes prior to maturity. We may redeem the Notes at times when prevailing interest rates are relatively low. Accordingly, you may not be able to reinvest the amount received upon redemption in a comparable security at an effective interest rate as high as that of the Notes.

Our credit ratings may not reflect all risks of your investments in the Notes, and changes in credit ratings may materially reduce the value of the Notes.

We expect the Notes to be rated and routinely evaluated by major rating agencies. Our credit ratings are an assessment by each rating agency at the time the ratings are issued of our ability to pay our debts when due, and thus are limited in scope and do not address or reflect all material risks relating to an investment in or the structure or marketing of the Notes. For example, the ratings do not address the payment of any Additional Amounts (as defined in “Description of the Notes” in this prospectus supplement). Agency ratings do not constitute recommendations to purchase, hold, or sell the Notes or any other securities inasmuch as such ratings do not comment as to market price or suitability for a particular investor, and may be revised or withdrawn at any time by the issuing organization. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes. Each agency’s rating should be evaluated independently of any other agency’s rating on the Notes, on other securities of ours, or on us. We cannot assure you that the ratings will remain in effect for any given period or that the ratings will not be revised by these rating agencies in the future if in their judgment circumstances so warrant. For example, rating agencies may revise their ratings in the future based on their view of our business or the business of our affiliates or certain companies with which we have a significant relationship, such as Tencent, our controlling shareholder.

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We may make amendments or modifications to certain provisions of the indenture.

Under certain circumstances as described under “Description of Debt Securities—Modification and Waiver” in the accompanying prospectus, we may, from time to time and without the consent of any holder of the Notes of any series, make certain amendments to the indenture. Further, under certain circumstances as described under “Description of Debt Securities—Modification and Waiver” in the accompanying prospectus, we may, from time to time and with the consent of the holders of not less than a majority in aggregate principal amount of the applicable series of the outstanding Notes, make certain amendments to the indenture or change or modify the rights of the holders of such Notes. If the requisite consents are obtained (if required) and/or the relevant conditions are satisfied (or waived) and such amendments or modifications become operative, all holders of the applicable series of the outstanding Notes will be bound by the terms of the indenture as amended, whether or not a holder of the Notes delivered a consent. Such amendments or modifications could materially increase the credit risks faced by the holders of the Notes or could otherwise be materially adverse to the interests of the holders of the Notes.

Risks Related to Doing Business in China

The audit report included in this prospectus is issued by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection. In addition, any changes in other governmental policies as a result of any deterioration of the United States and China relations may affect our business and prospect.

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditors are located in China, the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities.

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China, reiterating past SEC and PCAOB statements on matters including the difficulty associated with inspecting accounting firms and audit work papers in China and higher risks of fraud in emerging markets and the difficulty of bringing and enforcing SEC, Department of Justice and other U.S. regulatory actions, including in instances of fraud, in emerging markets generally. In response to the U.S. President Trump’s Memorandum on Protecting United States Investors from Significant Risks from Chinese Companies, on August 6, 2020, the U.S. President’s Working Group on Financial Markets (the “PWG”) released a report where it recommends that the SEC take steps to enhanced listing requirements on companies from certain jurisdictions, such as China, that do not provide the PCAOB with sufficient access to audit working papers. The proposed enhanced listing standards require, as a condition to initial and continued exchange listing, unrestricted PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies that are unable to satisfy this standard as a result of governmental restrictions may satisfy this standard by providing a co-audit from an audit firm with

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comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. The proposed new listing standards provide for a transition period until January 1, 2022 for currently listed companies. After this transition period, if currently listed companies were unable to meet the enhances listing standards, then they would become subject to securities exchange rules and processes that could lead to possible de-listing if not cured. The measures in the PWG report are presumably subject to the standard SEC rulemaking process before becoming effective. On August 10, 2020, the SEC announced that SEC Chairman Jay Clayton had directed the SEC staff to prepare proposals in response to the PWG report, and that the SEC was soliciting public comments and information with respect to these proposals. The PCAOB’s inspections of other firms outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. However, it remains unclear what additional actions the SEC and the stock exchanges will take in response to the PWG report.

This lack of the PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the NYSE of issuers included on the SEC’s list for three consecutive years. On May 20, 2020, the U.S. Senate passed S. 945, the Holding Foreign Companies Accountable Act, or the Kennedy Bill. On July 21, 2020, the U.S. House of Representatives approved its version of the National Defense Authorization Act for Fiscal Year 2021, which contains provisions comparable to the Kennedy Bill. On August 6, 2020, the PWG released a report where it recommends that the SEC take steps to enhanced listing requirements on companies from certain jurisdictions, such as China, that do not provide the PCAOB with sufficient access to audit working papers, as discussed above. If either of these bills or the PWG report is enacted into law, or if we fail to meet the requirements thereunder due to factors beyond our control, we could face possible de-listing from the NYSE, deregistration from the SEC and/or other risks, which may materially and adversely affect, or effectively terminate, our ADS trading in the United States.

