Exhibit 99.1

Tencent Music Entertainment Group Supplemental and Updated Disclosures

Tencent Music Entertainment Group (the “Company,” “we” or “TME”) has published a listing document (the “Listing Document”) in connection with a proposed secondary listing (the “Listing”) of its Class A ordinary shares (the “Shares”), with a par value of US$0.000083 each, on the Main Board of the Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) by way of introduction.

The Listing Document contains new and supplemental descriptions of certain aspects of the Company’s business and financial information as required by the Hong Kong Stock Exchange Listing Rules, updated disclosures of certain information previously disclosed in the Company’s annual report on Form 20-F for the year ended December 31, 2021 (the “2021 Form 20-F”), as well as financial statements for the three months ended March 31, 2021 and 2022 and as of March 31, 2021 and 2022 in the section headed “Consolidated Financial Statements.” This Supplemental and Updated Disclosures exhibit sets forth such new, supplemental, and updated information and disclosures as described below. The disclosures herein supplement, and should be read in conjunction with, the disclosures in the 2021 Form 20-F and other disclosures in documents or reports filed with or furnished to the United States Securities and Exchange Commission. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Listing Document. Unless otherwise stated, the conversions between Renminbi into U.S. dollars and from U.S. dollars into Renminbi in this document were made at a rate of RMB6.3393 to US$1.00 and the conversions between U.S. dollars and Hong Kong dollars were made at the rate of HK$7.8325 to US$1.00, the respective exchange rate on March 31, 2022 set forth in the H.10 statistical release of The Board of Governors of the Federal Reserve Board. All translations of financial data as of and for the three months ended June 30, 2022 from Renminbi into U.S. dollars were made at the rate of RMB6.6981 to US$1.00, the exchange rate on June 30, 2022 set forth in the H.10 statistical release of The Board of Governors of the Federal Reserve Board.

As the Company has applied for a secondary listing on the Hong Kong Stock Exchange, the New York Stock Exchange will continue to be the Company’s primary listing venue. The Company has also applied for a number of waivers and/or exemptions from strict compliance with the Hong Kong Stock Exchange Listing Rules. If these applications are approved, the Company would be exempted from certain requirements to which other companies listed on the Hong Kong Stock Exchange are subject. The Company does not expect the Listing to result in significant additional compliance or disclosure obligations.

There is no assurance as to if or when the Listing will take place. This communication is neither an offer to sell nor a solicitation of an offer to buy, nor shall there be any offer, solicitation, or sale of the Company’s securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful.

 

1

FORWARD-LOOKING STATEMENTS

This exhibit contains statements that constitute forward-looking statements. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

These forward-looking statements include, but are not limited to, statements about our goals and growth strategies, our future business development, results of operations and financial condition, relevant government policies and regulations relating to our business and industry, general economic and business conditions in China, and assumptions underlying or related to any of the foregoing.

Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including but not limited to the following: TME’s growth strategies; TME’s future business development, financial condition and results of operations; TME’s ability to retain, grow and engage the user base and expand the content and experience offerings; TME’s ability to retain and grow the paying users and drive their spending on its services; expected changes in TME’s revenues, content-related costs and operating margins; TME’s ability to retain key personnel and attract new talent; competition landscape in China’s online music and audio entertainment industry; general economic, political, demographic and business conditions in China and globally; the regulatory environment in which TME operates and assumptions underlying or related to any of the foregoing.

The forward-looking statements made in this exhibit relate only to events or information as of the date on which the statements are made in this exhibit. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this exhibit completely in conjunction with our annual reports on Form 20-F and other documents filed with or furnished to the SEC and with the understanding that our actual future results may be materially different from what we expect.

 

2

TABLE OF CONTENTS

 

RECENT DEVELOPMENTS			4
RISK FACTORS			20
INDUSTRY OVERVIEW			71
REGULATORY OVERVIEW			78
HISTORY AND CORPORATE STRUCTURE			100
BUSINESS			114
FINANCIAL INFORMATION			171
RELATED PARTY TRANSACTIONS			230
MAJOR SHAREHOLDERS			235
DIRECTORS AND SENIOR MANAGEMENT			237
GLOSSARY OF TECHNICAL TERMS			253
CONSOLIDATED FINANCIAL STATEMENTS			255

 

3

 

RECENT DEVELOPMENTS

 

 

 

OPERATIONAL HIGHLIGHTS FOR THE SECOND QUARTER OF 2022

The following tables set forth our key operating metrics for the periods indicated. See “— Key Operating Metrics” for more information about how these operating metrics are calculated.

 

		For the three months ended June 30,
		2022				2021				YoY %
Mobile MAU — online music (million)			593				623				(4.8	%)
Mobile MAU — social entertainment (million)			166				209				(20.6	%)
Paying users — online music (million)			82.7				66.2				24.9	%
Paying users — social entertainment (million)			7.9				11.0				(28.2	%)
Monthly ARPPU — online music (RMB)			8.5				9.0				(5.6	%)
Monthly ARPPU — social entertainment (RMB)			169.9				153.3				10.8	%

For online music services, we experienced a year-over-year decrease in mobile MAUs during the second quarter, primarily due to reduced marketing spending. However, we achieved robust year-over-year and quarter-over-quarter subscription revenue growth along with paying user growth and a sequential rebound of ARPPU, as we are strategically focused on driving monetization efficiencies of our online music services to maximize the monetization potential of our already-massive base of mobile MAUs. Leveraging our high-quality content offerings and services, we will continue to benefit from our expanded sales channels and paying user loyalty.

For social entertainment services, while we achieved a sequential improvement in mobile MAUs, we experienced year-over-year decreases in mobile MAUs and paying users during the second quarter, primarily due to increased market competition. China’s music-centric social entertainment services market is rapidly evolving with increasingly intensified competition. To drive user engagement in the long term, we are seeking to further improve our competitiveness through continuous product innovations and a variety of new initiatives, such as audio live streaming and virtual interactive product offerings.

 

4

FINANCIAL RESULTS FOR THE SECOND QUARTER OF 2022

Summary Consolidated Results of Operations

The table below sets forth our summary unaudited condensed consolidated income statement for the periods indicated.

 

		For the Three Months Ended June 30,
		2021								2022
		RMB				%				RMB				US$				%
		(in millions, except for percentages) (unaudited)
Revenues
Online music services			2,950				36.8				2,878				430				41.7
Social entertainment services and others			5,058				63.2				4,027				601				58.3
Total revenues			8,008				100.0				6,905				1,031				100.0
Cost of revenues			(5,571	)			(69.6	)			(4,842	)			(723	)			(70.1	)
Gross profit			2,437				30.4				2,063				308				29.9
Operating expenses
Selling and marketing expenses			(669	)			(8.3	)			(303	)			(45	)			(4.4	)
General and administrative expenses			(1,008	)			(12.6	)			(1,114	)			(166	)			(16.1	)
Total operating expenses			(1,677	)			(20.9	)			(1,417	)			(212	)			(20.5	)
Interest income			123				1.5				151				23				2.2
Other gains, net			152				1.9				248				37				3.5
Operating profit			1,035				12.9				1,045				156				15.1
Share of net loss of investments accounted for using equity method			(22	)			(0.3	)			(6	)			(1	)			(0.1	)
Finance cost			(29	)			(0.3	)			(23	)			(3	)			(0.3	)
Profit before income tax			984				12.3				1,016				152				14.7
Income tax expense			(113	)			(1.4	)			(124	)			(19	)			(1.8	)
Profit for the period			871				10.9				892				133				12.9
Attributable to:
Equity holders of the Company			827				10.4				856				128				12.4
Non-controlling interests			44				0.5				36				5				0.5
			871				10.9				892				133				12.9

 

5

Revenues

The following table sets forth a breakdown of our revenues, in absolute amounts and as percentages of total revenues, for the periods indicated.

 

		For the Three Months Ended June 30,
		2021								2022
		RMB				%				RMB				US$				%
		(in millions, except for percentages) (unaudited)
Revenues
Online music services			2,950				36.8				2,878				430				41.7
Social entertainment services and others			5,058				63.2				4,027				601				58.3
Total revenues			8,008				100.0				6,905				1,031				100.0

Our total revenues decreased by 13.8% from RMB8.0 billion for the second quarter of 2021 to RMB6.9 billion (US$1.0 billion) in the same period of 2022.

 

•

Revenue from online music services decreased by 2.4% from RMB3.0 billion for the second quarter of 2021 to RMB2.9 billion (US$430 million) in the same period of 2022. Revenue from music subscriptions was RMB2.1 billion (US$315 million), representing a 17.6% growth compared to RMB1.8 billion in the second quarter of 2021, primarily due to the increase in the number of paying users by 24.9%. ARPPU decreased from RMB9.0 in the second quarter of 2021 to RMB8.5 this quarter mainly due to the fact that we offered more promotions to attract users. Revenue from advertising decreased on a year-over-year basis due to the impact from industry adjustments on splash ads and the COVID-19 pandemic in some major cities. Sublicensing revenues also decreased on a year-over-year basis due to restructuring of agreements with certain music labels.

 

•

Revenue from social entertainment services and others decreased by 20.4% from RMB5.1 billion for the second quarter of 2021 to RMB4.0 billion (US$601 million) in the same period of 2022. On a year-over-year basis, ARPPU increased by 10.8% in the second quarter of 2022, while paying users of social entertainment services decreased by 28.2%. The decrease was mainly due to the impact of increased competition from other platforms.

Cost of Revenues

Cost of revenues decreased by 13.1% from RMB5.6 billion for the second quarter of 2021 to RMB4.8 billion (US$723 million) in the same period of 2022. The decrease was primarily due to decrease in revenue sharing fees and agency fees resulting from decrease in revenue from social entertainment services and advertising services on a year-over-year basis.

 

6

Gross Profit and Gross Margin

Gross profit decreased by 15.3% from RMB2.4 billion for the second quarter of 2021 to RMB2.1 billion (US$308 million) in the same period of 2022. Gross margin slightly decreased by 0.5% from 30.4% for the second quarter of 2021 to 29.9% in the same period of 2022. This decrease in gross margin was primarily because the decrease in our total revenues outpaced the decrease in our total cost of revenues as some of them remained fixed in nature. We are taking measures to manage costs effectively and improve overall efficiency.

Operating Expenses

Total operating expenses decreased by 15.5% from RMB1.7 billion for the second quarter of 2021 to RMB1.4 billion (US$212 million) in the same period of 2022. Operating expenses as a percentage of total revenues decreased by 0.4% from 20.9% in the second quarter of 2021 to 20.5% in the same period of 2022.

Selling and marketing expenses

Selling and marketing expenses decreased by 54.7% from RMB669 million for the second quarter of 2021 to RMB303 million (US$45 million) in the same period of 2022. This decrease was primarily due to effective control over marketing expenses and optimization of the overall promotion structure to improve operating efficiency.

General and administrative expenses

General and administrative expenses increased by 10.5% from RMB1.0 billion to RMB1.1 billion (US$166 million) in the same period of 2022. The increase was mainly due to the expenses related to the application for the Listing and increased investment in research and development to expand our competitive advantages in product and technology innovations.

Profit for the period

Profit for the period was RMB0.9 billion (US$133 million) in the second quarter of 2022, as compared to RMB0.9 billion in the same period of 2021.

 

7

Net Current Assets and Liabilities

We recorded net current assets of RMB15.8 billion (US$2.4 billion) as of June 30, 2022. The table below sets forth our current assets and current liabilities as of the dates indicated.

 

		As of March 31,				As of June 30,
		2022				2022
		RMB				RMB				US$
		(unaudited)				(unaudited)
		(in millions)
Current assets:
Inventories			23				23				3
Accounts receivable			2,513				2,898				433
Prepayments, deposits and other assets			2,690				3,398				507
Other investments			37				37				6
Short-term investments			1,088				1,116				167
Term deposits			10,556				10,202				1,523
Cash and cash equivalents			8,353				10,044				1,500
Total current assets			25,260				27,718				4,138
Current liabilities:
Accounts payable			5,179				5,738				857
Other payables and other liabilities			3,500				3,787				565
Current tax liabilities			425				393				59
Lease liabilities			86				88				13
Deferred revenue			1,872				1,895				283
Total current liabilities			11,062				11,901				1,777
Net current assets			14,198				15,817				2,361

Our current assets increased from RMB25.3 billion as of March 31, 2022 to RMB27.7 billion (US$4.1 billion) as of June 30, 2022, primarily due to (i) increased cash and cash equivalents; and (ii) increased prepayments, deposits and other assets as a result of increases in prepaid content royalties.

Our current liabilities increased from RMB11.1 billion as of March 31, 2022 to RMB11.9 billion (US$1.8 billion) as of June 30, 2022, attributable primarily to the increased accounts payable for operational costs and expenses.

Cash and Cash Equivalents

As of June 30, 2022, the balance of our cash, cash equivalents amounted to RMB10.0 billion (US$1.5 billion), compared to RMB8.4 billion as of March 31, 2022.

 

8

RECENT PRC REGULATORY DEVELOPMENTS

Cybersecurity and Data Privacy

On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, which took effect in September 2021. On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the Personal Information Protection Law of the PRC, effective from November 1, 2021. See “Regulatory Overview — Regulations on Internet Security” and “Regulatory Overview — Regulations on Privacy Protection.” On December 28, 2021, the CAC, the NDRC, the MIIT, and several other PRC regulatory authorities jointly issued the Cybersecurity Review Measures which became effective on February 15, 2022. Pursuant to the Cybersecurity Review Measures, critical information infrastructure operators that procure internet products and services, and network platform operators engaging in data processing activities, must be subject to the cybersecurity review if their activities affect or may affect national security. The Cybersecurity Review Measures further stipulate that network platform operators holding over one million users’ personal information shall apply with the Cybersecurity Review Office for a cybersecurity review before listing in a foreign country. On April 26, 2022, we consulted the China Cybersecurity Review Technology and Certification Center (the “CCRC”), which was entrusted by the CAC to set up cybersecurity review consultation hotlines, on a real-name basis. The CCRC has advised us that (i) the term of “listing in a foreign country” under the Cybersecurity Review Measures does not apply to listings in Hong Kong for purposes of the mandatory obligation to apply for a cybersecurity review with the CAC, and (ii) since the Regulations on Network Data Security Management (Draft for Comment) has not become effective or been formally implemented, the mandatory obligation to apply for a cybersecurity review with the CAC does not apply to the Listing. Our PRC Legal Adviser is of the view, based on consultation with the CCRC, that the term of “listing in a foreign country” under the Cybersecurity Review Measures does not apply to listings in Hong Kong for purposes of the mandatory obligation to apply for a cybersecurity review with the CAC. However, given the Cybersecurity Review Measures were recently promulgated, there are substantial uncertainties as to the interpretation, application and enforcement of the Cybersecurity Review Measures. See “Regulatory Overview — Regulations on Internet Security.”

 

9

We believe that the Listing is unlikely to give rise to any national security risks under the Cybersecurity Review Measures, having considered that, as of September 7, 2022 (the “Latest Practicable Date”), (i) we had not been notified by any PRC regulatory authorities of being classified as a critical information infrastructure operator which may be subject to cybersecurity review in certain circumstances that may affect national security in accordance with the Cybersecurity Review Measures; (ii) we had implemented comprehensive policies and rules and taken necessary measures on cybersecurity and data protection, which are in compliance with the mandatory requirements of the PRC regulatory authorities in all material respects; (iii) the users’ personal information we collect and generate within the territory of mainland China is stored within the territory of mainland China, and our daily operations and the Listing do not involve cross-border transfer of identified core data, important data or a large amount of personal information, which could increase the possibility of us being subject to a cybersecurity review that may be initiated by relevant regulatory authorities at their discretion; (iv) we had not received any inquiry, notice, warning from any PRC regulatory authorities, or have not been subject to any investigation, sanctions or penalties made by any PRC regulatory authorities regarding national security risks caused by our business operations or the proposed Listing; and (v) we had not been involved in any service, product or data processing activities that might give rise to national security risks based on the factors set out in Article 10 of the Cybersecurity Review Measures and have not been inquired, investigated, warned or penalized by any PRC authorities in this respect. Based on foregoing, our PRC Legal Adviser is of the view that, as of the Latest Practicable Date, the likelihood that our business operations and/or the proposed Listing would subject us to a cybersecurity review under the Cybersecurity Review Measures is relatively low. However, our PRC Legal Adviser has also advised us that, given that (i) there is no clear explanation or interpretations as to how to determine what “may affect national security” under the current effective PRC laws and regulations, (ii) the identification of critical information infrastructure operators and the scope of network products or services and data processing activities that affect or may affect national security remain unclear and are subject to interpretation by relevant PRC regulatory authorities, and (iii) the PRC regulatory authorities have discretion in interpreting the regulations, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC Legal Adviser.

 

10

Furthermore, on November 14, 2021, the CAC published the Regulations on Network Data Security Management (Draft for Comment), or the Draft Regulations on Network Data, which reiterate the circumstances under which data processors shall apply for cybersecurity review, including, among others, (i) the data processors who process over one million users’ personal information apply for listing in a foreign county; and (ii) the data processors’ proposed listing in Hong Kong affects or may affect national security. However, it provides no further explanation or interpretation as to how to determine what “may affect national security,” and there remain uncertainties whether we would be subject to the cybersecurity review for this Listing pursuant to such measures. As of the Latest Practicable Date, there is no schedule as to when the Draft Regulations on Network Data will be enacted. Substantial uncertainties exist with respect to its enactment timetable, final content, interpretation and implementation.

In the years ended December 31, 2019, 2020 and 2021 and the three months ended March 31, 2022 (the “Track Record Period”) and up to the Latest Practicable Date, (i) there had been no material incident of data or personal information leakage, infringement of data protection and privacy laws and regulations or investigation or other legal proceeding, pending or threatened against us initiated by competent regulatory authorities or third parties, that will materially and adversely affect the business of us; (ii) we had not been subject to any material fines, administrative penalties, or other sanctions by any relevant regulatory authorities in relation to violation of cybersecurity and data protection laws and regulations; and (iii) we had not been involved in any investigations on cybersecurity review made by the CAC. In addition, we have maintained a comprehensive and rigorous data protection program and implemented comprehensive and strict internal policies, procedures and measures to ensure our compliance practice in data protection. See “Business — Technology and Data Capabilities — Data Security and Privacy” for details. Moreover, we will (a) closely monitor and assess any regulatory development in relation to cybersecurity and data protection; (b) adjust and optimize our practices in data protection in a timely manner to comply with the new requirements imposed by any new laws and regulations; (c) continuously improve our data security protection technologies and internal control procedures and engage external professional parties to advise us on cybersecurity and data protection requirements, if needed; and (d) proactively maintain communications with the relevant PRC regulators.

Based on the foregoing, our PRC Legal Adviser and Directors are of the view that we are in compliance with the existing PRC laws and regulations on cybersecurity, data security and personal data protection in all material aspects. In addition, our Directors and PRC Legal Adviser do not believe that the Draft Regulations on Network Data, if implemented in the current form, would have a material adverse impact on our business operations or the proposed Listing, nor do they foresee any material impediments for us to comply with the requirements under the Draft Regulations on Network Data in all material aspects.

Filings and Approvals Required by the PRC Regulatory Authorities Regarding the Proposed Listing

On December 24, 2021, the CSRC published the Administrative Provisions of the State Council on the Overseas Issuance and Listing of Securities by Domestic Companies (Draft for Comments), or the Draft Administrative Provisions, and the Measures for the Overseas Issuance and Listing of Securities Record-filings by Domestic Companies (Draft for Comments), or the Draft Measures, for public comments. Pursuant to these drafts, PRC domestic companies that directly or indirectly seek to offer or list their securities on an overseas stock exchange, including a PRC company limited by shares and an offshore company whose main business operations are in China and intends to offer securities or be listed on an overseas stock exchange based on its onshore equities, assets, incomes or other similar interests, are required to file with the CSRC within three business days after submitting their application documents to the regulator in the place of intended listing or offering. See “Regulatory Overview — Regulations on M&A and Overseas Listings.”

 

11

Further, at the press conference held for these draft regulations on December 24, 2021, officials from the CSRC clarified that only the initial public offerings by PRC domestic companies and financing by existing overseas-listed PRC domestic companies would be required to complete the filing process if these drafts became effective in their current forms, and the existing overseas-listed companies that do not have subsequent financing activities will be allowed to complete the filing within the transition period. Therefore, if these draft regulations become effective in their current forms before this Listing is completed, our PRC Legal Adviser is of the view that we may be required to complete the filing procedures with the CSRC in connection with this Listing. The officials from the CSRC have also confirmed that companies with VIE structure may conduct overseas offerings and listings if they comply with applicable PRC laws and regulations. As advised by our PRC Legal Adviser, as of the date of the Listing Document, each of the agreements under the Contractual Arrangements is valid, legal and binding under PRC laws and regulations, and is not in violation of provisions of PRC laws and regulations currently in effect. Based on foregoing, our PRC Legal Adviser is of the view that the Contractual Arrangements would remain compliant with applicable PRC laws and regulations after these draft regulations come into effect in their current forms.