In addition to the proposed U.S. legislation and policies relating to Chinese companies’ compliance with applicable U.S. securities laws, our business and prospect may also be negatively affected by other changes in governmental policies including sanctions and export controls administered by U.S. government authorities, including those imposed as a result of a material deterioration of the political or economic relations between China and the United States and other geopolitical challenges. There is no assurance that the governmental authorities in the United States will not take any such actions against us or our controlling shareholder or affiliates in the event the tensions between China and the United States escalate, which could result in a material and adverse impact on our business and prospect.

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CERTAIN FINANCIAL DATA

Set forth below are certain consolidated statements of operations data and cash flow data for the years ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2019 and 2020, and certain consolidated balance sheets data as of December 31, 2017, 2018 and 2019 and June 30, 2020. The consolidated statements of operations data and cash flow data presented below for the years ended December 31, 2017, 2018 and 2019 and the consolidated balance sheets data as of December 31, 2018 and 2019 have been derived from our audited consolidated financial statements that are included in our annual report on Form 20-F for the year ended December 31, 2019, or the 2019 Form 20-F, and are incorporated into the accompanying prospectus by reference. Our selected consolidated balance sheet data as of December 31, 2017 has been derived from our audited consolidated financial statements not included in the 2019 Form 20-F. Our audited consolidated financial statements are prepared in accordance with IFRS. The consolidated statements of operations data and cash flow data presented below for the six months ended June 30, 2019 and 2020 and the consolidated balance sheets data as of June 30, 2020 have been derived from our unaudited interim condensed consolidated financial statements for the six months ended June 30, 2019 and 2020 and as of June 30, 2020, which are contained in our current report on Form 6-K furnished to the SEC on August 24, 2020 and are incorporated into the accompanying prospectus by reference. The unaudited interim financial information has been prepared on the same basis as our audited consolidated financial data.

The consolidated financial information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements for the three years ended December 31, 2017, 2018 and 2019 and as of December 31, 2017, 2018 and 2019 and related notes and “Item 5. Operating and Financial Review and Prospects” in our 2019 Form 20-F, and our current report on Form 6-K furnished to the SEC on August 24, 2020. Our historical results are not necessarily indicative of our results for any future periods.

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Non-IFRS Financial Measure

We use adjusted profit, which is a non-IFRS financial measure, in evaluating our operating results and for financial and operational decision-making purposes. We believe that adjusted profit helps identify underlying trends in our business that could otherwise be distorted by the effect of certain expenses that we include in our profit for the year. We believe that adjusted profit provides useful information about our results of operations, enhances the overall understanding of our past performance and future prospects and allows for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

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Adjusted profit should not be considered in isolation or construed as an alternative to operating profit, profit or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review adjusted profit and the reconciliation to its most directly comparable IFRS measure. Adjusted profit presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

Adjusted profit represents profit excluding amortization of intangible and other assets resulting from acquisitions, share-based compensation expenses, share-based payments in respect of the issuance of ordinary shares to music label partners, net losses/gains from investments, fair value changes arising from investments and income tax effects. The table below sets forth a reconciliation of our profit to adjusted profit indicated.

Notes:

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Set forth below is a discussion of our unaudited statements of operations data for the six months ended June 30, 2019 and 2020. The discussion of our audited financial information for the three years ended December 31, 2017, 2018 and 2019 and as of December 31, 2018 and 2019 is set forth in “Item 5. Operating and Financial Review and Prospectus” in our 2019 Form 20-F, which is incorporated by reference into the accompanying prospectus.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Revenues

Our revenues increased by 13.8% from RMB11,634 million for the six months ended June 30, 2019 to RMB13,243 million (US$1,874 million) for the six months ended June 30, 2020.

Online music services

Our revenues generated from online music services increased by 34.7% from RMB3,167 million for the six months ended June 30, 2019 to RMB4,265 million (US$604 million) for the six months ended June 30, 2020, mainly driven by strong growth in music subscription revenues, supplemented by growth in sales of digital albums and advertising service revenues, which was offset by a decrease in sublicensing revenues.

Our revenues generated from music subscriptions increased by 67.2% from RMB1,508 million for the six months ended June 30, 2019 to RMB2,521 million (US$357 million) for the six months ended June 30, 2020, which was mainly attributable to the increase in the number of paying users and the monthly ARPPU due to the success of our pay-for-streaming model as we continued to cultivate our users’ willingness to pay for premium music content with improved paying user retention. From the second quarter of 2019 to the second quarter of 2020, the number of paying users increased by 51.9%, from 31.0 million to 47.1 million and the monthly ARPPU increased by 8.1%, from RMB8.6 to RMB9.3 (US$1.3).