 

12

In addition, pursuant to the Draft Administrative Provisions, an overseas offering and listing of a PRC company is prohibited under any of the following circumstances, if (i) it is prohibited by PRC laws, (ii) it may constitute a threat to or endanger national security determined by competent PRC authorities, (iii) it has material ownership disputes over equity, major assets, and core technology, (iv) in recent three years, the Chinese operating entities and their controlling shareholders and actual controllers have committed relevant prescribed criminal offenses or are currently under investigations for suspicion of criminal offenses or major violations, (v) the directors, supervisors, or senior executives have been subject to administrative punishment for severe violations, or are currently under investigations for suspicion of criminal offenses or major violations, or (vi) it has other circumstances as prescribed by the State Council. As advised by our PRC Legal Adviser, there are no explicit PRC laws and regulations which prohibit us from offering and listing on an overseas stock exchange. Furthermore, based on legal due diligence and public search conducted on the Company’s PRC subsidiaries and consolidated affiliated entities, their controlling shareholders and actual controllers, and their directors, supervisors and senior executives and to the best of our knowledge, as of the Latest Practicable Date, our PRC subsidiaries and the consolidated affiliated entities, their controlling shareholders and actual controllers, as well as our directors, supervisors and senior executives have not been involved in relevant criminal offenses or administrative penalties that would prohibit us from conducting overseas offering and listing under the Draft Administrative Provisions. Based on the foregoing, if the Draft Administrative Provisions and the Draft Measures become effective in their current forms before the Listing is completed, we do not foresee any material impediment for us to comply with these regulations in any material respect. However, as advised by our PRC Legal Adviser, there are substantial uncertainties as to the implementation and interpretation of these draft regulations. In particular, it remains uncertain if the overseas offering and listing would be considered “constituting a threat to or endanger national security,” and the regulatory authorities may have discretion in the interpretation and enforcement of these rules, if enacted. The period for which the CSRC solicits comments on these drafts ended on January 23, 2022. As of the Latest Practicable Date, the Draft Administrative Provisions and the Draft Measures are still in draft form and there is no definitive schedule for the adoptions of such drafts, and it remains unclear whether the versions adopted will contain any further material changes. There remain substantial uncertainties about how these drafts will be enacted, interpreted or implemented and how they will affect our operations and the Listing.

As of the Latest Practicable Date, we have not received any formal inquiry, notice, warning, sanction, or any regulatory objection to the Listing from the CSRC, the CAC, or any other PRC regulatory agencies that have jurisdiction over our operations, nor have we received any enquiries, comments, instructions, guidance or other concerns from any PRC authorities, including the CSRC, with respect to our Listing plan or Contractual Arrangements. If it is determined in the future that filings or approvals from the CSRC, the CAC, or other regulatory requirements are required for the Listing, it is uncertain whether we can or how long it will take us to complete such filings or obtain such approvals, and any such approval could be rescinded even obtained. Any failure to complete such filings, or failure to obtain or delay in obtaining such approvals for the Listing, or a rescission of any such approval if obtained by us, would subject us to sanctions by the CSRC, the CAC, or other PRC regulatory agencies. See “Risk Factors — Risks Related to Our Corporate Structure — The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC regulatory authorities may be required under PRC law in connection with this Listing and our future issuance of securities overseas, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing” for more details.

Based on the foregoing, our PRC Legal Adviser is of the view that the Draft Measures permit PRC domestic companies with a VIE structure in compliance with applicable PRC laws and regulations to conduct overseas offerings and listings, and do not impose additional compliance requirements on the business operations of such PRC companies. Based on the foregoing analysis, with the advice of our PRC Legal Adviser, the Directors do not foresee the Draft Administrative Provisions and the Draft Measures, if they become effective in their current forms, would have a material adverse impact on our ability to operate our business under the Contractual Arrangements.

 

13

Recently Adopted Live Streaming Regulations

Regulatory authorities in China have been heightening its oversight on live streaming businesses. In November 2020, the National Radio and Television Administration promulgated the Circular on Strengthening the Administration of Live Streaming Web Shows and Live Streaming E-commerce, or the Circular 78, which sets forth requirements for certain live streaming businesses with respect to real-name registration, limits on users’ spending on virtual gifting, restrictions on minors from virtual gifting, live streaming review personnel requirements and content tagging requirements, among other things. Following the Circular 78, China’s regulatory authorities have stepped up scrutiny on live streaming businesses, with a number of regulations promulgated successively, including the Guidance Opinions on the Strengthening the Regulation and Management Work of Internet Live Streaming and the Opinions on Further Regulating the For-Profit Activities in Online Live Streaming to Promote a Healthy Development of the Industry.

In particular, on May 7, 2022, the CAC, together with three other authorities, jointly issued the Opinions on Regulating Live Streaming and Strengthening Minor Protections, or the Live Streaming Opinions, which reiterates the requirements for live streaming platforms in respect of strengthening real-name registration, restrictions on minors from virtual gifting and prohibition on providing live streaming services to minors. Pursuant to the Live Streaming Opinions, online platforms are prohibited from ranking, introducing or recommending live streaming performers solely by the monetary amount of virtual gifts that they have received from users, nor could they rank users based on the monetary amount of virtual gifts that they have sent to live streaming performers. Any such rankings currently available on these online platforms is ordered to be removed by June 7, 2022 according to the Live Streaming Opinions.

 

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We have taken various rectification measures across all of our live streaming platforms to adapt to other recently adopted live streaming regulations. For example, in response to the Guidance Opinions on the Strengthening the Regulation and Management Work of Internet Live Streaming issued in February 2021, we banned users from registering a live streaming publisher account on our live streaming platforms if they are identified as minors under the age of 16 based on their personal ID numbers. In compliance with applicable laws and regulations, minors aged between 16 and 18 are allowed to register a live streaming publisher account with QQ Music and WeSing with the consent from their parents or guardians. Such live streaming publisher account registration services are still not available to minors aged between 16 and 18 on Kugou Live and Kuwo Music. In addition, minors are not allowed to purchase or send any virtual gifts on all of our live streaming platforms. Furthermore, as required by the Live Streaming Opinions, we have adjusted relevant product functions so that our mobile apps do not rank, introduce and/or recommend live streaming performers solely based on the monetary amounts of virtual gifts received from users or rank users by the monetary amounts of virtual gifts sent to live streaming performers. As part of our efforts to comply with the foregoing live streaming regulations and enhanced risk management, we (i) have developed the relevant coding necessary to impose specific limits on the amounts of virtual gifts that can be sent by individual users which would be put in place once the regulatory authorities release the final implementation guidelines; (ii) closely monitor virtual gifting transactions by users to identify unusual or suspicious payments (e.g., virtual gifting in unreasonably large amounts); (iii) continuously monitor regulatory developments and market practices regarding limits on users’ spending on virtual gifting and maintain regular communications with the relevant PRC regulatory authorities; and (iv) prohibit any virtual gifting by users identified as minors.

As of the Latest Practicable Date, we believe, as concurred by our PRC Legal Adviser, that these newly adopted live streaming regulations as mentioned above, including the Live Streaming Opinions, had not resulted in any direct material adverse impact on our business, results of operations and financial condition. On the basis that, during the Track Record Period and up to the Latest Practicable Date, (i) we had not been subject to any material fines, administrative penalties, or other sanctions by any relevant regulatory authorities in relation to violation of any live streaming regulations during the Track Record Period and up to the Latest Practicable Date, and (ii) we had established effective internal control measures that had allowed us to adapt to changes in live streaming regulations, our Directors and PRC Legal Adviser are of the view that we are in compliance with these existing PRC laws and regulations on live streaming in all material aspects. We believe that (i) we have implemented remedial measures as appropriate in accordance with the Live Streaming Opinions; (ii) we have put in place well-established internal control measures regarding content monitoring and copyright protections (see “Business — Content Monitoring” and “Business — Intellectual Property — Copyright”); (iii) we have not been subject to any material fines, administrative penalties, or other sanctions by any relevant regulatory authorities in relation to violation of any live streaming regulations during the Track Record Period and up to the Latest Practicable Date; and (iv) we are not aware of any live streaming performers on our platform that have been subject to any material regulatory penalties or sanctions arising out of their performances on our platform during the Track Record Period and up to the Latest Practicable Date. Based on the foregoing, we believe our internal control measures addressing the above-mentioned latest live streaming-related regulations are adequate and effective. Nevertheless, since these recently adopted live streaming regulations are relatively new, uncertainty remains as to their interpretation and implementation in practice, as well as their ultimate impact on our business and results of operations in the long term. See also “Risk Factors — Risks Related to Our Business and Industry — Our business operations may be adversely affected by the heightened regulatory oversight and scrutiny on live streaming platforms and performers.”

 

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We devote significant resources to the monitoring and screening of live performances on our platforms in compliance with applicable PRC laws and regulations. Specifically, we require live streaming performers and users to register with our platform on a real-name basis in order to upload content and require them to agree not to distribute illegal or inappropriate content in violation of any third-party rights or any applicable laws or regulations. In addition, we require users and live streaming performers to comply with our terms of service which strictly prohibit inappropriate content across our platform. Our terms of service set forth in detail the types of prohibited content and actions including, but not limited to, provocative or inflammatory language, full or partial nudity, sexually suggestive language and body movements, abusive language or actions towards other users, acts and threats of violence, and information facilitating or promoting illegal transactions or activities. We also monitor live performance delivered on our platform using a combination of human and AI-based machine screening to identify and remove any illegal and inappropriate content in accordance with applicable PRC laws and regulations, as well as any content found to have violated the intellectual property rights of other parties. Users can also report any violations of our terms of service or other inappropriate behavior using the “report” function within our mobile apps. As live performances on our platform are user-generated content, in order to avail ourselves of the copyright infringement safe harbor, we are required under the PRC copyright laws and regulations to implement “notice and take-down” policies on such content, which mitigates the risks of being held liable for copyright infringement under PRC laws for distributing user-generated infringing content on our platform. See “Business — Content Monitoring” and “Business — Intellectual Property — Copyright.”

 

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Anti-Monopoly Law Enforcement

The PRC anti-monopoly enforcement agencies have in recent years strengthened enforcement of the PRC Anti-monopoly Law, including in the context of mergers and acquisitions and unfair competition. In July 2021, the SAMR issued an Administrative Penalty Decision to Tencent regarding its acquisition of CMC in 2016. Pursuant to the decision, we shall implement a rectification plan to, among other things, terminate exclusive music copyright licensing arrangements within 30 days from the date of the decision. We shall also discontinue any arrangement where we offer high advance licensing payment to and seek preferential licensing terms from copyright owners without reasonable grounds. To comply with such decision, Tencent and we have terminated the exclusivity with upstream copyright holders subject to certain limited exceptions specified in the decision and we will pursue non-exclusive collaborations with upstream copyright holders in accordance with the requirements in the decision. We had terminated the exclusivity with upstream copyright holders and ceased to enter into any new arrangements where we offer high advance licensing payments to and/or seek preferential licensing terms that may be deemed incompliant by the SAMR, from copyright holders pursuant to the Administrative Penalty Decision by late August 2021. We were not required to compensate the upstream copyright owners and did not make impairment to the relevant copyrights as a result of the termination of exclusive music copyright licensing arrangements pursuant to the Administrative Penalty Decision.

The requirements imposed by the Administrative Penalty Decision resulted in a decrease of our sublicensing revenues to the extent such revenues were generated from exclusive licensing arrangements. Meanwhile, the termination of exclusivity will reduce the content sourcing cost required to procure music content from certain music labels because we will no longer be required to pay music labels a premium to obtain exclusive rights to certain licensed content. Given such positive impacts to content sourcing cost and the fact that sublicensing revenues only accounted for a minority portion of our online music revenues before the termination of exclusive licenses, our remedial measures in response to the Administrative Penalty Decision did not overall have a material adverse impact on our net profit. Moreover, these measures did not have a material adverse impact on our online subscription revenue, because our online music paying users are not attracted to our platforms solely by the exclusivity of certain music content but rather because of our comprehensive content library, attractive social and product features, and all-in-one online entertainment experience which together distinguish us from our peers. In addition, despite the termination of exclusivity, we are allowed to offer songs licensed by certain copyright holders on an exclusive basis for a period of no more than 30 days upon their initial releases on our platform, which has also contributed to our ability to expand our paying user base and drive music subscription revenues.

We believe as concurred by our PRC Legal Adviser, that as of the Latest Practicable Date the Administrative Penalty Decision and our remedial measures taken in response had not resulted in any direct material adverse impact on our business, results of operations and financial condition because:

 

•

As of the Latest Practicable Date, the termination of exclusivity had not resulted in any direct material adverse impact on our online music revenues and total revenues, because music subscription, which currently accounts for a substantial majority of online music revenues, is expected to continue to grow and become an important driver for our online music revenues going forward.

 

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•

The termination of exclusivity with upstream copyright holders may lower the entry barriers for new market entrants, intensifying the competition within China’s online music industry, which may result in increased competitive pressure on us and our growth prospect. However, we believe that our established market position, vast and loyal customer base, technological innovations and increasingly diversified product and content offerings have allowed and will continue to allow us to compete effectively in our industry.

 

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The termination of exclusivity with upstream copyright owners is expected to reduce the content sourcing cost required to procure music content from certain music labels in the long run because we will no longer be required to pay music labels a premium to obtain exclusive rights to certain licensed content, which is expected to allow us to further improve overall content cost efficiency going forward.

 

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As of the date of the Listing Document, we had not received any further inquiry, notice, warning, sanction or objection relating to our remedial measures adopted in accordance with the Administrative Penalty Decision from the SAMR that resulted in any direct material adverse impact on our business, results of operations and financial condition.

 

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•

Other than the Administrative Penalty Decision, as of the Latest Practicable Date, we had not been subject to any other sanctions or penalties made by the PRC regulators regarding any anti-monopoly matters, nor had we received any order or decision from the PRC regulators that determines our current operations fall under the scope of monopolistic activities.

To further enhance our antitrust compliance efforts, we have formed a dedicated anti-monopoly compliance department to establish our group-wide compliance policies and programs including a systematic review mechanism to ensure that our commercial practices are conducted in compliance with antitrust laws, as well as protocols to effectively communicate with regulatory authorities, among other things. For details of our internal control measures, see “Business — Risk Management and Internal Control — Regulatory Compliance and Legal Risk Management.”

Changes in Board of Directors

On September 15, 2022, the date of the Listing Document, the resignation of Mr. Liang Tang from the board of directors (the “Board”) and the compensation committee of the Board became effectively. The Board also approved the appointment of Ms. Jeanette Kim Yum Chan as an independent director, and Ms. Edith Manling Ngan as a member of the compensation committee, both effective on the same date. Ms. Ngan will continue to serve as an independent director and a member of our audit committee.

 

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RISK FACTORS

 

 

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

We may not have obtained complete licenses for certain copyrights with respect to a small portion of the content offered on our platform.

Under PRC laws and regulations, to secure the rights to provide music or long-form audio content on the internet or for our users to download or stream music or long-form audio from our platform, or to provide other related online music or long-form audio services, we must obtain licenses from the appropriate copyright owners for one or more of the copyright, including the content publishing and recording rights, among others. See “Regulatory Overview — Regulations on Intellectual Property Rights — Copyright.”

We may not have complete licenses for the copyrights underlying a small portion of the content offered on our platform, and therefore we may be subject to assertions by third parties of infringement or other violations by us of their copyright in connection with such content. Many of these music tracks consist of songs uploaded voluntarily by users or performers, and our inability to obtain complete copyright licenses for these music tracks was mainly because the relevant copyright owners cannot be accurately identified despite our proactive efforts to locate such copyright owners. See “— We allow user-generated content to be uploaded on our platform. If users have not obtained all necessary copyright licenses in connection with such uploaded content, we may be subject to potential disputes and liabilities.” The content for which complete copyright licenses have not been obtained may also involve works licensed from labels and other copyright owners, where complete and accurate ownership information for the copyright embodied in the content is unavailable or difficult or, in some cases, impossible for us or the licensing party to obtain. When the ownership information is not complete or accurate, it may be difficult or impracticable to identify all copyright owners from whom licenses should have been obtained. While we have been proactively seeking to obtain complete, undisputed licenses for such content (by, for example, conducting reasonable diligence or having the licensing party represent as to the ownership status of the content), there have been circumstances where the licenses turn out to be subject to claims by third parties, especially where the process of obtaining such licenses involves multiple copyright holders, some of whom are unknown, as well as a myriad of complex legal issues, including in some cases open questions as to when and whether a particular license is needed.

 

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In addition, with respect to the musical compositions and lyrics we license from certain content partners, there is no guarantee that such content partners have the rights to license the copyright underlying all music content covered by our agreements. With respect to any musical compositions and lyrics that the MCSC, a collective copyright organization, was not authorized to sublicense to us, the MCSC undertook to resolve such disputes and compensate the relevant copyright owners from infringement claims made by third-party rights owners against us for using their content on our platform if the infringement happened within the validity period of the contract entered into between the MCSC and us. Despite such undertakings by the MCSC, there is no guarantee that we will not be subject to potential copyright infringement claims by third parties in relation to content licensed from the MCSC.

As advised by the PRC Legal Adviser, if we fail to obtain complete license for the music tracks available on our platform, we might be held liable in accordance with the law. According to the Copyright Law of the People’s Republic of China, Regulation on Protection of the Right to Network Dissemination of Information and other regulations, implementing rules and notices, we may bear civil liabilities including ceasing the infringement, eliminating the influence, making an apology, and compensating for the loss of the copyright owner, and we might be penalized by the relevant authority, including ceasing the tort, being subject to a warning, having the illegal gains confiscated, disposing the infringing copies, and monetary penalties. For example, where the illegal business amount exceeds RMB50,000, a fine of one to five times the illegal business amount may be imposed; where there is no illegal business amount, or the illegal business amount is difficult to be calculated or is less than RMB50,000, a fine of not more than RMB250,000 may be imposed. In the worst case scenario, where a crime is constituted, the violator shall be held criminally liable in accordance with the law.

We allow user-generated content to be uploaded on our platform. If users have not obtained all necessary copyright licenses in connection with such uploaded content, we may be subject to potential disputes and liabilities.

We allow users to upload user-generated content on our platform, which exposes us to potential disputes and liabilities in connection with third-party copyright. When users register on our platform, they agree to our standard agreement, under which they agree not to disseminate any content infringing on third-party copyright. As one of China’s earliest online music services with an operating history of nearly two decades, we have over the years accumulated a large amount of content, including user-generated content originally uploaded or otherwise provided to our platform by users who may not have obtained proper and complete copyright licenses from the ultimate rights holders. Given the large amount of such contents, the way they were uploaded by users and the passage of time since they were initially uploaded, it is generally impracticable for us to accurately identify and verify the individual users or performers that uploaded or provided such content, the copyright status of such content, and the appropriate copyright owners from whom copyright licenses should have been obtained.

Under PRC laws and regulations, online service providers, which provide storage space for users to upload works or links to other services or content, may be held liable for copyright infringement under various circumstances, including situations where the online service provider knows or should reasonably have known that the relevant content uploaded or linked to on its platform infringes upon the copyright of others and the online service provider profits from such infringing activities. For example, online service providers are subject to liability if they fail to take necessary measures, such as deletion, blocking or disconnection, after being duly notified by the legal right holders.

 

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As an online service provider, we have adopted a comprehensive set of measures to reduce the likelihood of using, developing or making available any content without the proper licenses or necessary consents. Such measures include (i) requiring users to acknowledge and agree that they will not upload or perform content which may infringe upon others’ copyright; (ii) putting in place procedures to block users on our blacklists from uploading or distributing content; (iii) using best reasonable efforts to seek licenses from the relevant copyright owners once they are identified and verified and adopting contractual protections for works licensed from labels and other copyright owners; and (iv) implementing “notice and take-down” policies to be eligible for the safe harbor exemption for user-generated content. According to the PRC Legal Adviser, to the extent these measures, especially the “notice and take-down” policies, are properly implemented in compliance with applicable laws and regulations, our failure to obtain complete copyright licenses for user-generated content does not constitute a violation of current PRC copyright law. However, these measures may not be effective in preventing the unauthorized posting and use of third parties’ copyrighted content or the infringement of other third-party intellectual property rights. Specifically, it is possible that such acknowledgments and agreements by users may not be enforceable against third parties who file claims against us. Furthermore, a plaintiff may not be able to locate users who generate content that infringes on the plaintiff’s copyright and may choose to sue us instead. In addition, individual users who upload infringing content on our platform may not have sufficient resources to fully indemnify us, if at all, for any such claims. Also, such measures may fail or be considered insufficient by courts or other relevant regulatory authorities. If we are not eligible for the safe harbor exemption, we may be subject to joint infringement liability with the users, and we may have to change our policies or adopt new measures to become eligible and retain eligibility for the safe harbor exemption, which could be expensive and reduce the attractiveness of our platform to users.