Social entertainment services and others

Our revenues generated from social entertainment services and others increased by 6.0% from RMB8,467 million for the six months ended June 30, 2019 to RMB8,978 million (US$1,271 million) for the six months ended June 30, 2020. The number of paying users of our social entertainment services increased by 11.6% from approximately 11.2 million for the second quarter of 2019 to 12.5 million for the second quarter of 2020, and the ARPPU of our social entertainment services decreased by 2.6% over the same period, primarily due to the impact from the outbreak of COVID-19 and adjustments to certain interactive features in live streaming.

Cost of revenues

Our cost of revenues increased by 18.7% from RMB7,660 million for the six months ended June 30, 2019 to RMB9,096 million (US$1,287 million) for the six months ended June 30, 2020, primarily driven by increases in service costs by 18.0% from RMB6,878 million for the six months ended June 30, 2019 to RMB8,116 million (US$1,149 million) for the six months ended June 30, 2020. The increase in service costs was primarily due to higher revenue sharing fees to strengthen our platforms’ competitiveness, as well as increased content costs related to higher digital album sales, purchase of variety show contents, and investment in new products and content offerings such as long-form audios.

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Other cost of revenues increased by 25.3% from RMB782 million for the six months ended June 30, 2019 to RMB980 million (US$139 million) for the six months ended June 30, 2020, which was primarily attributable to higher payment channel fees, agency fees, and bandwidth expense.

Gross profit

As a result of the foregoing, our gross profit increased by 4.4% from RMB3,974 million for the six months ended June 30, 2019 to RMB4,147 million (US$587 million) for the six months ended June 30, 2020. Our gross margin decreased from 34.2% for the six months ended June 30, 2019 to 31.3% for the six months ended June 30, 2020. The slight decrease in gross margin was mainly attributable to higher revenue sharing fees, which resulted from additional incentives offered to live streaming performers and increase in revenue sharing ratio to online karaoke performers, as well as the impact from increased investment in new products and content offerings such as long-form audios.

Operating expenses

Our operating expenses increased by 18.0% from RMB2,089 million for the six months ended June 30, 2019 to RMB2,465 million (US$349 million) for the six months ended June 30, 2020.

Selling and marketing expenses

Our selling and marketing expenses increased by 24.3% from RMB853 million for the six months ended June 30, 2019 to RMB1,060 million (US$150 million) for the six months ended June 30, 2020, which was primarily due to increased spending to promote existing products to strengthen our products’ competitiveness and in promoting our new product and content offerings such as long-form audio, Kugou Changchang and TME Live. Such new offerings were still ramping up in terms of revenue generation as we incurred material initial investments in promoting them for future growth.

General and administrative expenses

Our general and administrative expenses increased by 13.7% from RMB1,236 million for the six months ended June 30, 2019 to RMB1,405 million (US$199 million) for the six months ended June 30, 2020, primarily due to our increased investment in research and development in new products to expand our competitive advantages in product and technology innovations.

Interest income

Our interest income was RMB327 million (US$46 million) for the six months ended June 30, 2020, as compared to RMB288 million for the six months ended June 30, 2019. The increase was primarily due to increased balances of our cash and cash equivalents and term deposits.

Other gains, net

Our other gains, net, were RMB145 million (US$21 million) for the six months ended June 30, 2020, as compared to other gains, net, of RMB59 million for the six months ended June 30, 2019. The increase was mainly attributable to tax rebate received during the year and gains on disposal of a subsidiary.

Operating profit

As a result of the foregoing, our operating profit for the period decreased by 3.5% to RMB2,154 million (US$305 million) for the six months ended June 30, 2020 from RMB2,232 million for the six months ended June 30, 2019. Operating margin decreased to 16.3% for the six months ended June 30, 2020 from 19.2% for the six months ended June 30, 2019. The decreased was mainly due to the decrease in gross margin and increase in selling and marketing expenses.

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Income tax expense

We had an income tax expense of RMB271 million for the six months ended June 30, 2019 and RMB269 million (US$38 million) for the six months ended June 30, 2020. Our effective tax rate was 12.8% in the first half of 2020, as compared to 12.4% in the first half of 2019.

Profit for the period

As a result of the foregoing, our profit for the period decreased from RMB1,914 million for the six months ended June 30, 2019 to RMB1,829 million (US$259 million) for the six months ended June 30, 2020.

Cash Flows and Working Capital

Our principal sources of liquidity have been cash generated from operating activities and contributions from shareholders. As of June 30, 2020, we had RMB11,776 million (US$1,667 million) in cash and cash equivalents. Our cash and cash equivalents consist primarily of bank deposits and highly liquid investments, which have original maturities of three months or less when purchased. We believe that our current cash and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months.

On December 17, 2019, we announced a share repurchase program under which we may repurchase up to $400 million of our Class A ordinary shares in the form of ADSs pursuant to relevant SEC rules during a twelve-month period commencing on December 15, 2019. In March and up to the date of this prospectus, we have repurchased ADSs from the open market for an aggregate amount of approximately US$19 million in cash pursuant to the share repurchase program.

We intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities and funds raised from financing activities, including the net proceeds from this offering and the net proceeds we received from our initial public offering in December 2018. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to issue debt or equity securities or obtain additional credit facilities. Financing may be unavailable in the amounts we need or on terms acceptable to us, if at all. Issuance of additional equity securities, including convertible debt securities, would dilute our earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

As a holding company with no material operations of our own, we conduct our operations primarily through our PRC subsidiaries and our consolidated VIEs in China. We are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries in China through capital contributions or loans, subject to the approval of government authorities and limits on the amount of capital contributions and loans. In addition, our subsidiaries in China may provide Renminbi funding to our consolidated VIEs only through entrusted loans. The ability of our subsidiaries in China to make dividends or other cash payments to us is subject to various restrictions under PRC laws and regulations.

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The following table presents our selected consolidated cash flow data for the periods indicated.

Operating activities

Net cash generated from operating activities was RMB2,505 million (US$355 million) in the six months ended June 30, 2020. The difference between our profit before income tax of RMB2,098 million (US$297 million) and the net cash generated from operating activities was mainly due to (i) depreciation and amortization of RMB362 million (US$51 million); (ii) the increase in accounts payable of RMB295 million (US$42 million); (iii) non-cash share-based compensation expense of RMB276 million (US$39 million); and (iv) the decrease in accounts receivables of RMB203 million (US$29 million), partially offset by (i) the income tax paid of RMB370 million (US$52 million); (ii) the increase in other operating assets of RMB253 million (US$36 million)) and (iii) the decrease in other operating liabilities of RMB173 million (US$24 million).

Net cash generated from operating activities was RMB2,815 million for the six months ended June 30, 2019. The difference between our profit before income tax of RMB2,185 million and the net cash generated from operating activities was mainly due to (i) the increase in accounts payable of RMB594 million; (ii) the increase in other operating liabilities of RMB399 million; and (iii) depreciation and amortization of RMB233 million, partially offset by (i) the income tax paid of RMB292 million; and (ii) the increase in accounts receivables of RMB205 million.

Investing activities

Net cash used in investing activities was RMB6,168 million (US$873 million) in the six months ended June 30, 2020, which was primarily attributable to (i) placement of term deposits with initial terms of over three months of RMB15.0 billion (US$2.1 billion); (ii) payments for investment in UMG of RMB1.53 billion (US$216 million), (iii) purchase of financial asset of RMB785 million (US$111 million), (iv) payment for business combination of RMB240 million (US$34 million), (v) purchase of intangible assets of RMB235 million (US$33 million); and (iii) our purchases of property, plant and equipment of RMB65 million (US$9 million), partially offset by receipt from maturity of term deposits with initial terms of over three months of RMB12.0 billion (US$1.7 billion).

Net cash used in investing activities was RMB850 million for the six months ended June 30, 2019, which was primarily attributable to (i) placement of term deposits with initial terms of over three months of

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RMB4.0 billion; (ii) payments for acquisition of investments accounted for using equity method of RMB248 million; (iii) purchase of intangible assets of RMB51 million; and (iv) purchase of property, plant and equipment of RMB25 million, partially offset by receipt from maturity of term deposits with initial terms of over three months of RMB3.4 billion.

Financing activities

Net cash used in financing activities in the six months ended June 30, 2020 was RMB156 million (US$22 million), which was mainly due to (i) payment for repurchase of ordinary shares of RMB134 million (US$19 million); (ii) payment for lease liabilities of RMB42 million (US$6 million); (iii) share withheld for share award schemes of RMB18 million (US$3 million), partially offset by the proceeds from exercise of share options of RMB42 million (US$6 million).

Net cash generated from financing activities for the six months ended June 30, 2019 was RMB5 million, which was mainly due to the proceeds from exercise of share options and issuance of ordinary shares of RMB39 million, partially offset by (i) payment for acquisition of non-controlling interests in non-wholly-owned subsidiaries of RMB19 million; and (ii) payment for lease liabilities of RMB18 million.

Capital expenditures

Our capital expenditures are incurred primarily in connection with purchases of property, plant and equipment and intangible assets. Our capital expenditures were RMB76 million and RMB300 million (US$42 million), in the six months ended June 30, 2019 and 2020, respectively. We intend to fund our future capital expenditures with our existing cash balance and net proceeds from this offering and our initial public offering in December 2018. We will continue to make capital expenditures to meet the expected growth of our business.

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