 

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We operate in a competitive industry. If we are unable to compete successfully, we may lose market share to our competitors.

We operate in a competitive industry. We compete for users and their time and spending primarily with the online music services provided by other online music services providers in China. We also face general competition from online offerings of other forms of content, including long-form audio, karaoke services, live streaming, radio services, literature, games and video provided by other social entertainment services providers. In particular, we are increasingly facing noticeable competition from offerings of other emerging forms of content which have been growing in popularity rapidly in recent years, such as live streaming and user-generated short videos.

We compete with our competitors based on a number of factors, such as the diversity and quality of content, product features, social interaction features, quality of user experience, brand awareness and reputation, and our ability to continuously attract, incentivize and retain live streaming performers and their agencies. Some of our competitors may be able to respond more quickly to technological innovations or changes in user demands and preferences, acquire more attractive and diverse content, and act more effectively in the development, promotion and sale of products than we can. Also, they may enter into more favorable relationships with content providers and provide their users with content that competes with our offerings. If any of our competitors achieves greater market acceptance or is able to provide more attractive content offerings than we do, our user traffic and market share may decrease, which may result in a loss of users and a material and adverse effect on our business, financial condition and results of operations.

Our revenues generated from social entertainment services and others decreased by 0.1% from RMB19,804 million in 2020 to RMB19,777 million in 2021, decreased by 20.6% from RMB5,075 million in the three months ended March 31, 2021 to RMB4,028 million (US$635 million) in the same period in 2022, and decreased by 20.4% from RMB5,058 million in the three months ended June 30, 2021 to RMB4,027 million (US$601 million) in the same period of 2022. Such decreases were mainly due to increased market competition and weakened macroeconomic environment that had negatively impacted our users’ consumption on our platform. China’s music-centric social entertainment services market in which we operate is rapidly evolving and increasingly intensified. In recent years, China’s music-centric social entertainment services market has been characterized by changing user needs and preferences, increasing competition, and heightened regulations. In particular, we are facing increased competition from not only other online music platforms but also providers of new content formats, such as audio and short-form videos, which has and is expected to continue to, put pressure on our short-term growth in terms of the overall user base and monetization of our social entertainment services. For further details, see “Industry Overview — China Music-Centric Social Entertainment Services Market Overview — Competitive Landscape,” and “Industry Overview — China Music-Centric Social Entertainment Services Market Overview — Emerging Trends, Challenges & Opportunities in China’s Music-Centric Social Entertainment Services Market.” As competition is intense and increasing, we cannot assure you that we will be able to compete effectively or that competition will not adversely affect us in the future.

 

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China’s internet, music entertainment and long-form audio industries are highly regulated. Our failure to obtain and maintain requisite licenses or permits or to respond to any changes in regulatory policies, laws or regulations may materially and adversely impact our business, financial condition and results of operations.

The PRC regulators regulate the internet industry extensively, including foreign ownership of companies in the internet industry and the licensing requirements pertaining to them. A number of regulatory authorities, such as the MOFCOM, the Ministry of Culture and Tourism, the National Copyright Administration, the MIIT, the National Radio and Television Administration, or the NRTA and the CAC regulate different aspects of the internet industry. In addition to complying with the laws and regulations promulgated and enforced by Chinese regulatory authorities, operators in the internet industry also need to follow Chinese regulatory authorities’ policies and guidelines. Such laws, regulations, policies and guidelines cover many aspects of the telecommunications, internet information services, copyright, internet culture, online publishing industries and online audio-video products services, including entry into such industries, scope of permitted business activities, licenses and permits for various business activities and foreign investments into such industries. Operators are required to obtain various regulatory approvals, licenses and permits in connection with their provision of internet information services, internet culture services, online publishing services, online audio-video products and other related value-added telecommunications services. If we fail to obtain and maintain approvals, licenses or permits required for our business, we could be subject to liabilities, penalties and operational disruption and our business could be materially and adversely affected. In addition, if we fail to follow applicable laws, regulations, policies and guidelines, or applicable laws, regulations, policies and guidelines are tightened by any regulatory authorities, or if there are new laws, regulations, policies or guidelines introduced to impose additional regulatory approvals, licenses, permits and requirements, our business may be disrupted and our results of operations may suffer.

Some of our PRC subsidiaries or consolidated affiliated entities currently have not obtained certain licenses, permits or approvals that may be required to conduct their respective business operations in China. For details, see “Business — Licenses, Permits and Regulatory Approvals.”

 

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PRC laws and regulations are evolving, and there are uncertainties relating to the regulation of different aspects of the internet, music entertainment and long-form audio industries, including but not limited to exclusive licensing and sublicensing arrangements. Pursuant to an article posted on National Copyright Administration’s official website, in September 2017, the National Copyright Administration held meetings with a number of music industry players, including us, where it encouraged the relevant industry players to “avoid acquiring exclusive music copyright” and indicated that they should also not engage in activities involving “collective management of music copyright.” Furthermore, the National Copyright Administration held meetings with a number of music industry players on January 6, 2022 to emphasize that relevant industry players shall not execute exclusive music copyright agreement except under certain circumstances and shall develop internal copyright management system. On July 24, 2021, the SAMR issued an Administrative Penalty Decision to Tencent regarding its acquisition of CMC in 2016. Pursuant to the decision, we shall implement a rectification plan to, among other things, terminate exclusive music copyright licensing arrangements within 30 days from the date of the decision. To comply with such decision, Tencent and we have terminated the exclusivity with upstream copyright holders subject to certain limited exceptions specified in the decision. While we are pursuing non-exclusive collaborations with upstream copyright holders, there can be no assurance that all the licenses once exclusively available to us will remain available at royalty rates and on terms that are commercially reasonable or at all. In addition, the termination of exclusive copyright licensing arrangements may potentially lower the competition barriers in a way that benefits some of our competitors. For more details about the implication on our financial and operational performance brought by the Administrative Penalty Decision and our associated remedial measures, see the subsection headed “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Industry— We depend upon third-party licenses for the content of our content offerings, and any adverse changes to or loss of, our relationships with these content providers may materially and adversely affect our business, operating results, and financial condition” in our 2021 Form 20-F and “Summary — Recent PRC Regulatory Developments — Anti-Monopoly Law Enforcement.” Any such adverse regulatory development or enforcement in China may have a material and adverse impact on our business, financial condition and results of operations. To the extent our historical or current licensing arrangements are found objectionable by the regulatory authorities, we may be subject to legal and regulatory penalties and/or have to revisit and modify such arrangements in a way that may cause substantial costs, and our ability to offer music content and our competitive advantages may be harmed. Such events may have a material and adverse impact on business, financial condition and results of operations.

Our business operations may be adversely affected by the heightened regulatory oversight and scrutiny on live streaming platforms and performers.

Regulatory authorities in China have been heightening its oversight on live streaming businesses. In November 2020, the NRTA promulgated the Circular on Strengthening the Administration of Live Streaming Web Shows and Live Streaming E-commerce, or the Circular 78, which sets forth requirements for certain live streaming businesses with respect to real-name registration, limits on users’ spending on virtual gifting, restrictions on minors from virtual gifting, live streaming review personnel requirements and content tagging requirements, among other things. In February 2021, the CAC, together with six other authorities, jointly issued the Guidance Opinions on the Strengthening the Regulation and Management Work of Internet Live Streaming, or the Circular 3, which requires internet streaming platforms to set up appropriate caps on the maximum purchase price for each piece of virtual gifts and maximum value of virtual gifts that the users give to the performers each time. A portion of our revenue is from virtual gift payments from our users to performers, so any limitation imposed by PRC authorities on the sale, exchange or circulation of virtual gifts in the future may reduce the virtual gift payments and therefore may adversely affect the engagement of our live-streaming performers, which may result in a loss of users and a material and adverse effect on our business, financial condition and results of operations.

 

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In addition, the Law of the PRC on the Protection of Minors (2020 Revision) took effect on June 1, 2021, which provides that, among others, live streaming service providers are prohibited from providing minors under age 16 with online live streaming publisher account registration services, and that they must obtain the consent from the minors’ parents or guardians and verify the identity of the minors before allowing minors aged between 16 and 18 to register a live streaming publisher account. Furthermore, in December 2021, certain live streaming e-commerce influencers in China on other platforms were fined by the State Taxation Administration for tax evasion, which demonstrated the PRC tax authorities’ enhanced efforts to strengthen tax administration in live streaming businesses. On March 25, 2022, CAC, the State Taxation Administration and SAMR issued Opinions on Further Regulating the For-Profit Activities in Online Live Streaming to Promote a Healthy Development of the Industry, which provides that, among others, live streaming platforms shall report to tax authorities information including but not limited to live streaming publishers’ identity, information of the live streaming account and bank account which receives profits, types of revenue and profits earning information. On May 7, 2022, the CAC, together with three other authorities, jointly issued the Opinions on Regulating Live Streaming Rewards and Strengthening Minor Protections, or the Live Streaming Opinions, which reiterates the requirements for live streaming platforms in respect of strengthening real-name registration, restrictions on minors from virtual gifting and prohibition on providing live streaming services to minors. Pursuant to the Live Streaming Opinions, online platforms are prohibited from ranking, introducing or recommending live streaming performers solely by the monetary amount of virtual gifts that they have received from users, nor could they rank users based on the monetary amount of virtual gifts that they have sent to live streaming performers. Any such rankings currently available on these online platforms is ordered to be removed by June 7, 2022 according to the Live Streaming Opinions. In addition, the online platforms shall procure that, during the peak hours (from 8.00 p.m. to 10.00 p.m.) every day, each live streaming performer shall not engage in “PKs” (i.e. real-time interactive competitive game between two performers) against another performer for more than twice, and the online platforms shall not impose penalty within the game or provide any technical support to facilitate imposing such penalty. Although we believe we have adjusted the relevant aspects of our live streaming services in material compliance with these new requirements, there is no guarantee that the relevant PRC regulators will not impose additional requirements on our operations or otherwise find any aspect of our operations not to be in full compliance with these regulatory requirements. Although we are currently not able to accurately quantify the financial impacts of the Live Streaming Opinions due to its lack of implementation track record and our ability to rapidly adapt our operations, enhanced regulation with respect to live streaming businesses in China may constrain our business operations and profitability, which in turn may adversely affect our results of operations and financial condition.

 

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Pending or future litigation or regulatory proceedings could have a material and adverse impact on our reputation, business, financial condition and results of operations.

From time to time, we have been, and may in the future be, subject to lawsuits brought by our competitors, individuals, or other entities against us, as well as regulatory investigations or proceedings, in matters primarily relating to intellectual property rights, antitrust, and competition claims concerning our content acquisition and distribution. We cannot predict the outcomes of such lawsuits or regulatory actions, which may not be successful or favorable to us. Lawsuits or regulatory investigations or actions against us, our shareholders, Directors, officers or employees may also generate negative publicity that significantly harms our reputation, which may adversely affect our user base and relationships with our content partners. In addition to the related cost, managing and defending litigation and regulatory proceedings can significantly divert our management’s attention from operating our business. We may also need to pay damages or settle lawsuits or regulatory proceedings with a substantial amount of cash, or be required by the relevant regulatory authorities to make substantive changes to our existing business model. As of March 31, 2022, there were 590 lawsuits pending in connection with alleged copyright infringement on our platform against us or our affiliates with an aggregate amount of damages sought of approximately RMB72.9 million (US$11.5 million). While we do not believe that any such proceedings are likely to have a material adverse effect on us, if there were adverse determinations in legal proceedings against us, we could be required to pay substantial monetary damages or adjust our business practices, which could have an adverse effect on our reputation, business, financial condition and results of operations.

The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections.

Our auditor, an independent registered public accounting firm that issues the audit reports included in our annual reports on Form 20-F filed with the SEC, 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 auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the applicable Chinese authorities, our auditor has not been and is currently not subject to inspections by the PCAOB.

This lack of the PCAOB inspections in China prevents the PCAOB from fully evaluating audit and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ADSs or 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.

 

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Our ADSs may be delisted and our ADSs and shares prohibited from trading in the over-the-counter market under the Holding Foreign Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect and fully investigate auditors located in China. On December 16, 2021, PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect and investigate completely. Under the current law, delisting and prohibition from over-the-counter trading in the U.S. could take place in 2024.

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, the Holding Foreign Companies Accountable Act, or the HFCAA, has been signed into law on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. Accordingly, under the current law this could happen in 2024.

On December 2, 2021, the SEC adopted final amendments to its rules implementing the HFCAA (the “Final Amendments”). The Final Amendments include requirements to disclose information, including the name and location, the percentage of shares of the issuer owned by regulatory entities, whether regulatory entities in the applicable foreign jurisdiction with respect to the auditor has a controlling financial interest with respect to the issuer, the name of each official of the Chinese Communist Party who is a member of the board of the issuer, and whether the articles of incorporation of the issuer contains any charter of the Chinese Communist Party. The Final Amendments also establish procedures the SEC will follow in identifying issuers and prohibiting trading by certain issuers under the HFCAA.

On December 16, 2021, the PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect or investigate completely. As of the Latest Practicable Date, we had been conclusively identified by the SEC under the HFCAA as having filed audit reports issued by a registered public accounting firm that cannot be inspected or investigated completely by the PCAOB in connection with our filing of the annual report on Form 20-F for the fiscal year ended December 31, 2021.

On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC which contains provisions that, if abided by, would give the PCAOB access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong completely. The PCAOB is required to reassess its determinations for purposes of the Holding Foreign Companies Accountable Act by the end of 2022. However, uncertainties exist with respect to the implementation of these provisions and there is no assurance that the PCAOB will be able to execute, in a timely manner, its future inspections and investigations in a manner that satisfies the Statement of Protocol.

 

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The HFCAA or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of the ADSs and/or Class A ordinary shares could be adversely affected. Additionally, whether the PCAOB will be able to conduct inspections and investigations of auditors before the issuance of our financial statements on Form 20-F for the year ended December 31, 2023, which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of factors out of our and our auditor’s control. If auditors are unable to be inspected and investigated, we are unable to meet the PCAOB inspection and investigation requirement in time, we could be delisted from the New York Stock Exchange and our ADSs will not be permitted for trading “over-the-counter” either. Such a delisting would substantially impair the ability of the holders of our ADSs to sell or purchase our ADSs when they wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs and/or Class A ordinary shares. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.

 

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Complying with evolving laws and regulations regarding cybersecurity, information security, privacy and data protection and other related laws and requirements may be expensive and may force us to make adverse changes to our business. Many of these laws and regulations are subject to changes and uncertain interpretations, and any failure or perceived failure to comply with these laws and regulations could result in negative publicity, legal proceedings, suspension or disruption of operations, increased cost of operations, or otherwise harm our business.

We are subject to a variety of laws and other obligations relating to the security and privacy of data, including restrictions on the collection, use and storage of personal information and requirements to take steps to prevent personal data from being divulged, stolen, or tampered with.

The PRC Cyber Security Law, which became effective in June 2017, created China’s first national-level data protection regime for “network operators,” which may include all organizations in China that provide services over the Internet or other information network. Specifically, the PRC Cyber Security Law provides that China adopts a multi-level protection scheme, under which network operators are required to perform obligations of security protection to ensure that the network is free from interference, disruption or unauthorized access, and prevent network data from being disclosed, stolen or tampered.

 

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In addition, the PRC Data Security Law was promulgated by the SCNPC on June 10, 2021 and took effect on September 1, 2021. The PRC Data Security Law establishes a tiered system for data protection in terms of their importance. Data categorized as “important data,” which will be determined by regulatory authorities in the form of catalogs, are required to be treated with higher level of protection. Specifically, the PRC Data Security Law provides that operators processing “important data” are required to appoint a “data security officer” and a “management department” to take charge of data security. In addition, such operator is required to evaluate the risk of its data activities periodically and file assessment reports with relevant regulatory authorities.

Numerous regulations, guidelines and other measures have been or are expected to be adopted under the umbrella of, or in addition to, the PRC Cyber Security Law and PRC Data Security Law. For example, Regulations on the Security Protection of Critical Information Infrastructure, or the CII Protection Regulations, became effective on September 1, 2021. According to the CII Protection Regulations, critical information infrastructure, or the CII, refers to any important network facilities or information systems of the important industry or field such as public communication and information service, energy, transportation, water conservancy, finance, public services, e-government affairs and national defense science, which may endanger national security, people’s livelihood and public interest in the case of damage, function loss or data leakage. Regulators supervising specific industries are required to formulate detailed guidance to recognize the CII in the respective sectors, and a critical information infrastructure operator, or a CIIO, must take the responsibility to protect the CII’s security by performing certain prescribed obligations. For example, CIIOs are required to conduct network security test and risk assessment, report the assessment results to relevant regulatory authorities, and timely rectify the issues identified at least once a year. In addition, relevant administration departments of each critical industry and sector shall be responsible for formulating eligibility criteria and identifying CIIOs in the respective industry or sector. The operators shall be informed about the final determination as to whether they are categorized as CIIOs. As of the Latest Practicable Date, no detailed rules or guidance with respect to the implementation of such regulations had been issued by any regulatory authorities and we had not been identified as a CIIO by any regulatory authorities. Furthermore, the exact scope of CIIOs under the current regulatory regime remains unclear, and the PRC regulatory authorities may have wide discretion in the interpretation and enforcement of these laws. Therefore, it is uncertain whether we would be deemed as a CIIO under PRC law.

The Personal Information Protection Law of the PRC, which was promulgated by the SCNPC on August 20, 2021 and took effect on November 1, 2021, integrates the various rules with respect to personal information rights and privacy protection and applies to the processing of personal information within mainland China as well as certain personal information processing activities outside mainland China, including those for the provision of products and services to natural persons within China or for the analysis and assessment of acts of natural persons within China.

 

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Additionally, in December 2021, the CAC and several other administrations jointly promulgated the amended Cybersecurity Review Measures, or the Cybersecurity Review Measures, which took effect on February 15, 2022, and superseded and replaced the cybersecurity review measures that became effective since June 2020. Pursuant to the Cybersecurity Review Measures, a CIIO that purchases network products and services, or an internet platform operator that conducts data processing activities, which affects or may affect national security, shall be subject to the cybersecurity review. The Cybersecurity Review Measures also expands the cybersecurity review to internet platform operators in possession of personal information of over one million users if such operators intend to list their securities in a foreign country. The Cybersecurity Review Measures elaborate on the factors to be considered when assessing the national security risk, including but not limited to the risks of core data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or illegally exited the country, risks of critical information infrastructure, core data, important data or a large amount of personal information data being affected, controlled and maliciously used by foreign governments after a listing, and risks associated with Internet information security. See “— Risks Related to Our Corporate Structure — The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC regulatory authorities may be required under PRC law in connection with this Listing and our future issuance of securities overseas, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing.” Additionally, relevant regulatory authorities in the PRC may initiate cybersecurity review if they determine an operator’s network products or services or data processing activities affect or may affect national security.

Furthermore, on November 14, 2021, Regulations on Network Data Security Management (Draft for Comment), or the Draft Regulations on Network Data, was proposed by the CAC for public comments until December 13, 2021. The Draft Regulations on Network Data requires data processors to apply for cybersecurity review in accordance with the relevant laws and regulations for carrying out activities including but not limited to: (i) a merger, reorganization, or division to be conducted by an internet platform operator who has amassed a substantial amount of data resources that concern national security, economic development or the public interest, which will or may impact national security; (ii) an overseas initial public offering to be conducted by a data processor processing the personal information of more than one million individuals; (iii) an initial public offering in Hong Kong to be conducted by a data processor, which will or may impact national security; and (iv) other data processing activities that will or may have an impact on national security. Any failure to comply with such requirements may subject us to, among others, suspension of services, fines, revoking relevant business permits or business licenses and penalties. However, the Draft Regulations on Network Data provides no further explanation or interpretation as to how to determine what “may affect national security,” and there remain uncertainties as to whether we would be subject to the cybersecurity review for this Listing pursuant to the Draft Regulations on Network Data. As of the Latest Practicable Date, there was no schedule as to when the Draft Regulations on Network Data will be enacted. Substantial uncertainties exist with respect to its enactment timeline, final content, interpretation and implementation. We cannot predict the impact of the Draft Regulations on Network Data, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If the enacted versions of the Draft Regulations on Network Data mandate clearance of cybersecurity review and other specific actions to be completed by China-based companies listed on a U.S. stock exchange, including us, we face uncertainties as to whether such clearance can be timely obtained, or at all.

 

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Since these laws and regulations in China are relatively new, uncertainties still exist in relation to their interpretation and implementation. Any change in laws and regulations relating to privacy, data protection and information security and any enhanced and scrutinized enforcement action of such laws and regulations could greatly increase our cost in providing our products and services, limit their use or adoption or require certain changes to be made to our operations. We cannot assure you that we will be compliant with these new laws and regulations described above in all respects, and we may be ordered to rectify and terminate any actions that are deemed illegal by the regulatory authorities and become subject to fines and other regulatory sanctions, which may materially and adversely affect our business, financial condition, and results of operations. For example, in November 2021, we received a notice from the MIIT requiring us to rectify our collection and usage of personal information on QQ Music and WeSing Lite, a simplified version of WeSing available only on Android devices, in accordance with the applicable laws and regulations. We have made rectification measures on these two applications to the satisfaction of the MIIT without any penalty being imposed upon us.

In addition, if and to the extent our operations are extended into Europe, we may be required to notify European Data Protection Authorities within strict time periods about any personal data breaches, unless the personal data breach is unlikely to result in a risk to the rights and freedoms of affected individuals. We may also be required to notify affected individuals of the personal data breach where there is a high risk to their rights and freedoms. If we suffer a personal data breach, or otherwise violate the General Data Protection Regulation, we could be fined up to EUR 20 million or 4% of worldwide annual turnover of the preceding financial year, whichever is greater. Furthermore, any data breach by service providers that are acting as data processors (i.e., processing personal data on our behalf) could also mean that we are subject to these fines and are required to comply with the notification obligations described above. Complying with the General Data Protection Regulation and other applicable regulatory requirements may cause us to incur substantial expenses or require us to alter or change our practices in a manner that could harm our business.

Regulatory requirements regarding the protection of data are constantly evolving and can be subject to differing interpretations or significant changes, making the extent of our responsibilities in that regard uncertain. While in the U.S., the state of California enacted the California Consumer Privacy Act, which became effective on January 1, 2020 and imposes heightened obligations with respect to data privacy, including the ability for individuals in California to object to the sale of their personal data in certain instances. If other states in the United States adopt similar laws, or if a comprehensive federal data privacy law is enacted, we may be required to expend considerable resources to meet the applicable requirements to the extent our operations are expanded into the United States.

Any failure, or perceived failure, by us, or by our third-party partners, to maintain the security of our user data or to comply with applicable privacy or data security laws, regulations, policies, contractual provisions, industry standards, and other requirements, may result in civil or regulatory liability, including actions and investigations, fines, penalties, enforcement orders requiring us to cease operating in a certain way, litigation, or adverse publicity, and may require us to expend significant resources in responding to and defending allegations and claims. Moreover, claims or allegations that we have failed to adequately protect our users’ data, or otherwise violated applicable privacy and data security laws, regulations, policies, contractual provisions, industry standards, or other requirements, may result in damage to our reputation and a loss of confidence in us by our users or our partners, potentially causing us to lose users, advertisers, content providers, other business partners and revenues, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market price of our Class A ordinary shares and/or ADSs to drop significantly.

 

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We may face impairment risks in connection with our goodwill and other intangible assets.

We recorded goodwill, which is arising from our historical acquisitions, of RMB17,140 million, RMB17,492 million, RMB19,121 million and RMB19,126 million (US$3,017 million) as of December 31, 2019, 2020 and 2021 and March 31, 2022, respectively. These acquisitions mainly include our acquisition of CMC in 2016, a long-form audio company in 2021 and certain music contents and other music related businesses from time to time. We also recorded intangible assets, which primarily included domain name, trademark and other internet audio and video program transmission license, copyrights, supplier resources, corporate customer relationships, non-compete agreement and others, of RMB1,622 million, RMB2,020 million, RMB2,829 million and RMB2,692 million (US$425 million) as of December 31, 2019, 2020 and 2021 and March 31, 2022, respectively. Our impairment assessment of goodwill and other intangible assets is based on a number of assumptions made by our management. If any of these assumptions does not materialize, or if the performance of our business is not consistent with such assumptions, we may be required to make an impairment loss against our goodwill and other intangible assets, which could in turn adversely affect our results of operations. Any significant impairment losses of goodwill or intangible assets could have a material adverse effect on our results of operations.

We are subject to credit risks related to our accounts receivable and other receivables.

Our accounts receivable are amounts due from customers for goods sold or services performed in our ordinary course of business. Our accounts receivable are generally due for settlement within 30 to 90 days and therefore are all classified as current assets. The total balance of our accounts receivable before loss allowance was approximately RMB2,209 million, RMB2,814 million, RMB3,630 million and RMB2,536 million (US$400 million) as of December 31, 2019, 2020 and 2021, and March 31, 2022, respectively. For the years ended December 31, 2019, 2020 and 2021, and March 31, 2022, we recorded loss allowance for expected credit losses of RMB11 million, RMB14 million, RMB20 million and RMB23 million (US$4 million), respectively. If any of our customers with significant outstanding accounts receivable balances were to become insolvent or otherwise unable to make payments in a timely manner, or at all, we would have to make further provisions against such accounts receivable, or write off the relevant amounts, either of which could adversely affect our profitability and liquidity position. In addition, we may also be required to make an impairment loss against our prepayments and other receivables, which could in turn adversely affect our results of operations.

 

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We may not be able to fulfill our obligations in respect of contract liabilities, which may have an adverse impact on our business, reputation and liquidity position.

A contract liability represents our obligation to transfer goods or services to a customer for which we have received a consideration (or an amount of consideration is due) from the customer. We recorded deferred revenue of RMB1,761 million, RMB1,686 million, RMB1,920 million and RMB1,977 million (US$312 million) as of December 31, 2019, 2020 and 2021 and March 31, 2022, respectively. Our deferred revenues as of these dates mainly represented contract liabilities incurred in our ordinary course of business as of the same dates in relation to the service fees paid by customers for time-based virtual gifts, membership subscriptions, content sublicensing and digital music albums or single songs, for which the related services had not been rendered by us as of the respective dates. Any failure to honor our obligations in respect of such contract liabilities may have an adverse impact on our business, reputation and liquidity position.

 

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Our results of operations, financial conditions and prospects may be adversely affected by fair value changes of financial assets through other comprehensive income and financial assets at fair value through profit or loss, the valuation of which is uncertain due to the use of unobservable inputs that require judgment and assumptions that are inherently uncertain.

We held certain listed equity securities, which were designated as financial assets at fair value through other comprehensive income, of RMB4,461 million, RMB9,771 million, RMB7,302 million and RMB4,904 million (US$774 million) as of December 31, 2019, 2020 and 2021 and March 31, 2022, respectively. We also had certain unlisted companies investments classified as other investments of RMB255 million, RMB386 million, RMB236 million and RMB385 million (US$61 million) as of December 31, 2019, 2020 and 2021 and March 31, 2022, respectively, and short-term investments of RMB6 million, nil, RMB1,029 million and RMB1,088 million (US$172 million) as of December 31, 2019, 2020 and 2021 and March 31, 2022, respectively, which were designated as financial assets at fair value through profit or loss. The fair value of these financial assets carried at fair value other than listed equity securities that are traded in an active market is determined by using valuation techniques, including discounted cash flows approach and comparable transactions. The assessment of fair value of these financial assets requires the use of unobservable inputs including expected rate of return, discount rate, discount of lack of marketability and expected volatility. We use our judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the respective valuation dates. These valuation methodologies that we use involve a significant degree of management judgment and are inherently uncertain. Changes in these unobservable inputs and other estimates and judgments could materially affect the fair value of these financial assets, which in turn may adversely affect our results of operations. While we have established internal policies and procedures to prudently manage these financial assets, we cannot assure you that we will not incur any losses from the fair value changes of these financial assets in the future. If we incur such fair value losses, our results of operations, financial condition and prospects may be adversely affected. For additional information, please see “Financial Information — Discussion of Certain Key Balance Sheet Items — Financial Assets at Fair Value,” and Note 3.3 to the Accountant’s Report of our Company, the text of which is set out in “Consolidated Financial Statements.”

Our investments accounted for using equity method and the share of results of these investments may affect our results of operations.

During the Track Record Period, we made certain investments in our associates and joint ventures. As of December 31, 2019, 2020 and 2021 and March 31, 2022, we had such investments accounted for using equity method of RMB489 million, RMB2,255 million, RMB3,599 million and RMB3,652 million (US$576 million), respectively. We are subject to the risk that the associates and joint ventures in which we invest may make business, financial or management decisions with which we do not agree, and over which we do not have control, or that the majority shareholders, or the management, of these investee companies may take risks or otherwise act in a manner that does not serve our interests. In particular, the carrying value of our investments accounted for using equity method, may be affected by a number of factors such as share of results, impairment, dilution, issuance of equity securities, and currency translation differences. Any of those above may adversely affect our business and results of operations.

In addition, our investments accounted for using equity method are subject to liquidity risk. Our investments accounted for using equity method are not as liquid as other investment products as there is no cash flow until dividends are received, even if our investee companies reported profits under the equity method. Furthermore, our ability to promptly sell our interests in these investee companies in response to changing economic, financial and investment conditions is limited. The market is affected by various factors, such as general economic conditions, availability of financing, interest rates and supply and demand, many of which are beyond our control.

 

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Any discontinuation, reduction or delay of government grants, tax rebates or preferential tax treatments could have a material and adverse impact on our business.

We recorded other gains of government grants and tax rebates of RMB132 million, RMB245 million, RMB393 million and RMB53 million (US$8 million) for the years ended December 31, 2019, 2020 and 2021 and the three months ended March 31, 2022, respectively. See Note 7 to Accountant’s Report of our Company, the text of which is set out in “Consolidated Financial Statements” for more detailed information. In addition, certain of our subsidiaries enjoyed preferential tax treatments during the Track Record Period. See Note 10 to Accountant’s Report of our Company, the text of which is set out in “Consolidated Financial Statements” for more detailed information. We cannot assure you that we will continue to receive such government grants and tax rebates at the same level or at all, or that we will continue to enjoy the current preferential tax treatments, in which case our business, financial condition and results of operations may be materially and adversely affected.

Our deferred tax assets may not be recovered.

Our deferred tax assets may not be recovered. As of March 31, 2022, our deferred tax assets amounted to RMB361 million (US$57 million), representing approximately 0.5% of our total assets. For each reporting year, we evaluate our deferred income tax assets to determine whether it is probable that they will be utilized. In determining whether it is probable that our deferred income tax assets will be utilized, we assess the likelihood that we will be able to recover deferred income tax assets using historical levels of income and estimates of future income. These determinations require significant judgment from our management on assessments on the probability, timing and adequacy of future taxable profits for the deferred income tax assets to be recovered. If these judgments turn out to be incorrect or imprecise, we may need to adjust our tax provisions accordingly. Furthermore, we cannot predict future movements in our deferred income tax assets or the extent to which they may affect our financial position. Any of these events may have a material adverse effect on our business, financial condition and results of operations.

 

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If we fail to attract more advertisers to our platform or if advertisers are less willing to advertise with us, our business, financial condition and results of operations may be adversely affected.

Our advertising revenues depend on the overall growth of the online advertising industry in China and advertisers’ continued willingness to deploy online advertising as part of the advertising spend. In addition, advertisers may choose more established Chinese internet portals or search engines over our platform. If the online advertising market does not continue to grow, or if we are unable to capture and retain a sufficient share of that market, our ability to grow our advertising revenues may be materially and adversely affected. Furthermore, our key and long-term priority of optimizing user experience and satisfaction may limit our ability to significantly grow our advertising revenues. To the extent our philosophy of prioritizing user experience negatively impacts our relationships with advertisers, or does not deliver the long-term benefits that we expect, the success of our business, financial condition and results of operations could be materially and adversely affected.

 

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Our ability to attract or retain direct advertisers or advertising agencies may be negatively impacted by the changing regulatory environment. As an online music entertainment platform, we are subject to various PRC regulations governing online advertising. For example, the MIIT promulgated the Notice of the Ministry of Industry and Information Technology on Launching the Action for Improvements to the Perception of Information and Communications Services, or the MIIT Notice. Under the MIIT Notice, internet enterprises shall set obvious and effective close buttons in the splash ads of their APPs. Moreover, since the second half of 2021, the MIIT has launched a series of regulatory campaigns which imposed certain restrictions on splash ads in order to improve user experience on online platforms, including restricting the use of splash ads to redirect user traffic and allowing users to skip splash ads. Such restrictions have generally compromised advertising effectiveness of splash ads on China’s online platforms, which in turn led to a decrease in our advertising revenues. Our online music services revenue decreased by 4.8% from RMB2,749 million in the three months ended March 31, 2021 to RMB2,616 million (US$413 million) in the same period in 2022 and decreased by 2.4% from RMB2,950 million in the three months ended June 30, 2021 to RMB2,878 million (US$430 million) in the same period of 2022, partially due to the decreased advertising revenues during these periods. For details, see “Regulatory Overview — Regulations on Online Advertising Services.”

 

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We cannot assure you that we will be able to attract or retain direct advertisers or advertising agencies. If we fail to retain and enhance our business relationships with these advertisers or third-party advertising agencies, we may suffer from a loss of advertisers and our business and results of operations may be materially and adversely affected. If we fail to retain existing advertisers and advertising agencies or attract new direct advertisers and advertising agencies or any of our current advertising methods or promotion activities becomes less effective, our business, financial condition and results of operations may be materially and adversely affected.

 

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We have granted, and may continue to grant, share incentives, which may result in increased share-based compensation expenses and cause shareholding dilution to our existing shareholders.

We have adopted various equity incentive plans, including a share incentive plan adopted in 2014 and a share option plan and a restricted share award plan adopted in 2017. We account for compensation costs for all share-based awards using a fair-value based method and recognize expenses in our consolidated statements of comprehensive income in accordance with IFRS. Under such plans, we are authorized to grant options, stock appreciation rights, restricted shares, restricted stock units and other types of awards as the administrator of such plans may decide. The maximum aggregate number of shares that we are authorized to issue pursuant to the equity awards granted under such plans is 436,999,865 shares as of the Latest Practicable Date. As of the same date, 59,826,474 restricted shares and the options to purchase a total of 50,162,830 Class A ordinary shares have been granted and are outstanding, under such plans. In 2019, 2020, 2021 and the three months ended March 31, 2022, we recorded RMB519 million, RMB569 million, RMB752 million and RMB189 million (US$30 million), respectively, in share-based compensation expenses. We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based awards in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations. In addition, issuance of additional shares with respect to share-based awards may dilute the shareholding percentage of our existing shareholders.

 

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RISKS RELATED TO OUR RELATIONSHIP WITH TENCENT

Tencent, one of our Controlling Shareholders, has had and will continue to have effective control over the outcome of shareholder actions in the Company. The interests of Tencent may not be aligned with the interests of our other shareholders and holders of the ADSs.

As of the Latest Practicable Date, Tencent beneficially owned 9.6% of our outstanding Class A ordinary shares and 95.7% of our outstanding Class B ordinary shares, and held in the aggregate 90.4% of our total voting power¹. Tencent’s voting power gives it power to control certain actions that require shareholder approval under Cayman Islands law, our Articles of Association and New York Stock Exchange requirements, including approval of mergers and other business combinations, changes to our Articles of Association, the number of shares available for issuance under any share incentive plans, and the issuance of significant amounts of our ordinary shares in private placements.

Tencent’s voting control may cause transactions to occur that might not be beneficial to you as a holder of the Class A ordinary shares and/or ADSs and may prevent transactions that would be beneficial to you. For example, Tencent’s voting control may prevent a transaction involving a change of control in us, including transactions in which you as a holder of the Class A ordinary shares and/or ADSs might otherwise receive a premium for the Class A ordinary shares and/or ADSs over the then-current market price. In addition, Tencent is not prohibited from selling the controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your Class A ordinary shares and/or ADSs. If Tencent is acquired, otherwise undergoes a change of control or is subject to a corporate restructuring, an acquirer, successor or other third party may be entitled to exercise the voting control and contractual rights of Tencent, and may do so in a manner that could vary significantly from that of Tencent currently.

We may have conflicts of interest with Tencent and, because of Tencent’s controlling ownership interest in the Company, we may not be able to resolve such conflicts on terms favorable to us.

Conflict of interest may arise between Tencent and us in a number of areas relating to our ongoing relationships. Potential conflicts of interest that we have identified mainly include the following:

 

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Agreements with Tencent. We entered into a master business cooperation agreement in July 2018. Tencent may use its control over us to prevent us from bringing a legal claim against it in the event of a contractual breach by Tencent, notwithstanding our contractual rights under the master business cooperation agreement and any other agreement we may enter into with Tencent from time to time.

 

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Allocation of business opportunities. There may arise business opportunities in the future that both we and Tencent are interested in and which may complement each of our respective businesses. Tencent holds a large number of business interests, some of which may directly or indirectly compete with us. Tencent may decide to take up such opportunities itself, which would prevent us from taking advantage of those opportunities.

 

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Employee recruiting and retention. We may compete with Tencent in the hiring of employees, especially computer programmers, engineers, sales and other employees with experience or an interest in the internet industry.

 

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Sale of Shares in the Company. Tencent may decide to sell all or a portion of the Shares that it holds in the Company to a third party, including to one of our competitors, thereby giving that third party substantial influence over our business and our affairs. Such a sale could be contrary to the interests of our employees or our other shareholders or holders of the ADSs.

 

1	The foregoing beneficial ownership information of Tencent is based on the Amendment No. 2 to Schedule 13G filed by Tencent with the SEC on February 10, 2022.

 

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Developing business relationships with Tencent’s competitors. We may be limited in our ability to do business with Tencent’s competitors, which may limit our ability to serve the best interests of the Company and our other shareholders or holders of the ADSs.

 

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Our Directors may have conflicts of interest. Certain of our Directors are also employees of Tencent. These relationships could create, or appear to create, conflicts of interest when these persons are faced with decisions with potentially different implications for Tencent and us.

Our financial contribution to Tencent was not material during the Track Record Period, and Tencent may from time to time make strategic decisions that it believes are in the best interests of its business as a whole, which may be different from the decisions that we would have made on our own. Tencent’s decisions with respect to us or our business may favor Tencent and therefore the Tencent shareholders, which may not necessarily be aligned with our interests and the interests of our other shareholders. Moreover, Tencent may make decisions, or suffer adverse trends, that may disrupt or discontinue our collaborations with Tencent or our access to Tencent’s user base. Although we are now a stand-alone public company and we have an audit committee, consisting of independent non-executive directors, to review and approve all proposed related party transactions, we may not be able to resolve all potential conflicts of interest, and even if we do so, the resolution may be less favorable to us than if we were dealing with a non-controlling shareholder.

RISKS RELATED TO OUR CORPORATE STRUCTURE

There are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to the agreements that establish the VIE structure for our operations in China, including potential future actions by the PRC regulators, which could affect the enforceability of our contractual arrangements with the VIEs and, consequently, significantly affect our financial condition and results of operations. If the PRC regulators find such agreements non-compliant with relevant PRC laws, regulations, and rules, or if these laws, regulations, and rules or the interpretation thereof change in the future, we could be subject to severe penalties or be forced to relinquish our interests in the VIEs.

Foreign investment in the value-added telecommunication services industry and internet cultural service industry in China is extensively regulated and subject to numerous restrictions. Pursuant to the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2021 Version), or the Negative List, published by the MOFCOM and the NDRC on December 27, 2021 and became effective on January 1, 2022 with a few exceptions, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider. On March 29, 2022, the Decision of the State Council on Revising and Repealing Certain Administrative Regulations, which took effect on May 1, 2022, was promulgated to amend certain provisions of regulations including the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision), whereby the requirement for major foreign investor to demonstrate a good track record and experience in operating value-added telecommunications businesses is deleted. However, as this promulgation is relatively new and no detailed guidance or implementation measure has been issued, uncertainty still remains as to how it should be interpreted and implemented. As advised by our PRC Legal Adviser, such regulatory development does not invalidate our ICP licenses or require us to modify our current contractual arrangements according to PRC laws and regulations. In addition, foreign investors are prohibited from investing in companies engaged in online publishing businesses, internet audio-video programs businesses, internet culture businesses (except for music), and radio and television program production businesses. See “Regulatory Overview — Regulations on Foreign Investment.”

 

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We are a Cayman Islands company and our wholly-owned PRC subsidiaries are currently considered foreign-invested enterprise. Accordingly, our PRC subsidiaries are not eligible to provide value-added telecommunication services (except for a few exceptions), internet audio-video program services, online publishing businesses, internet culture businesses, radio and television program production businesses and other related businesses in China. To ensure strict compliance with the PRC laws and regulations, we conduct such business activities through the VIEs and their respective subsidiaries in the PRC. Our wholly-owned subsidiaries in China have entered into a series of contractual arrangements with the VIEs and their shareholders or partners, as the case may be, which enable us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in the VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of the VIEs and hence consolidate their financial results under IFRS. See “History and Corporate Structure — Contractual Arrangements” for further details.

If the regulatory authorities find that our contractual arrangements do not comply with their restrictions on foreign investment in the value-added telecommunication services, internet cultural services, internet audio-video program services and certain other businesses and related business, or if the regulatory authorities otherwise find that we, the VIEs or any of their respective subsidiaries are in violation of PRC laws or regulations or lack the necessary permits or licenses to operate our business, the relevant PRC regulatory authorities, including the MIIT and SAMR, would have broad discretion in dealing with such violations or failures, including, without limitation:

 

•

revoking the business licenses and/or operating licenses of such entities;

 

•

discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our PRC subsidiaries and the VIEs;

 

•

imposing fines, confiscating the income from our PRC subsidiaries or the VIEs, or imposing other requirements with which we or the VIEs may not be able to comply;

 

•

requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with the VIEs and deregistering the equity pledges of the VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over the VIEs; or

 

•

restricting or prohibiting our use of the proceeds of financing activities to finance our business and operations in China.

 

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Any of these actions could cause significant disruptions to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. In addition, new PRC laws, regulations, and rules may be introduced to impose additional requirements, posing additional challenges to our corporate structure and contractual arrangements. If any of these occurrences results in our inability to direct the activities of the VIEs or our failure to receive the economic benefits from the VIEs and/or our inability to claim our contractual control rights over the assets of the VIEs that conduct substantially all of our operations in China, we may not be able to consolidate the entity in our consolidated financial statements in accordance with IFRS which could materially and adversely affect our financial condition and results of operations and cause our Class A ordinary shares and/or ADSs to significantly decline in value or become worthless.

Any failure by the VIEs or their shareholders or partners to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

Since PRC laws prohibit or restrict foreign equity ownership in certain kinds of business in China, we have relied and expect to continue to rely on the contractual arrangements with the VIEs and their shareholders or partners, as the case may be, to operate our business in China.

However, these contractual arrangements may not be as effective as direct ownership in providing us with control over our affiliated entities. Any of our affiliated entities, including the VIEs and their shareholders or partners, as the case may be, could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. In the event that the shareholders or partners of the VIEs breach the terms of these contractual arrangements and voluntarily liquidate the VIEs, or the VIEs declare bankruptcy and all or part of their assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by our affiliated entities, which could have a material adverse effect on our business, financial condition and results of operations.

The enforceability of the contractual agreements between us, the VIEs and their shareholders or partners depends to a large extent upon whether the VIEs and their shareholders or partners will fulfill these contractual agreements. Their interests in enforcing these contractual agreements may not align with our interests or the interests of our shareholders. If their interest diverges from that of the Company and other shareholders, it may potentially increase the risk that they could seek to act contrary to these contractual arrangements. If the VIEs or their shareholders or partners fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and contractual remedies, which we cannot assure you will be sufficient or effective under PRC law. Our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these agreements would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. There remain uncertainties under PRC laws and regulations with respect to the enforceability of our contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC law.

There remain significant uncertainties regarding the ultimate outcome of such adjudication should legal action become necessary. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our affiliated entities, and our ability to conduct our business may be negatively affected.

 

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The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC regulatory authorities may be required under PRC law in connection with this Listing and our future issuance of securities overseas, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing.

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain China Securities Regulatory Commission, or the CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and this Listing may ultimately require approval of the CSRC. If CSRC approval under the M&A Rules is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for our future issuance of securities overseas would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

 

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Furthermore, the recently issued Opinions on Strictly Cracking Down on Illegal Securities Activities emphasized the need to strengthen the administration over “illegal securities activities” and the supervision on overseas listings by China-based companies, and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies, although such opinions did not specify the definition of “illegal securities activities.” On December 24, 2021, the CSRC published the Administrative Provisions of the State Council on the Overseas Issuance and Listing of Securities by Domestic Companies (Draft for Comments), or the Draft Administration Provisions, and the Measures for the Overseas Issuance and Listing of Securities Record-filings by Domestic Companies (Draft for Comments), or the Draft Measures, for public comments. These draft regulations stipulate that PRC domestic companies that seek to offer and list securities in overseas markets directly or indirectly shall complete the filing procedures with and report relevant information to the CSRC. Pursuant to these drafts, if the issuer meets the following conditions, its offering and listing will be deemed as an “indirect overseas offering and listing by a PRC domestic company” and is therefore subject to the filing requirement: (i) the revenues, profits, total assets or net assets of the Chinese operating entities in the most recent financial year accounts for more than 50% of the corresponding data in the issuer’s audited consolidated financial statements for the same period; (ii) the majority of senior management in charge of business operation are Chinese citizens or have domicile in PRC, and its principal place of business is located in PRC or main business activities are conducted in PRC. In addition, these drafts prescribe that the domestic enterprises should submit filing documents to CSRC within three business days after the submission of the application for overseas initial public offering, and after completing the filing procedures for an overseas initial public offering and listing, for the purposes of implementing and strengthening the CSRC’s supervision, the issuer will need to comply with continuous filing and reporting requirements after such offering and listing, among others, including the following: (i) reporting material events which arose prior to such offering and listing, (ii) filing for follow-on offerings after the initial offering and listing, (iii) filing for transactions in which the issuer issues securities for acquiring assets, and (iv) reporting material events after the initial offering and listing. In a Q&A released on its official website, the respondent CSRC official indicated that the CSRC will start applying the filing requirements to new offerings and listings. New initial public offerings and refinancing by existing overseas listed Chinese companies will be required to go through the filing process. As for the other filings for the existing companies, the regulator will grant adequate transition period to complete their filing procedures. On April 2, 2022, the CSRC published the Provisions on Strengthening the Management of Confidentiality and Archives Related to the draft Overseas Issuance of Securities and Overseas Listing by Domestic Companies (Draft for Public Comments), or the Draft Confidentiality and Archives Management Provisions relating to Overseas Listing, for public comments. In the overseas listing activities of domestic companies, securities companies and securities service institutions providing relevant securities services should establish a sound system of confidentiality and archival work, shall not disclose state secrets, or harm the state and public interests. Where a domestic company provides or publicly discloses to the relevant securities companies, securities service institutions, overseas regulatory authorities and other entities and individuals, or provides or publicly discloses through its overseas listing entity, any document or material involving any state secret or any work secret of organizations, it shall report to the competent authority for approval in accordance with the law, and submit to the secrecy administration department for filing. Domestic companies shall not provide accounting records to an overseas accounting firm that has not performed the corresponding procedures. Securities companies and securities service organizations shall comply with the confidentiality and archive management requirements, and keep the documents and materials properly. Securities companies and securities service institutions that provide domestic enterprises with relevant securities services for overseas issuance and listing of securities shall keep such archives they compile within the territory of the PRC and shall not transfer such archives to overseas institutions or individuals, by any means such as carriage, shipment or information technology, without the approval of the relevant competent authorities. If the archives or duplicates of such archives are of important value to the state and society and needed to be taken abroad, approval shall be obtained in accordance with relevant provisions.

However, as the Draft Administration Provisions, the Draft Measures and the Draft Confidentiality and Archives Management Provisions relating to Overseas Listing had not yet come into effect as of the Latest Practicable Date, there remains substantial uncertainty, including but not limited to its final content, adoption timeline, effective date or relevant implementation rules. As of the Latest Practicable Date, we could not predict the impact of these regulations on our ability to pursue the Listing, maintain the listing status of our ADSs or carry out future offerings or listing of our securities overseas.

 

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In addition, on December 28, 2021, the CAC and several other regulatory authorities in China jointly promulgated the Cybersecurity Review Measures, which came into effect on February 15, 2022. Pursuant to the Cybersecurity Review Measures, (i) a CIIO that purchases network products and services, or an internet platform operator that conducts data processing activities, which affects or may affect national security, shall be subject to the cybersecurity review, (ii) an application for cybersecurity review shall be made by an issuer which is an internet platform operator holding personal information of more than one million users before such issuer applies to list its securities in a foreign country, and (iii) relevant regulatory authorities in the PRC may initiate cybersecurity review if they determine an operator’s network products or services or data processing activities affect or may affect national security. As the Cybersecurity Review Measures was newly issued, there remain uncertainties as to how it would be interpreted and enforced, and to what extent it may affect us. Our PRC Legal Adviser is of the view, based on consultation with the China Cybersecurity Review Technology and Certification Center which has been entrusted by the CAC to set up cybersecurity review consultation hotlines, that the term of “listing in a foreign country” under the Cybersecurity Review Measures does not apply to listings in Hong Kong for purposes of the mandatory obligation to apply for a cybersecurity review with the CAC. However, given the Cybersecurity Review Measures were recently promulgated, there are substantial uncertainties as to the interpretation, application and enforcement of the Cybersecurity Review Measures, especially the explanation or interpretation as to how to determine what may “affect national security.” If the CAC, the CSRC or other relevant PRC regulatory agencies subsequently determine that prior approval is required for the proposed Listing, any of our future offerings or listing of our securities overseas or to maintain the listing status of our Class A ordinary shares and/or ADSs, we cannot guarantee that we will be able to obtain such approval in a timely manner, or at all. The CAC, the CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, not to proceed with the proposed Listing or any such offerings or listing of securities or to maintain the listing status of our Class A ordinary shares and/ or ADSs. If we proceed with any of the foregoing without obtaining these regulatory agencies’ approval to the extent it is required, or if we are unable to comply with any new approval requirements which might be adopted for offerings or listing of securities that we have completed prior to the publication of the above-referenced opinions, we may face regulatory actions or other sanctions from these regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from offering of securities overseas into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the Class A ordinary shares and/or ADSs.

Furthermore, if there are any other approvals, filings and/or other administration procedures to be obtained from or completed with the CSRC or other PRC regulatory agencies as required by any new laws and regulations for any of our future proposed offerings or listing of our securities overseas or to maintain the listing status of our Class A ordinary shares or ADSs, we cannot assure you that we can obtain the required approval or complete the required filings or other regulatory procedures in a timely manner, or at all. Any failure to obtain the relevant approvals or complete the filings and other relevant regulatory procedures may subject us to regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies, which may have a material adverse effect on our business, financial condition or results of operations.

 

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We rely on contractual arrangements with the VIEs and their respective shareholders or partners for a large portion of our business operations, which may not be as effective as direct ownership in providing operational control.

We have relied and expect to continue to rely on contractual arrangements with the VIEs and their respective shareholders or partners, as the case may be, as well as certain of the VIEs’ subsidiaries to operate our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with control over the VIEs. For example, the VIEs and their respective shareholders or partners could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. The revenues contributed by the VIEs and their subsidiaries constituted substantially all of our revenues during the Track Record Period.

If we had direct ownership of the VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of the VIEs that are companies, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level, and to exercise our rights as a managing partner to effect changes of the management and executives of the VIEs that are partnerships. However, under the current contractual arrangements, we rely on the performance by the VIEs and their respective shareholders or partners of their respective obligations under the contracts to exercise control over the VIEs. The shareholders or partners of the VIEs may not act in the best interests of the Company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portion of our business through the contractual arrangements with the VIEs and their respective shareholders or partners. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation or other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “— Any failure by the VIEs or their shareholders or partners to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.” Therefore, our contractual arrangements with the VIEs and their respective shareholders or partners may not be as effective in controlling our business operations as direct ownership.

 

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The shareholders or partners of the VIEs may have actual or potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The shareholders or partners of the VIEs, as the case may be, may have actual or potential conflicts of interest with us. These shareholders or partners may breach, or cause the VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and the VIEs, which would have a material and adverse effect on our ability to effectively control the VIEs and receive economic benefits from them. For example, the shareholders or partners may be able to cause our agreements with the VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders or partners will act in the best interests of the Company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders or partners and the Company. If we cannot resolve any conflict of interest or dispute between us and these shareholders or partners, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

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We may lose the ability to use, or otherwise benefit from, the licenses, permits and assets held by the VIEs.

As part of our contractual arrangements with the VIEs, the VIEs hold certain assets, licenses and permits that are material to our business operations. The contractual arrangements contain terms that specifically obligate the VIEs’ shareholders or partners, as the case may be, to ensure the valid existence of the VIEs and restrict the disposal of material assets of the VIEs. However, in the event the VIEs’ shareholders or partners breach the terms of these contractual arrangements and voluntarily liquidate any of the VIEs, or any of the VIEs declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of or encumbered without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by the VIEs, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, under the contractual arrangements, the VIEs may not, in any manner, sell, transfer, mortgage or dispose of their material assets or legal or beneficial interests in the business without our prior consent. If any of the VIEs undergoes a voluntary or involuntary liquidation proceeding, its shareholders or partners or unrelated third-party creditors may claim rights to some or all of the assets of the VIEs, thereby hindering our ability to operate our business as well as constrain our growth.

 

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RISKS RELATED TO DOING BUSINESS IN CHINA

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the anti-monopoly law enforcement agency be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise.

The Anti-Monopoly Law of the PRC requires that the anti-monopoly law enforcement agency be notified in advance of any transaction where the parties’ turnover in the China market and/or global market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the target as a result of the business combination. As further clarified by the Provisions of the State Council on the Threshold of Filings for Undertaking Concentrations issued by the State Council in 2008 and amended in September 2018, such thresholds include: (i) the total global turnover of all operators participating in the transaction exceeds RMB10 billion in the preceding fiscal year and at least two of these operators each had a turnover of more than RMB400 million within China in the preceding fiscal year, or (ii) the total turnover within China of all the operators participating in the transaction exceeded RMB2 billion in the preceding fiscal year, and at least two of these operators each had a turnover of more than RMB400 million within China in the preceding fiscal year. There are numerous factors the anti-monopoly law enforcement agency considers in determining “control” or “decisive influence,” and, depending on certain criteria, the anti-monopoly law enforcement agency may conduct anti-monopoly review of transactions in respect of which it was notified. On June 24, 2022, the Decision of the Standing Committee of the National People’s Congress to Amend the Anti-Monopoly Law of the People’s Republic of China was adopted and became effective on August 1, 2022, which stipulates that where a concentration of undertakings does not meet the threshold for declaration set by the State Council, but there is evidence that the concentration of undertakings has or may have the effect of excluding or limiting competition, the law enforcement agencies may order the operators to file the concentration of undertakings.

 

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In particular, the PRC anti-monopoly enforcement agencies have in recent years strengthened enforcement under the PRC Anti-monopoly Law. In March 2018, the SAMR was formed as a new regulatory agency to take over, among other things, the anti-monopoly enforcement functions from the relevant departments under the MOFCOM, the NDRC and the SAIC, respectively. Since its inception, the SAMR has continued to strengthen anti-monopoly enforcement. On December 28, 2018, the SAMR issued the Notice on Anti-monopoly Enforcement Authorization which grants authorities to its province-level branches to conduct anti-monopoly enforcement within their respective jurisdictions. On September 11, 2020, the SAMR issued the Anti-monopoly Compliance Guideline for Operators, which requires, under the PRC Anti-monopoly Law, operators to establish anti-monopoly compliance management systems to prevent anti-monopoly compliance risks. In February 2021, the SAMR promulgated the Guidelines to Anti-Monopoly in the Field of Internet Platforms, or the Anti-Monopoly Guidelines for Internet Platforms, aiming to improve anti-monopoly administration on online platforms. The Anti-Monopoly Guidelines for Internet Platforms will operate as a compliance guidance under the existing PRC anti-monopoly laws and regulations for platform economy operators. However, considering the substantial uncertainty over the interpretation and implementation of the Anti-Monopoly Guidelines for Internet Platforms, we may face challenges in addressing its requirements and making necessary changes to our policies and practices, and may incur significant costs and expenses in an effort to do so. Any failure or perceived failure by us to comply with the Anti-Monopoly Guidelines for Internet Platforms and other anti-monopoly laws and regulations may result in regulatory investigations or enforcement actions, litigation or claims against us and could have an adverse effect on our business, financial condition and results of operations. On November 18, 2021, the National Anti-monopoly Bureau was officially established to formulate anti-monopoly institutional measures and guidelines, implement anti-monopoly law enforcement, undertake the guidance for enterprises’ anti-monopoly action responding abroad and so on.

In July 2021, the SAMR issued an Administrative Penalty Decision to Tencent regarding its acquisition of CMC in 2016. Pursuant to the decision, we shall implement a rectification plan to, among other things, terminate exclusive music copyright licensing arrangements within 30 days from the date of the decision. We shall also discontinue any arrangement where we offer high advance licensing payment to and seek preferential licensing terms from copyright owners without reasonable grounds. Tencent and we have terminated all existing exclusive music copyright licensing arrangements with the relevant upstream copyright holders subject to certain limited exceptions specified in the decision, and we will pursue nonexclusive collaborations with upstream copyright holders. The termination of exclusivity with upstream copyright holders resulted in a decrease of our sublicensing revenues to the extent such revenues were generated from exclusive licensing arrangements. For more details, see “Recent Developments — Recent PRC Regulatory Developments — Anti- Monopoly Law Enforcement.”

 

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In addition, the Circular of the General Office of the State Council on the Establishment of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors that became effective in March 2011, and the Rules on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors issued by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the SAMR, the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

The potential enactment of the Accelerating Holding Foreign Companies Accountable Act would decrease the number of non-inspection years from three years to two, thus reducing the time period before our ADSs may be prohibited from over-the-counter trading or delisted. If this bill is enacted, our ADSs could be delisted from the exchange and prohibited from over-the-counter trading in the U.S. in 2023.

On June 22, 2021, the U.S. Senate passed a bill known as the Accelerating Holding Foreign Companies Accountable Act, to amend Section 104(i) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7214(i)) to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded over-the-counter if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for two consecutive years, instead of three consecutive years as currently enacted in the HFCAA. On February 4, 2022, the U.S. House of Representatives passed a bill containing, among other things, an identical provision. If this provision is enacted into law, it will reduce the time period before our ADSs would be delisted from the exchange and prohibited from over-the-counter trading in the U.S. from 2024 to 2023.

 

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RISKS RELATED TO OUR SHARES, OUR ADSs AND THE LISTING

As a company applying for listing under Chapter 19C, we adopt different practices as to certain matters as compared with many other companies listed on the Hong Kong Stock Exchange.

As we are applying for a listing under Chapter 19C of the Hong Kong Listing Rules, we will not be subject to certain provisions of the Hong Kong Listing Rules pursuant to Rule 19C.11, including, among others, rules on notifiable transactions, connected transactions, share option schemes, content of financial statements as well as certain other continuing obligations. In addition, in connection with the Listing, we have applied for a number of waivers and/or exemptions from strict compliance with the Hong Kong Listing Rules and the SFO. As a result, we will adopt different practices as to those matters as compared with other companies listed on the Hong Kong Stock Exchange that do not enjoy those exemptions or waivers.

Our Articles of Association are specific to us and include certain provisions that may be different from common practices in Hong Kong.

In particular, as we are seeking a secondary listing as a Grandfathered Greater China Issuer pursuant to Chapter 19C of the Hong Kong Listing Rules with a WVR structure, certain shareholder protection measures and governance safeguards under Chapter 8A of the Hong Kong Listing Rules (Weighted Voting Rights) do not apply to us pursuant to Rule 8A.46 and our Articles of Association differ from Chapter 8A in a number of ways:

 

•

The Company is controlled by corporate WVR beneficiaries, namely Tencent and Min River, which do not have a finite life span and will not be subject to directors’ fiduciary duties, as opposed to those owned by individual WVR beneficiaries who must be directors of the listing applicant under Chapter 8A of the Listing Rules;

 

•

Rule 8A.10 of the Hong Kong Listing Rules imposes restriction on voting power conferred to WVR beneficiaries to not more than ten times the voting power of ordinary shares. Each of our Class B ordinary share entitles the holder to exercise 15 votes;

 

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Rule 8A.09 of the Hong Kong Listing Rules requires non-WVR shareholders to be entitled to cast at least 10% of the votes that are eligible to be cast on resolutions at the listed issuer’s general meetings. Our WVR beneficiaries in aggregate have more than 90% of the voting power;

 

•

Chapter 8A prohibits the increase in the proportion of shares with WVRs after the Listing and, where there is a reduction in the number of issued shares, requires shares with WVRs to be reduced proportionately. Our Articles of Association do not contain such restrictions on the Class B ordinary shares;

 

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Chapter 8A requires (a) amendments to a listed issuer’s constitutional documents, (b) variation of rights attached to any class of shares, (c) the appointment or removal of an independent non-executive director, (d) the appointment or removal of auditors and (e) the voluntary winding-up of a listed issuer to be subject to shareholder approval on a one vote per share basis. Our Articles of Association do not contain such provisions;

 

•

we do not have a corporate governance committee. Therefore, there is not a charter that contains the terms otherwise required under Rule 8A.30 and Code Provision A.2.1 of Appendix 14 to the Hong Kong Listing Rules. For more details, see “Directors and Senior Management — Board Practices;” and

 

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•

the independent non-executive directors of a listed issuer with a WVR structure must be subject to retirement by rotation at least once every three years under Chapter 8A, whereas our Articles of Association do not provide for a term of office for our Directors.

Moreover, our Articles of Association must comply with the requirements set out in Appendix 3 to the Hong Kong Listing Rules unless waived by the Hong Kong Stock Exchange. We will put forth resolutions to our shareholders at a general meeting to be convened within six months after the completion of the Listing to amend certain provisions of our Articles of Association in order to comply with the Hong Kong Listing Rules.

Furthermore, if 55% or more of the total worldwide trading volume, by dollar value, of our Class A ordinary shares and ADSs over our most recent fiscal year takes place on the Hong Kong Stock Exchange, the Hong Kong Stock Exchange will regard us as having a dual primary listing in Hong Kong and we will no longer enjoy certain exemptions or waivers from strict compliance with the requirements under the Hong Kong Listing Rules and the SFO and ruling given under the Takeovers Code, which could result in us having to amend our corporate structure and Articles of Association and we may incur of incremental compliance costs.

If we change the listing venue of our securities, including delisting from either of the New York Stock Exchange and the Hong Kong Stock Exchange, you may lose the shareholder protection mechanisms afforded under the regulatory regimes of the applicable securities exchange.

As a company listed on the New York Stock Exchange and the Hong Kong Stock Exchange, we are subject to various listing standards and requirements that are aimed at protecting your rights as shareholders of the Company, subject to certain applicable permitted exceptions. If we choose to change the listing venue of our securities, including delisting from either exchange, you may lose the shareholder protection measures afforded under the regulatory regimes of the applicable securities exchange. In particular, various factors will be taken into consideration by the Company in relation to the circumstances under which it may be considered not desirable or viable for the shares to remain listed on a certain stock exchange, such as the then regulatory environment of the listing venue and whether the additional compliance cost arising by remaining listed in a particular stock exchange will be unduly burdensome for the Company to further its interest, realize its vision or implementing certain business plans.

The trading price of our ADSs has fluctuated and may be, and the trading price of our Class A ordinary shares can be, volatile, which could result in substantial losses to investors.

The trading price of our ADSs has been volatile and has ranged from a low of US$3.12 to a high of US$31.79 between January 4, 2021 and June 15, 2022. The trading price of our Class A ordinary shares, likewise, can be volatile for similar or different reasons, many of which are beyond our control. The price and trading volumes for our Class A ordinary shares and/or ADSs may be highly volatile for various factors, including the following:

 

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variations in our revenues, operating costs and expenses, earnings and cash flow;

 

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our controlling shareholder’s business performance and the trading price of its stock;

 

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announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

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announcements of new products and services by us or our competitors;

 

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changes in financial estimates by securities analysts;

 

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detrimental adverse publicity about us, our shareholders, affiliates, Directors, officers or employees, our content offerings, our business model, our services or our industry;

 

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general economic or political conditions in China or elsewhere in the world;

 

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announcements of new regulations, rules or policies relevant for our business;

 

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additions or departures of key personnel;

 

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any share repurchase program;

 

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release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

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potential litigation, regulatory investigations or other legal or regulatory proceedings.

Any of these factors may result in large and sudden changes in the volume and price at which our Class A ordinary shares and/or ADSs will trade.

In addition, the stock market in general, and the market prices for companies with operations in China in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings in recent years, including, in some cases, substantial declines in the trading prices of their securities. The trading performances of these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the United States in general, which consequently may impact the trading performance of our Class A ordinary shares and/or ADSs, regardless of our actual operating performance. Moreover, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate activities. These broad market and industry fluctuations may adversely affect the market price of our Class A ordinary shares and/or ADSs. Volatility or a lack of positive performance in our Class A ordinary shares and/or ADSs price may also adversely affect our ability to retain key employees, most of whom have been granted options or other equity incentives.

 

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If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our Class A ordinary shares and/or ADSs, the trading price for our Class A ordinary shares and/or ADSs and trading volume could decline.

The trading market for our Class A ordinary shares and/or ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our Class A ordinary shares and/or ADSs, the trading price for our Class A ordinary shares and/or ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or volume for our Class A ordinary shares and/or ADSs to decline.

Our dual-class voting structure will limit the holders of our Class A ordinary shares and ADSs to influence corporate matters, provide certain shareholders of ours with substantial influence and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

We have adopted a dual-class voting structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights other than voting and conversion rights. Each holder of our Class A ordinary shares is entitled to one vote per share and each holder of our Class B ordinary shares is entitled to 15 votes per share. Our Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. Each Class B ordinary share is convertible into one Class A ordinary share, whereas Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon (i) any sale, transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, or (ii) a change of beneficial ownership of any Class B ordinary shares as a result of which any person who is not an affiliate of registered holders of such Class B ordinary shares becomes a beneficial owner of such Class B ordinary shares, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share. There is no limit on the circumstances where holders of Class B ordinary shares may transfer or otherwise dispose of their Class B ordinary shares.

As of the Latest Practicable Date, Tencent, together with its affiliates, beneficially owned 9.6% of our outstanding Class A ordinary shares and 95.7% of our outstanding Class B ordinary shares, and held in the aggregate 90.4% of our total voting power². As a result of this dual-class share structure, Tencent will have complete control over the outcome of matters put to a vote of shareholders and have significant influence over our business, including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all of our assets, election of Directors and other significant corporate actions. This concentrated control will limit the ability of the holders of our Class A ordinary shares and ADSs to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial. Moreover, Tencent may increase the concentration of its voting power and/or share ownership in the future, which may, among other consequences, decrease the liquidity in our Class A ordinary shares and ADSs.

 

2	The foregoing beneficial ownership information of Tencent is based on the Amendment No. 2 to Schedule 13G filed by Tencent with the SEC on February 10, 2022.

 

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Techniques employed by short sellers may drive down the trading price of our Class A ordinary shares and/or ADSs.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying an identical number of securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant listed company and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.

We may be the subject of unfavorable allegations made by short sellers in the future. Any such allegations may be followed by periods of instability in the trading price of our Class A ordinary shares and/or ADSs and negative publicity. If and when we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable federal or state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming and could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our business operations and shareholders’ equity, and the value of any investment in our Class A ordinary shares and/or ADSs could be greatly reduced or rendered worthless.

The sale or availability for sale, or perceived sale or availability for sale, of substantial amounts of our Class A ordinary shares and/or ADSs could adversely affect their trading price.

Sales of substantial amounts of our Class A ordinary shares and/or ADSs in the public market, or the perception that these sales could occur, could adversely affect the trading price of our Class A ordinary shares and/or ADSs and could materially impair our ability to raise capital through equity offerings in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the trading price of our Class A ordinary shares and/or ADSs. In addition, certain holders of our existing shares have the right to cause us to register under the Securities Act of 1933, or the Securities Act, the sale of their shares. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market, or the perception that such sales could occur, could cause the trading price of our Class A ordinary shares and/or ADSs to decline.

 

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Because we do not expect to pay dividends in the foreseeable future, the holders of our Class A ordinary shares and/or ADSs must rely on price appreciation of our Class A ordinary shares and/or ADSs for return on their investment.

We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our Class A ordinary shares and/or ADSs as a source for any future dividend income.

Our Board of Directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our Board of Directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our Board of Directors. Accordingly, the return to the holders of our Class A ordinary shares and/or ADSs will likely depend entirely upon any future price appreciation of our Class A ordinary shares and/or ADSs. There is no guarantee that our Class A ordinary shares and/or ADSs will appreciate in value or even maintain the price at which the holders of our Class A ordinary shares and/or ADSs purchased the Class A ordinary shares and/or ADSs. The holders of our Class A ordinary shares and/or ADSs may not realize a return on their investment in our Class A ordinary shares and/or ADSs and they may even lose their entire investment in our Class A ordinary shares and/or ADSs.

Our Articles of Association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our Class A ordinary shares and ADSs.

Our Articles of Association contain provisions to limit the ability of others to acquire control of the Company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of the Company in a tender offer or similar transaction. Our Board of Directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADSs or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of the Company or make removal of management more difficult. If our Board of Directors decides to issue preferred shares, the price of our Class A ordinary shares and/or ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and ADSs may be materially and adversely affected.

 

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Our shareholders may face difficulties in protecting their interests, and ability to protect their rights through U.S. or Hong Kong courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our Articles of Association, the Companies Act and the common law of the Cayman Islands. The rights of shareholders to take action against the Directors, actions by minority shareholders and the fiduciary duties of our Directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our Directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some other jurisdictions. In particular, the Cayman Islands has a less developed body of securities laws than the United States or Hong Kong. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States or a court in Hong Kong.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (except for our Articles of Association, special resolutions passed by our shareholders and our register of mortgages and charges) or to obtain copies of registers of members of these companies. Our Directors have discretion under our Articles of Association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for our shareholders to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

As a result of all of the above, our public shareholders may face more difficulties in protecting their interests in the face of actions taken by our management, members of the Board of Directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States or Hong Kong.

 

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Since we are a Cayman Islands exempted company, the rights of our shareholders may be more limited than those of shareholders of a company organized in the United States or Hong Kong.

Under the laws of some jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are obviously unreasonable may be declared null and void. Cayman Islands law relating to the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in some U.S. jurisdictions. In addition, the circumstances in which a shareholder of a Cayman Islands company may sue the company derivatively, and the procedures and defenses that may be available to the company, may result in the rights of shareholders of a Cayman Islands company being more limited than those of shareholders of a company organized in the United States.

Furthermore, our Directors have the power to take certain actions without shareholder approval which would require shareholder approval under Hong Kong law or the laws of most U.S. jurisdictions. The directors of a Cayman Islands company, without shareholder approval, may implement a sale of any assets, property, part of the business, or securities of the company. Our ability to create and issue new classes or series of shares without shareholders’ approval could have the effect of delaying, deterring or preventing a change in control without any further action by our shareholders, including a tender offer to purchase our ordinary shares at a premium over then current market prices.

Furthermore, our Articles of Association are specific to us and include certain provisions that may be different from common practices in Hong Kong, such as the absence of requirements that the appointment, removal and remuneration of auditors must be approved by a majority of our shareholders.

It may be difficult for overseas regulators to conduct investigations or collect evidence within China.

Shareholder claims or regulatory investigations that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are legal and other restrictions to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the United States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigations or evidence collection activities within the territory of the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability of an overseas securities regulator to directly conduct investigations or evidence collection activities within China may further increase difficulties faced by you in protecting your interests.

 

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ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our Class A ordinary shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that the investors consult legal counsel regarding the jury waiver provision before investing in the ADSs.

If any of the holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, such holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary, lead to increased costs to bring a claim, limited access to information and other imbalances of resources between such holder and us, or limit such holder’s ability to bring a claim in a judicial forum that such holder finds favorable. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including outcomes that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

 

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Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands exempted company and the majority of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, a majority of our current Directors and officers are nationals and residents of countries and jurisdictions other than the United States or Hong Kong. As a result, it may be difficult or impossible for our shareholders to bring an action against us or against these individuals in the United States or Hong Kong in the event that such shareholders believe that their rights have been infringed under the U.S. federal securities laws, Hong Kong laws or otherwise. Even if such shareholders are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render them unable to enforce a judgment against our assets or the assets of our Directors and officers.

 

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We may need additional capital, and the sale of additional Class A ordinary shares and/or ADSs or other equity securities could result in additional dilution to our shareholders, and the incurrence of additional indebtedness could increase our debt service obligations.

We may require additional cash resources due to changed business conditions, strategic acquisitions or other future developments. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity and equity-linked securities could result in additional dilution to our shareholders. The sale of substantial amounts of our Class A ordinary shares and/or ADSs could dilute the interests of our shareholders and ADS holders and adversely impact the market price of our Class A ordinary shares and/or ADSs. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Our ADS holders may be subject to limitations on transfer of their ADSs.

In certain cases, our ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or regulatory body, or under any provision of the deposit agreement, or for any other reason.

Future sales or issuances, or perceived future sales or issuances, of substantial amounts of our Class A ordinary shares or ADSs could adversely affect the price of our Class A ordinary shares and/or ADS.

If our existing shareholders sell, or are perceived as intending to sell, substantial amounts of our Class A ordinary shares or ADSs, including those issued upon the exercise of our outstanding stock options, the market price of our Class A ordinary shares and/or ADSs could fall. Such sales, or perceived potential sales, by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in the future at a time and place we deem appropriate. Shares held by our existing shareholders may be sold in the public market in the future subject to the restrictions contained in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. If our existing shareholders sell a substantial amount of Class A ordinary shares, the prevailing market price for our Class A ordinary shares and/or ADSs could be adversely affected.

 

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We incur increased costs as a result of being a public company.

As a public company, we incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, have detailed requirements concerning corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. Complying with these rules and regulations applicable to public companies has increased our accounting, legal and financial compliance costs, making certain corporate activities more time-consuming and costly. We will also incur additional costs as a result of the Listing on the Hong Kong Stock Exchange. Our management will be required to devote substantial time and attention to our public company reporting obligations and other compliance matters. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Our reporting and other compliance obligations as a public company may place a strain on our management, operational and financial resources and systems for the foreseeable future. In the past, shareholders of a public company in the United States often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material and adverse effect on our financial condition and results of operations.

The different characteristics of the capital markets in Hong Kong and the U.S. may negatively affect the trading prices of our Class A ordinary shares and/or ADSs.

Upon the Listing, we will be subject to Hong Kong and NYSE listing and regulatory requirements concurrently. The Hong Kong Stock Exchange and NYSE have different trading hours, trading characteristics (including trading volume and liquidity), trading and listing rules, and investor bases (including different levels of retail and institutional participation). As a result of these differences, the trading prices of our Class A ordinary shares and our ADSs may not be the same, even allowing for currency differences. Fluctuations in the price of our ADSs due to circumstances peculiar to the U.S. capital markets could materially and adversely affect the price of our Class A ordinary shares, or vice versa. Certain events having significant negative impact specifically on the U.S. capital markets may result in a decline in the trading price of our Class A ordinary shares notwithstanding that such event may not impact the trading prices of securities listed in Hong Kong generally or to the same extent, or vice versa. Because of the different characteristics of the U.S. and Hong Kong capital markets, the historical market prices of our ADSs may not be indicative of the trading performance of our Class A ordinary shares after the Listing.

Exchange between our Class A ordinary shares and our ADSs may adversely affect the liquidity and/or trading price of each other.

Our ADSs are currently traded on NYSE. Subject to compliance with U.S. securities law and the terms of the Deposit Agreement, holders of our Class A ordinary shares may deposit Class A ordinary shares with the depositary in exchange for the issuance of our ADSs. Any holder of ADSs may also surrender ADSs and withdraw the underlying Class A ordinary shares represented by the ADSs pursuant to the terms of the Deposit Agreement for trading on the Hong Kong Stock Exchange. In the event that a substantial number of Class A ordinary shares are deposited with the depositary in exchange for ADSs or vice versa, the liquidity and trading price of our Class A ordinary shares on the Hong Kong Stock Exchange and our ADSs on NYSE may be adversely affected.

 

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The time required for the exchange between Class A ordinary shares and ADSs might be longer than expected and investors might not be able to settle or effect any sale of their securities during this period, and the exchange of Class A ordinary shares into ADSs involves costs.

There is no direct trading or settlement between the NYSE and the Hong Kong Stock Exchange on which our ADSs and our Class A ordinary shares are respectively traded. In addition, the time differences between Hong Kong and New York, unforeseen market circumstances or other factors may delay the deposit of Class A ordinary shares in exchange for ADSs or the withdrawal of Class A ordinary shares underlying the ADSs. Investors will be prevented from settling or effecting the sale of their securities during such periods of delay. In addition, there is no assurance that any exchange for Class A ordinary shares into ADSs (and vice versa) will be completed in accordance with the timelines that investors may anticipate. Furthermore, the depositary for the ADSs is entitled to charge holders fees for various services including for the issuance of ADSs upon deposit of Class A ordinary shares, cancelation of ADSs, distributions of cash dividends or other cash distributions, distributions of ADSs pursuant to share dividends or other free share distributions, distributions of securities other than ADSs and annual service fees. As a result, shareholders who exchange Class A ordinary shares into ADSs, and vice versa, may not achieve the level of economic return the shareholders may anticipate.

We are exposed to risks associated with the potential spin-off of one or more of our businesses.

We are exposed to risks associated with the potential spin-off of one or more of our businesses. We have applied for, and the Hong Kong Stock Exchange has granted, a waiver from strict compliance with the requirements in paragraph 3(b) of Practice Note 15 to the Hong Kong Listing Rules such that we are able to spin-off a subsidiary entity and list it on the Hong Kong Stock Exchange within three years of the Listing. While we did not have any specific plans with respect to the timing or details of any potential spin-off listing on the Hong Kong Stock Exchange as of Latest Practicable Date, we continue to explore the ongoing financing requirements for our various businesses and may consider a spin-off listing on the Hong Kong Stock Exchange for one or more of those businesses within the three year period subsequent to the Listing. As of the Latest Practicable Date, we had not identified any target for a potential spin-off, and as a result, we do not have any information relating to the identity of any spin-off target or any other details of any spin off. Accordingly, there is no material omission of any information relating to any possible spin-off in the Listing Document. The waiver granted by the Hong Kong Stock Exchange is conditional upon us confirming to the Hong Kong Stock Exchange in advance of any spin-off that it would not render the Company, excluding the businesses to be spun off, incapable of fulfilling either the eligibility or suitability requirements under Rules 19C.02 and 19C.05 of the Hong Kong Listing Rules based on the financial information of the entity or entities to be spun-off at the time of the Company’s Listing (calculated cumulatively if more than one entity is spun-off). We cannot assure you that any spin-off will ultimately be consummated, whether within the three-year period after the Listing or otherwise, and any such spin-off will be subject to market conditions at the time and approval by the Listing Committee. In the event that we proceed with a spin-off, the Company’s interest in the entity to be spun-off (and its corresponding contribution to the financial results of our Group) will be reduced accordingly.

 

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An active trading market for our Class A ordinary shares on the Hong Kong Stock Exchange might not develop or be sustained, the trading prices of our Class A ordinary shares might fluctuate significantly and the effectiveness of the bridging and liquidity arrangements might be limited.

Following the completion of the Listing, we cannot assure you that an active trading market for our Class A ordinary shares on the Hong Kong Stock Exchange will develop or be sustained. The trading price or liquidity for our ADSs on the NYSE might not be indicative of those of our Class A ordinary shares on the Hong Kong Stock Exchange following the completion of the Listing. If an active trading market of our Class A ordinary shares on the Hong Kong Stock Exchange does not develop or is not sustained after the Listing, the market price and liquidity of our Class A ordinary shares could be materially and adversely affected.

In 2014, the Hong Kong, Shanghai and Shenzhen Stock Exchanges collaborated to create an inter-exchange trading mechanism called Stock Connect that allows international and mainland Chinese investors to trade eligible equity securities listed in each other’s markets through the trading and clearing facilities of their home exchange. Stock Connect currently covers over 2,000 equity securities trading in the Hong Kong, Shanghai and Shenzhen markets. Stock Connect allows mainland Chinese investors to trade directly in eligible equity securities listed on the Hong Kong Stock Exchange, known as Southbound Trading; without Stock Connect, mainland Chinese investors would not otherwise have a direct and established means of engaging in Southbound Trading. In October 2019, the Shanghai and Shenzhen Stock Exchanges separately announced their amended implementation rules in connection with Southbound Trading to include shares of WVR companies to be traded through Stock Connect. However, since these rules are relatively new, there remains uncertainty as to the implementation details, especially with respect to shares of those companies with a secondary listing on the Hong Kong Stock Exchange. It is unclear whether and when the Class A ordinary shares of our Company, a WVR company with a secondary listing in Hong Kong upon the Listing, will be eligible to be traded through Stock Connect, if at all. The ineligibility or any delay of our Class A ordinary shares for trading through Stock Connect will affect mainland Chinese investors’ ability to trade our Class A ordinary shares and therefore may limit the liquidity of the trading of our Class A ordinary shares on the Hong Kong Stock Exchange.

Throughout the Bridging Period, the Designated Dealers intend to implement certain bridging and liquidity arrangements as set out in the section headed “Market Arrangements to Facilitate Dealings in Hong Kong — Bridging and Liquidity Arrangements” in the Listing Document. While such arrangements are expected to contribute towards liquidity to meet demand for our Class A ordinary shares in Hong Kong and to maintain a fair and orderly market, investors should be aware that such bridging and liquidity arrangements are subject to the Designated Dealers’ ability to obtain sufficient numbers of our Class A ordinary shares to meet demand. There is no guarantee that such bridging and liquidity arrangements will attain and/or maintain liquidity in our Class A Ordinary Shares at any particular level on the Hong Kong Stock Exchange, nor is there any assurance that the price of our Class A Ordinary Shares in Hong Kong will not exhibit significant volatility.

 

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We also cannot guarantee you that the price at which our Class A Ordinary Shares are traded on the Hong Kong Stock Exchange will be substantially the same as or similar to the price at which our ADSs are traded on the NYSE or that any particular volume of our Class A Ordinary Shares will be traded on the Hong Kong Stock Exchange. The bridging and liquidity arrangements being implemented in connection with the Listing are not equivalent to the price stabilization activities which may be undertaken in connection with an initial public offering. The bridging and liquidity arrangements will terminate and cease to continue beyond the Bridging Period. Accordingly, there may be volatility in the Hong Kong market after the Bridging Period.

There is uncertainty as to whether Hong Kong stamp duty will apply to the trading of ADSs or deposits in, or withdrawals from, the ADS facility following the Listing.

In connection with the Listing, we will establish a branch register of members in Hong Kong, or the Hong Kong share register. Our Class A ordinary shares that are traded on the Hong Kong Stock Exchange, including those that may be withdrawn from the ADS facility, will be registered on the Hong Kong share register, and the trading of these Class A ordinary shares on the Hong Kong Stock Exchange will be subject to the Hong Kong stamp duty. To facilitate deposits in and withdrawals from the ADS facility and trading between the NYSE and the Hong Kong Stock Exchange, we also intend to move all our Class A ordinary shares represented by ADSs from our register of members maintained in the Cayman Islands to our Hong Kong share register.

Under the Hong Kong Stamp Duty Ordinance, any person who effects any sale or purchase of Hong Kong stock, defined as stock the transfer of which is required to be registered in Hong Kong, is required to pay Hong Kong stamp duty. The stamp duty is currently set at a total rate of 0.26% of the greater of the consideration for, or the value of, shares transferred, with 0.13% payable by each of the buyer and the seller.

To the best of our knowledge, Hong Kong stamp duty has not been levied in practice on the trading of ADSs or deposits in, or withdrawals from, the ADS facility of companies that are listed in both the United States and Hong Kong and that have maintained all or a portion of their ordinary shares, including ordinary shares underlying ADSs, in their Hong Kong share registers. However, it is unclear whether, as a matter of Hong Kong law, the trading of ADSs or deposits in, or withdrawals from, the ADS facility of these dual-listed companies constitutes a sale or purchase of the underlying Hong Kong-registered ordinary shares that is subject to Hong Kong stamp duty. We advise investors to consult their own tax advisers on this matter. If Hong Kong stamp duty is determined by the competent authority to apply to the trading of ADSs or deposits in, or withdrawals from, the ADS facility, the trading price and the value of your investment in our Class A ordinary shares and/or ADSs may be affected.

 

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Investors should not place undue reliance on facts, forecasts, estimates and other statistics in the Listing Document relating to the economy and our industry obtained from official government and other resources.

Facts, forecasts, estimates and other statistics in the Listing Document relating to the economy and the industry in which we operate our business have been collected from official government and other sources. Neither we nor any of our respective affiliates or advisors have independently verified the accuracy or completeness of such information directly or indirectly derived from official government and other sources. Statistics, industry data and other information relating to the economy and the industry derived from the official government and other sources used in the Listing Document may not be consistent with other information available from other sources and therefore, investors should not unduly rely on such information in the Listing Document.

 

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INDUSTRY OVERVIEW

 

 

CHINA ONLINE MUSIC SERVICES MARKET OVERVIEW

Sizable Market with Significant Growth Potential

According to iResearch, China is the second largest online music services market in the world in terms of total revenues in 2021. The market size of China’s online music services increased from RMB3.6 billion in 2016 to RMB17.1 billion in 2021, and is expected to reach RMB38.0 billion in 2026, according to iResearch, demonstrating rapid growth historically and significant room for future growth. In China, online music services are primarily monetized through membership subscriptions and advertising services from music content offerings.

Market Size of China Online Music Services (in RMB billions)

 

 

 

Source: iResearch

With technologies, music entertainment has evolved from a pure “listening” experience to diversified use cases. This has greatly improved user experience, leading to increased popularity of online music entertainment among China’s internet users and increasing paying ratio and user spending.

 

•

China has a massive audience with a growing demand for music entertainment. According to the China Statistical Report on Internet Development published by the China Internet Network Information Center, the number of online music services users in China had grown from 503 million in 2016 to 729 million in 2021. It is expected that the number of online music services users in China will further reach 848 million in 2026, according to iResearch. Apart from growth, this also represents a consistently high penetration rate (defined as the number of online music services users as a percentage of total internet population) of approximately 70%, demonstrating that online music stands out as one of the most popular forms of entertainment among China’s internet users.

 

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Number of Online Music Services Users in China (in millions)

 

 

 

Source: China Internet Network Information Center, iResearch

 

•

Online music services users in China are increasingly willing to pay for music, due to the efforts in the promotion of copyright protection in China, as well as superior music entertainment experience offered by major online music platforms through innovative products and technologies. According to iResearch, membership paying ratio for online music in China increased from 3.0% in 2016 to 13.8% in 2021 and is expected to nearly double and reach 27.0% in 2026. Compared to the membership paying ratio of more than 40% in the U.S. as of 2021, which was more than three times the ratio in China in the same year, there remains substantial opportunities for monetization as major online music platforms continue to enrich their content library, diversify their offerings, and provide a more innovative user experience.

Membership Paying Ratio for Online Music Services in China

(as % of online music users)

 

 

 

Source: iResearch

 

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Emerging Trends & Opportunities in China’s Online Music Services Market

China’s online music services market presents significant opportunities for leading players who can capitalize on the following market trends.

 

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Evolving user demand for diversified content: With the increasing user needs for the diversity of content, the ability to dynamically optimize content creation strategy to cater for diverse and evolving users’ preferences has become a key differentiating factor. Online music platforms are in pursuit of diversification across content types, music genres and formats via (i) partnerships with music labels and leading industry players, (ii) offering all-in-one services and rich resources to support the creation of original works by indie musicians, and (iii) enhancements of in-house content development capabilities powered by advanced technology.

 

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User demands for a multi-dimensional music experience: As user demands for online music services continue to evolve, the format of music enjoyment has transcended beyond merely listening to songs, and online music platforms have continued to innovate by permeating music into various music entertainment formats or channels. The COVID-19 pandemic has also boosted users’ demands for multi-dimensional music experience that helps them stay connected with friends and families. As a result, a myriad of innovations to create novel user experience of music enjoyment have emerged, such as (i) combining music sharing with interactive features to facilitate connections among users, (ii) online-merge-offline performance platforms designed to deliver immersive and convenient music entertainment experience to users, (iii) hosting of virtual music festival where users can interact with artists and fellow music lovers in an immersive virtual setting, (iv) application of AR/VR and other technologies in music and audio content offerings. As a result, online music services platforms that can offer a one-stop experience to satisfy users’ diverse entertainment and social needs will be better positioned to attract, retain and monetize their user bases.

 

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•

Continued technological innovations to improve users’ experience: Online music platforms that are able to innovate continuously in their technologies to enhance users’ experience will stand out. Examples of these technologies include music recommendation algorithms that enhance efficiency in distribution and marketing, song recognition technology that enables users to quickly discover their favorite songs and artists, audio text-to-speech technology that enables more immersive listening experience, and synthetic audio for virtual artists and idols.

Competitive Landscape

China’s online music services market currently has a relatively small number of players. The early movers in this market typically have longer and deeper relationships with content suppliers and have accumulated larger content libraries than their peers. Additionally, the significant time and resources needed to develop advanced technologies, establish brand recognition and nurture long-term user loyalty have given industry early movers and leaders competitive edges over their competitors.

The table below summarizes the operating metrics of the key players in China’s online music services market:

Key Operating Metrics of Key Players in Online Music Services Market in China in 2021

		Our Group				Company A(2)
Revenues (RMB, billion)(1)			11.5				3.3
Mobile MAUs (million)(1)			622				183
Paying users (million)(1)			68.6				28.9
Paying ratio (%)(1)			11.0				15.8
Monthly ARPPU (RMB)(1)			8.9				6.7

 

Source: iResearch

Notes:

(1)

Please see “Glossary of Technical Terms” for more information about how we calculate our mobile MAUs and paying users. Please note that each company has its own methods for calculating its operating metrics, which may be materially different. As a result, our operating metrics may not be directly comparable to similarly titled metrics used by other companies.

(2)	Founded in Hangzhou, China in 2016, Company A is an online music entertainment platform offering both online music and social entertainment services that was listed on the Hong Kong Stock Exchange in 2021.

China’s online music services market has long been characterized by intense competition in terms of breadth and diversity of content, product features, social interaction features, evolving user preferences, brand awareness and reputation. In recent years, we have faced increased competition for users and their time and attention from other online music providers and providers of new, emerging formats of online music and entertainment content. We believe we are well positioned to continue to scale our business and drive our profitability as we are capable of continuously growing our core online music subscription basis by offering a compelling music content library and user experience. Amid the increasingly intense competition, leading players in China’s online music services market are beginning to place more emphasis on the quality of the growth in terms of user engagement and willingness to pay, rather than merely focusing on driving the size of their overall user bases.

 

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CHINA MUSIC-CENTRIC SOCIAL ENTERTAINMENT SERVICES MARKET OVERVIEW

Music-centric social entertainment services enable users to sing, perform, and socialize in online music communities and share their performances with friends and other users who have common music interests. Music-centric social entertainment services in China, offered in the form of online karaoke as well as audio and video live streaming, are primarily monetized through sales of virtual gifts or premium memberships.

Market Size of China Music-centric Social Entertainment Services (in RMB billions)

 

 

 

Source: iResearch

Emerging Trends, Challenges & Opportunities in China’s Music-Centric Social Entertainment Services Market

The main growth drivers, trends, challenges and opportunities in China’s music-centric social entertainment services market include:

 

•

Massive and increasing user need for quality music-centric content and services and competition brought by new content and product formats. China has a massive internet user audience with an increasing demand for quality music-centric social entertainment content and services. This has given rise to emergence of music-centric social entertainment platforms and is expected to continue to drive the long-term growth of the market. In recent years, new content formats, such as audio and short-form videos, have emerged and quickly gained traction among users. Music-centric social entertainment platforms must respond effectively to changing user needs and preferences and invest in improving and diversifying content in order to remain competitive.

 

•

Adoption of innovative technologies driving user engagement. Music-centric social entertainment platforms have continued to leverage cutting-edge technologies to offer more diversified engaging content and provide users with new, innovative ways to communicate, perform and socialize. Music-centric social entertainment platforms which have stronger technology capabilities and a more diversified product portfolio are better positioned than their peers to engage users and drive sustainable, profitable growth.

 

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Changing market environment. In recent years, China’s music-centric social entertainment services market has been characterized by changing user needs and preferences, increasing competition, and heightened regulations. For more information about the regulations relating to social entertainment services, see “Recent Developments — Recent PRC Regulatory Developments — Recently Adopted Live Streaming Regulations” and “Regulatory Overview.” Companies that are able to adapt to these challenges and changing market conditions are more likely than their peers to retain competitive advantages.

 

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Competitive Landscape

China’s music-centric social entertainment services market has been and is expected to continue to be relatively fragmented in terms of market shares. The table below sets forth the key operating metrics of the key players in this market:

 

Key Operating Metrics of Key Players in Music-centric Social Entertainment Services Market in China in 2021
		Our Group				Company A(2)				Company B(3)				Company C(4)
Revenues (RMB billion)(1)			19.8				3.7				2.1				1.0
Mobile MAUs (million)(1)			203				20.0				9.4				5.5
Paying users (million)(1)			10.3				0.68				0.19				0.17
Paying ratio (%)(1)			5.1				3.6				2.0				3.0
Monthly ARPPU (RMB)(1)			160				448				352				637

 

Source: iResearch

Notes:

(1)

Please see “Glossary of Technical Terms” for more information about how we calculate our mobile MAUs and paying users. Please note that each company has its own methods for calculating its operating metrics, which may be materially different. As a result, our operating metrics may not be directly comparable to similarly titled metrics used by other companies.

(2)	Founded in Hangzhou, China in 2016, Company A is an online music entertainment platform offering both online music and social entertainment services that was listed on the Hong Kong Stock Exchange in 2021.

(3)	Founded in Guangzhou, China in 2007, Company B is an online audio platform offering both (i) audio entertainment services and (ii) podcast and other services that was listed on Nasdaq in 2020.

(4)	Founded in Shanghai, China in 2012, Company C is a privately owned online audio platform that focuses on providing online audio services and audio- and music-centric entertainment services.

China’s music-centric social entertainment services market is highly competitive. Market players compete based on their ability to meet increasing and constantly evolving user need for quality content and services, drive user engagement, and effectively adapt to the evolving market and regulatory environment. In particular, the increased competition from providers of new content formats, such as audio and short-form videos, in recent years have driven music-centric social entertainment platforms like us to devote more resources to diversifying content offerings (including video content) and exploring new monetization strategies in order to meet changing user preferences and remain competitive. At the same time, such dynamic competitive landscape has, and is expected to continue to, put pressure on our short-term growth in terms of the overall user base and monetization of our social entertainment services. See “— Emerging Trends, Challenges & Opportunities in China’s Music-Centric Social Entertainment Services Market.”

 

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SOURCES OF INFORMATION

We commissioned Shanghai iResearch Co., Ltd., an independent market research consulting firm that is principally engaged in the provision of market research consultancy services, to conduct a detailed study of the online music services market and music-centric social entertainment services market in China.

We have included certain information from the iResearch Report in the Listing Document because our Directors believe that such information facilitates an understanding of the relevant markets for potential investors. The market research process for the iResearch Report has been undertaken through detailed primary research and secondary research. Primary research involved expert interviews and company interviews. Secondary research involved statistical data and special reports issued by government departments or industry associations, the prospectus, annual reports and quarterly reports of listed or proposed listed companies, views and forecasts of industry experts in public reports, other research reports of iResearch, research database data of iResearch, etc.

Analysis and forecasts contained in the iResearch Report are based on major assumptions at the time of compiling such report: China’s social, economic and political environment will remain stable during the forecast period, and China’s mobile Internet industry can maintain relatively stable development. The quoted data of government departments, industry associations and institutions remain unchanged. The key forces driving the development of the industry are still relevant and applicable in the forecast period. There is no significant change in the environment of relevant industries. Our Directors confirm that after taking reasonable care, there has been no material adverse change in the overall market information since the date of the iResearch Report that would materially qualify, contradict or have an impact on such information. The reliability of the iResearch Report may be affected by the accuracy of the foregoing assumptions and factors.

We have agreed to pay a fee of RMB550,000 to iResearch in connection with the preparation of the iResearch Report. We have extracted certain information from the iResearch Report in this section, as well as in the sections headed “Risk Factors,” “Business,” “Financial Information” in this Exhibit 99.1 to the 6-K and elsewhere in the Listing Document to provide our potential investors with a more comprehensive presentation of the industries where we operate.

 

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REGULATORY OVERVIEW

 

 

Regulations on Foreign Investment

The Foreign Investment Law of the PRC adopted by the National People’s Congress on March 15, 2019 and its Implementing Regulation adopted by the State Council on December 26, 2019 became effective on January 1, 2020. Pursuant to the Foreign Investment Law of the PRC, China will grant national treatment to foreign invested entities, except for those foreign invested entities that operate in industries that fall within “restricted” or “prohibited” categories as prescribed in the “negative list” to be released or approved by the State Council.

The MOFCOM and the NDRC jointly promulgated the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2021 Version), or the Negative List, on December 27, 2021, which became effective on January 1, 2022. The Negative List stipulates that any PRC domestic enterprise engaging in prohibited industries under the Negative List shall obtain the consent of the relevant competent PRC authorities for overseas listing, and the foreign investors shall not participate in the operation and management of such enterprise, and the shareholding percentage of the foreign investors in such enterprise shall be subject to the relevant administrative provisions of the PRC domestic securities investment by foreign investors.

In December 2020, the NDRC and MOFCOM promulgated the Measures for the Security Review of Foreign Investment, which came into effect on January 18, 2021. Pursuant to such measures, the NDRC establishes a working mechanism office, or the Working Mechanism Office, in charge of the security review of foreign investment, which is led by the NDRC and the MOFCOM. Such measures also define foreign investment as direct or indirect investment by foreign investors in the PRC, including (i) investment in new onshore projects or establishment of wholly foreign owned onshore enterprises or joint ventures with foreign investors; (ii) acquiring equity or asset of onshore companies by merger and acquisition; and (iii) onshore investment by and through any other means. Foreign investment in certain key areas with national security concerns, such as important cultural products and services, important information technology and internet products and services, key technologies and others which results in the acquisition of de facto control of the invested companies, shall be filed with the Working Mechanism Office before such investment is carried out. What may constitute “onshore investment by and through any other means” or “de facto control” is not clearly defined under such measures, and could be broadly interpreted. It is likely that control through contractual arrangement be regarded as de facto control based on provisions applied to security review of foreign investment in such measures. Failure to make such filing may subject such foreign investor to rectification within a prescribed period, and the foreign investor will be negatively recorded in the relevant national credit information system, which would then subject such investor to joint punishment as provided by relevant rules. If such investor fails to or refuses to undertake such rectification, it would be ordered to dispose of the equity or asset and to take any other necessary measures so as to restore to the status before the implementation of the investment and to erase the impact to national security.

 

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Regulations on Transmitting Audio-Video Programs through the Internet

On December 20, 2007, the MII and the State Administration of Radio, Film and Television, or the SARFT, jointly issued the Administrative Provisions on the Internet Audio-Video Program Service, or the Audio-Video Program Provisions, which came into effect on January 31, 2008 and was amended on August 28, 2015. The Audio-Video Program Provisions defines “internet audio-video program services” as producing, editing and integrating audio-video programs, supplying audio-video programs to the public via the internet, and providing audio-video programs uploading and transmission services to a third party. Entities providing internet audio-video programs services must obtain an Audio and Video Service Permission, or AVSP. Applicants for the AVSP shall be state-owned or state-controlled entities unless an AVSP has been obtained prior to the effectiveness of the Audio-Video Program Provisions in accordance with the then-in-effect laws and regulations. In addition, foreign-invested enterprises are not allowed to engage in the above-mentioned services. According to the Audio-Video Program Provisions and other relevant laws and regulations, audio-video programs provided by the entities supplying internet audio-video program services shall not contain any illegal content or other content prohibited by the laws and regulations, such as any content against the basic principles in the PRC Constitution, any content that jeopardizes the sovereignty of the country or national security, and any content that disturbs social order or undermine social stability. A full copy of any audio-video program that has already been broadcasted shall be retained for at least 60 days. Movies, television programs and other media content used as internet audio-video programs shall comply with applicable administrative regulations on programs transmitting through radio, movie and television channels. Entities providing services related to internet audio-video programs shall immediately remove the audio-video programs violating laws and regulations, keep the relevant records, report to the relevant authorities, and implement other regulatory requirements.

The Categories of the Internet Audio-Video Program Services, or the Audio-Video Program Categories, promulgated by SARFT on March 17, 2010 and amended on March 10, 2017, classifies internet audio-video programs into four categories: (I) Category I internet audio-video program service, which is carried out with a form of radio station or television station; (II) Category II internet audio-video program service, including (a) re-broadcasting service of current political news audio-video programs; (b) hosting, interviewing, reporting, and commenting service of arts, entertainment, technology, finance and economics, sports, education, and other specialized audio-video programs; (c) producing (interviewing not included) and broadcasting service of arts, entertainment, technology, finance and economics, sports, education, and other specialized audio-video programs; (d) producing and broadcasting service of internet films/dramas; (e) aggregating and broadcasting service of films, television dramas and cartoons; (f) aggregating and broadcasting service of arts, entertainment, technology, finance and economics, sports, education and other specialized audio-video programs; and (g) live audio-video broadcasting service of cultural activities of common social organizations, sport events or other organization activities; (III) Category III internet audio-video program service, including (a) aggregating service of online audio-video content, and (b) re-broadcasting service of the audio-video programs uploaded by internet users; and (IV) Category IV internet audio-video program service, including (a) re-broadcasting of the radio or television program channels; (b) re-broadcasting of internet audio-video program channels; and (c) re-broadcasting of online live audio-video program.

On July 20, 2015, the State Administration of Press, Publication, Radio, Film and Television (the SAPPRFT, currently known as the National Radio and Television Administration) issued the Circular on Relevant Issues Concerning Implementing the Approval Granting for Mobile Internet Audio-Video Program Services, or the Mobile Audio-Video Program Circular. The Mobile Audio-Video Program Circular provides that the mobile internet audio-video program services shall be deemed a type of internet audio-video program services. Entities approved to provide mobile internet audio-video program services may use mobile WAP websites or mobile applications to provide audio-video program services, but the types of the programs operated by such entities shall be within the permitted scope as provided in their AVSPs and the said mobile applications shall be filed with the SAPPRFT.

 

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On November 18, 2019, the CAC, the Ministry of Culture and Tourism and the National Radio and Television Administration jointly issued the Administrative Provisions on Internet Audio-Video Information Services, or the Internet Audio-Video Information Services Provisions, which became effective on January 1, 2020. The Internet Audio-Video Information Services Provisions defines the “Internet audio-video information services” as providing services regarding audio and video information production, uploading and transmission to the public via internet platforms such as websites and applications. Entities providing internet audio-video information services must obtain relevant licenses subject to applicable PRC laws and regulations and are required to authenticate users’ identities based on their organizational codes, PRC ID numbers, or mobile phone numbers, etc.

Regulations on Online Live Streaming

On November 4, 2016, the CAC issued the Administrative Regulations on Online Live Streaming Services, or the Online Live Streaming Regulations, which came into effect on December 1, 2016. According to the Online Live Streaming Regulations, when providing internet news information services, both online live streaming service providers and online live streaming publishers must obtain the relevant licenses for providing internet news information service and may only carry out internet news information services within the scope of such licenses. All online live streaming service providers (whether or not providing internet news information) must take certain actions to operate their services, including establishing platforms for monitoring live streaming content.

According to the Measures for the Administration of Cyber Performance Business Operations, which was promulgated by the Ministry of Culture on December 2, 2016 and became effective on January 1, 2017, an online performance business entity engaging in online performance business operations shall apply to the cultural administrative department at the provincial level for an Internet Culture Operation License, and the business scope of such license shall include online performance. An online performance business entity shall indicate the license number of its Internet Culture Operation License in a conspicuous place of the homepage of its website.

On November 12, 2020, the National Radio and Television Administration promulgated the Circular on Strengthening the Administration of Live Streaming Web Shows and Live Streaming E-commerce, or the Circular 78, which sets forth registration requirements for platforms providing online show live streaming or e-commerce live streaming as well as requirements for certain live streaming businesses with respect to real-name registration, limits on users’ spending on virtual gifting, restrictions on minors from virtual gifting, live streaming review personnel requirements and content tagging requirements, among other things. On February 9, 2021, the CAC, together with six other authorities, jointly issued the Guidance Opinions on the Strengthening the Regulation and Management Work of Internet Streaming, or the Circular 3, which requires internet streaming platforms to set up appropriate caps on the maximum purchase price for each piece of virtual gifts and maximum value of virtual gifts that the users give to the performers each time.

 

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On March 25, 2022, CAC, the State Taxation Administration and SAMR issued Opinions on Further Regulating the For-Profit Activities in Online Live Streaming to Promote a Healthy Development of the Industry, which provides that, among others, live streaming platforms shall report to tax authorities information including but not limited to live streaming publishers’ identity, information of the live streaming account and the bank account which receives profits, types of revenue and profits earning information.

On May 7, 2022, CAC, together with three other authorities, jointly issued the Opinions on Regulating Live Streaming Rewards and Strengthening Minor Protections, or the Live Streaming Opinions, which iterates the requirements for live streaming platforms in respect of strengthening real-name registration, prohibiting minors from virtual gifting and restrictions on providing live streamer services to minors. Pursuant to the Live Streaming Opinions, online platforms are prohibited from ranking, introducing or recommending live streaming performers solely by the monetary amount of virtual gifts that they have received from users, nor could the platforms rank users based on the monetary amount of virtual gifts that they have sent to live streaming performers. Any such rankings currently available on these online platforms is ordered to be removed by June 7, 2022 according to the Live Streaming Opinions. In addition, the online platforms shall procure that, during the peak hours (from 8.00 p.m. to 10.00 p.m.) every day, each live streaming performer shall not engage in “PKs” (i.e. real-time interactive competitive game between two performers) against another performer for more than twice, and the online platforms shall not impose penalty within the game or provide any technical support to facilitate imposing such penalty.

 

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Regulations on Publication

Publishing activities in China are mainly supervised and regulated by the SAPPRFT. On February 4, 2016, the SAPPRFT and the MIIT jointly promulgated the Regulations on the Administration of Online Publishing Services, or the Online Publishing Regulations, which came into effect on March 10, 2016. The Online Publishing Regulations define “online publications” as digital works that are edited, produced, or processed to be published and provided to the public through the internet, including (a) original digital works, such as pictures, maps, games and comics; (b) digital works with content that is consistent with the type of content that, prior to being released online, typically was published in offline media such as books, newspapers, periodicals, audiovisual products and electronic publications; (c) digital works in the form of online databases compiled by selecting, arranging and compiling other types of digital works; and (d) other types of digital works identified by the SAPPRFT. In addition, foreign-invested enterprises are not allowed to engage in the distribution of the foregoing online publications through the internet. Under the Online Publishing Regulations, internet operators distributing online publications via internet are required to obtain an Online Publishing Service Permit from the SAPPRFT.

On May 31, 2016, the SAPPRFT and the MOFCOM jointly promulgated the Provisions for the Administration of the Publication Market, or Provisions for Publication, which became effective on June 1, 2016. According to the Provisions for Publication, any entity or individual that intends to engage in wholesale or retail of publications shall obtain a publication business permit. The Administrative Regulations on Publishing (2020 Revised), which was promulgated by the State Council and became effective on November 29, 2020, specifies that entities and individually owned businesses engaging in retail of publications shall obtain a publication business permit.

 

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Regulations on Commercial Performances

The Administrative Regulations on Commercial Performances was promulgated by the State Council in August 11, 1997 and last amended with immediate effect on November 29, 2020. According to these regulations, to legally engage in commercial performances, a culture and arts performance group shall have full-time performers and equipment in line with its performing business, and file an application with the culture administrative department of the people’s government at the county level for approval. To legally engage in commercial performances, a performance brokerage agency shall have three or more full-time performance brokers and funds for the relevant business, and file an application with the culture administrative department of the people’s government of a province, autonomous region or municipality directly under central government. The culture administrative department shall make a decision within 20 days from the receipt of the application whether to approve the application, and upon approval, will issue a performance permit. Anyone or any entity engaging in commercial performance activities without approval may be imposed a penalty, in addition to being ordered to cease its actions. Such penalty may include confiscation of performance equipment and illegal proceeds, and a fine of 8 to 10 times of the illegal proceeds. Where there are no illegal proceeds or the illegal proceeds are less than RMB10,000, a fine of RMB50,000 to RMB100,000 will be imposed. In addition, the Measures for the Administration of Performance Brokers was promulgated by the Ministry of Culture and Tourism on December 13, 2021 and became effective on March 1, 2022, pursuant to which performance broker shall pass the performance broker exam and acquire a performance broker certificate before engaging in the performance brokage activities. The Implementing Rules for Administrative Regulations on Commercial Performances, or the Rules for Commercial Performances, which was promulgated on March 5, 1998 by the Ministry of Culture and last amended with immediate effect on May 13, 2022, further stipulates that foreign-invested performance brokerage institution engaged in commercial performance activities shall submit applications in accordance with the Rules for Commercial Performances before conducting such activities.

To regulate brokerage activities in the field of the radio and television and internet audio-video, the National Radio and Television Administration issued the Administration Measures for Brokerage Agencies in the Field of Radio and Television and Internet Audio-Video, or the Administration Measures for Brokerage Agencies, on May 20, 2022, which became effective on June 30, 2022. The Administration Measures for Brokerage Agencies stipulates that, among others, (i) a brokerage agency shall obtain the consent from minors’ legal guardians before providing brokerage services to minors; and (ii) a brokerage agency shall strengthen the daily account maintenance of and supervision over any official fans group and fans club, and shall not appoint any minor to be the group leader or person in charge of such accounts.

Regulations on Online Advertising Services

On April 24, 2015, the Standing Committee of the National People’s Congress enacted the revised Advertising Law of the PRC, or the Advertising Law, effective on September 1, 2015 which was further amended on October 26, 2018 and April 29, 2021. The Advertising Law increases the potential legal liability of advertising services providers and strengthens regulations of false advertising. The Advertising Law sets forth certain content requirements for advertisements including, among other things, prohibitions on false or misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest.

 

 

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On July 4, 2016, the State Administration for Industry and Commerce (currently known as the State Administration for Market Regulations) issued the Interim Measures on the Administration of Online Advertising, or the SAIC Interim Measures, which came into effect on September 1, 2016. The Advertising Law and the SAIC Interim Measures require that online advertisements may not affect users’ normal use of internet and internet pop-up advertisements must display a “close” sign prominently and ensure one-key closing of the pop-up windows. The SAIC Interim Measures provide that all online advertisements must be marked “advertisement” so that consumers can distinguish them from non-advertisement information. Moreover, the SAIC Interim Measures require that, among other things, sponsored search advertisements shall be prominently distinguished from normal research results and it is forbidden to send advertisements or advertisement links by email without the recipient’s permission or induce internet users to click on an advertisement in a deceptive manner.

On November 26, 2021, the Administrative Measures for Internet Advertising (Draft for Comment) was published by the SAMR for public comments until December 25, 2021, which requires that internet advertising operators and publishers shall establish and improve the management systems regarding acceptance, registration, review and filing of the internet advertising businesses according to the relevant regulations and shall examine, verify and register the identity information of advertisers such as their names, addresses and valid contact details, set up registration files and check and update them on a regular basis. Relevant files shall be kept for not less than three years from the date of termination of the advertisement release. Internet advertising operators and publishers are required to set up advertisement reviewers familiar with advertising laws and regulations, and if possible, a special department shall be established to be responsible for the review of internet advertisements. The Administrative Measures for internet Advertising (Draft for Comment) was released for public comment only and there remains substantial uncertainty, including but not limited to its final content, adoption timeline, effective date or relevant implementation rules.

On November 1, 2021, the MIIT promulgated the Notice of the Ministry of Industry and Information Technology on Launching the Action for Improvements to the Perception of Information and Communications Services, or the MIIT Notice. Under the MIIT Notice, internet enterprises shall set obvious and effective close buttons in the splash ads of their APPs. On September 9, 2022, the Administrative Provisions on Internet Pop-up Window Information Notification Services was issued by the CAC, MIIT and SAMR, effective from September 30, 2022, which requires that splash ads shall be subject to content compliance review and shall be identifiable, prominently marked as “advertisement,” and users shall be notified expressly. Besides, splash ads shall be able to be closed with a single click.

 

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Regulations on Internet Security

On December 28, 2000, the Standing Committee of the National People’s Congress enacted the Decision on the Protection of Internet Security, as amended on August 27, 2009, which provides that the following activities, among others, conducted through the internet, will be subject to criminal liabilities if constituting a crime: (a) gaining improper entry into any of the computer information networks relating to state affairs, national defensive affairs, or cutting-edge science and technology; (b) spreading rumor, slander or other harmful information via the internet for the purpose of inciting subversion of the state political power; (c) stealing or divulging state secrets, intelligence or military secrets via internet; (d) spreading false or inappropriate commercial information; or (e) infringing on the intellectual property. The Ministry of Public Security issued the Administrative Measures on Security Protection for International Connections to Computer Information Networks on December 16, 1997 and amended it on January 8, 2011, which prohibits using internet to leak state secrets or to spread socially destabilizing content.

 

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On December 13, 2005, the Ministry of Public Security issued the Provisions on the Technical Measures for the Protection of the Security of the Internet, which requires that internet services providers shall have the function of backing up the records for at least 60 days. In addition, internet services providers shall (a) set up technical measures to record and keep the information as registered by users; (b) record and keep the corresponding relation between the internet web addresses and intranet web addresses as applied by users; and (c) record and follow up the net operation and have the functions of security auditing.

On January 21, 2010, the MIIT promulgated the Administrative Measures for Communications Network Security Protection, which requires that all communication network operators including telecommunications services providers and internet domain name service providers divide their own communication networks into units. The unit category shall be classified in accordance with degree of damage to national security, economic operation, social order and public interest. In addition, the communication network operators must file the division and ratings of their communication network with MIIT or its local counterparts. If a communication network operator violates these measures, the MIIT or its local counterparts may order rectification or impose a fine up to RMB30,000 in case such violation is not duly rectified in accordance with the order of the competent authority.

On July 1, 2015, the Standing Committee of the National People’s Congress issued the PRC National Security Law, which came into effect on the same day. The National Security Law provides that the state shall safeguard the sovereignty, security and cyber security development interests of the state, and that the state shall establish a national security review and supervision system to review, among other things, foreign investment, key technologies, internet and information technology products and services, and other important activities that are likely to impact the national security of China. On April 13, 2020, twelve PRC regulatory authorities including the CAC issued the Cybersecurity Review Measures, with effect from June 1, 2020, which provide detailed cybersecurity review procedures for the purchase of network products and services by operators of “critical information infrastructure.” According to the Measures for Cybersecurity Review, operators of “critical information infrastructure” are operators identified by the regulatory department in charge of the protection of critical information infrastructure, and “network products and services” primarily are core network equipment, high-performance computers and servers, mass storage equipment, large databases and applications, network security equipment, cloud computing services, and other network products and services that may have an important impact on the security of critical information infrastructure.

In addition, the PRC Data Security Law was promulgated by the Standing Committee of the National People’s Congress on June 10, 2021 and took effect on September 1, 2021. The PRC Data Security Law establishes a tiered system for data protection in terms of their importance. Data categorized as “important data,” which will be determined by regulatory authorities in the form of catalogs, are required to be treated with higher level of protection.

 

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Specifically, the PRC Data Security Law provides that operators processing “important data” are required to appoint a “data security officer” and a “management department” to take charge of data security. In addition, such operator is required to evaluate the risk of its data activities periodically and file assessment reports with relevant regulatory authorities.

On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law, which request improvement on the laws and regulations related to data security, cross-border data transfer and the management of confidential information, strengthening principal responsibility for the information security of overseas listed companies, strengthening standardized mechanisms for providing cross-border information, and improvement of cross-border audit regulatory cooperation in accordance with the law and the principle of reciprocity.

Regulations on the Security Protection of Critical Information Infrastructure, or the CII Protection Regulations, became effective on September 1, 2021. According to the CII Protection Regulations, critical information infrastructure, or the CII, refers to any important network facilities or information systems of the important industry or field such as public communication and information service, energy, transportation, water conservancy, finance, public services, e-government affairs and national defense science, which may endanger national security, people’s livelihood and public interest in the case of damage, function loss or data leakage. Regulators supervising specific industries are required to formulate detailed guidance to recognize the CII in the respective sectors, and a critical information infrastructure operator, or a CIIO, must take the responsibility to protect the CII’s security by performing certain prescribed obligations. For example, CIIOs are required to conduct network security test and risk assessment, report the assessment results to relevant regulatory authorities, and timely rectify the issues identified at least once a year. In addition, relevant administration departments of each critical industry and sector shall be responsible to formulate eligibility criteria and determine the CIIO in the respective industry or sector. The operators shall be informed about the final determination as to whether they are categorized as CIIOs.

On November 14, 2021, Regulations on Network Data Security Management (Draft for Comment), or the Draft Regulations on Network Data, was proposed by the CAC for public comments until December 13, 2021. The Draft Regulations on Network Data requires data processors to apply for cybersecurity review in accordance with the relevant laws and regulations for carrying out activities including but not limited to: (i) a merger, reorganization, or division to be conducted by an Internet platform operator who has amassed a substantial amount of data resources that concern national security, economic development or the public interest, which will or may impact national security; (ii) an overseas initial public offering to be conducted by a data processor processing the personal information of more than one million individuals; (iii) an initial public offering in Hong Kong to be conducted by a data processor, which will or may impact national security; and (iv) other data processing activities that will or may have an impact on national security. Any failure to comply with such requirements may subject us to, among others, suspension of services, fines, revoking relevant business permits or business licenses and penalties. However, it provides no further explanation or interpretation as to how to determine what “may affect national security.” As of the date of the Listing Document, there is no schedule as to when the Draft Regulations on Network Data will be enacted.

 

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On December 28, 2021, the CAC, the NDRC, the MIIT, and several other PRC regulatory authorities jointly issued the Cybersecurity Review Measures which became effective on February 15, 2022 and replaced the Measures for Cybersecurity Review promulgated on April 13, 2020. Pursuant to the Cybersecurity Review Measures, critical information infrastructure operators that procure internet products and services, and network platform operators engaging in data processing activities, must be subject to the cybersecurity review if their activities affect or may affect national security. The Cybersecurity Review Measures further stipulate that network platform operators holding over one million users’ personal information shall apply with the Cybersecurity Review Office for a cybersecurity review before listing in a foreign country. The relevant regulatory authorities may initiate the cybersecurity review against the relevant operators if the authorities believe that the network products or services or data processing activities of such operators affect or may affect national security.

Regulations on Privacy Protection

On December 29, 2011, the MIIT promulgated the Several Provisions on Regulation of Order of Internet Information Service Market, which prohibit internet information service providers from collecting personal information of any user without prior consent. Internet information service providers shall explicitly inform the users of the means of collecting and processing personal information, the scope of content, and purposes. In addition, internet information service providers shall properly keep the personal information of users, if the preserved personal information of users is divulged or may possibly be divulged, internet information service providers shall immediately take remedial measures and report any material leak or potential material leak to the telecommunications regulatory authority.

On December 28, 2012, the Decision on Strengthening Network Information Protection promulgated by the Standing Committee of the National People’s Congress emphasizes the need to protect electronic information that contains individual identification information and other private data. The decision requires internet service providers to establish and publish policies regarding the collection and use of electronic personal information and to take necessary measures to ensure the security of the information and to prevent leakage, damage or loss.

In July 2013, the MIIT promulgated the Regulations on Protection of Personal Information of Telecommunications and Internet Users, or the Regulations on Network Information Protection, effective on September 1, 2013, to enhance and enforce legal protection over user information security and privacy on the internet. The Regulations on Network Information Protection require internet operators to take various measures to ensure the privacy and confidentiality of users’ information.

Pursuant to the Ninth Amendment to the Criminal Law of the PRC issued by the Standing Committee of the National People’s Congress on August 29, 2015, effective on November 1, 2015, any internet service provider that fails to fulfill the obligations related to internet information security as required by applicable laws and refuses to take corrective measures, will be subject to criminal liability for (i) any large-scale dissemination of illegal information; (ii) any severe effect due to the leakage of users’ personal information; (iii) any serious loss of evidence of criminal activities; or (iv) other severe situations, and any individual or entity that (a) sells or provides personal information to others unlawfully or (b) steals or illegally obtains any personal information will be subject to criminal liability in severe situations.

 

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On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the Cybersecurity Law of the PRC, or the Cybersecurity Law, which came into effect on June 1, 2017. Pursuant to the Cybersecurity Law, network operators shall follow their cybersecurity obligations according to the requirements of the classified protection system for cybersecurity, including: (a) formulating internal security management systems and operating instructions, determining the persons responsible for cybersecurity, and implementing the responsibility for cybersecurity protection; (b) taking technological measures to prevent computer viruses, network attacks, network intrusions and other actions endangering cybersecurity; (c) taking technological measures to monitor and record the network operation status and cybersecurity incidents; (d) taking measures such as data classification, and back-up and encryption of important data; and (e) other obligations stipulated by laws and administrative regulations. In addition, network operators shall follow the principles of legitimacy to collect and use personal information and disclose their rules of data collection and use, clearly express the purposes, means and scope of collecting and using the information, and obtain the consent of the persons whose data is gathered.

Pursuant to the Notice of the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security on Legally Punishing Criminal Activities Infringing upon the Personal Information of Citizens, issued on April 23, 2013, and the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues regarding Legal Application in Criminal Cases Infringing upon the Personal Information of Citizens, which was issued on May 8, 2017 and took effect on June 1, 2017, the following activities may constitute the crime of infringing upon a citizen’s personal information: (i) providing a citizen’s personal information to specified persons or releasing a citizen’s personal information online or through other methods in violation of relevant national provisions; (ii) providing legitimately collected information relating to a citizen to others without such citizen’s consent (unless the information is processed, not traceable to a specific person and not recoverable); (iii) collecting a citizen’s personal information in violation of applicable rules and regulations when performing a duty or providing services; or (iv) collecting a citizen’s personal information by purchasing, accepting or exchanging such information in violation of applicable rules and regulations.

On January 23, 2019, the Office of the Central Cyberspace Affairs Commission and other three authorities jointly issued the Circular on the Special Campaign of Correcting Unlawful Collection and Usage of Personal Information via Apps. Pursuant to this circular, (i) app operators are prohibited from collecting any personal information irrelevant to the services provided by such operator; (ii) information collection and usage policy should be presented in a simple and clear way, and such policy should be consented by the users voluntarily; and (iii) authorization from users should not be obtained by coercing users with default or bundling clauses or making consent a condition of a service. App operators violating such rules may be ordered by authorities to rectify within a given period of time and those that refuse to rectify may be disclosed to the public. Provided that the circumstances are serious, the relevant business may be suspended, or the business operation may be terminated for rectification, or the relevant business permits or licenses may be revoked in accordance with the law. Such regulatory requirements were emphasized by the Notice on the Special Rectification of Apps Infringing upon User’s Personal Rights and Interests, which was issued by MIIT on October 31, 2019. On November 28, 2019, the CAC, the MIIT, the Ministry of Public Security and the SAMR jointly issued the Methods of Identifying Illegal Acts of Apps to Collect and Use Personal Information which further illustrates certain common illegal practices of apps operators in terms of personal information protection, including “failure to publicize rules for collecting and using personal information,” “failure to expressly state the purpose, manner and scope of collecting and using personal information,” “collection and use of personal information without consent of users of such App,” “collecting personal information irrelevant to the services provided by such app in violation of the principle of necessity,” “provision of personal information to others without users’ consent,” “failure to provide the function of deleting or correcting personal information as required by laws” and “failure to publish information such as methods for complaints and reporting.”

 

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Furthermore, the Provisions on the Cyber Protection of Children’s Personal Information issued by the CAC came into effect on October 1, 2019, which require, among others, that network operators who collect, store, use, transfer and disclose personal information of children under the age of 14 establish special rules and user agreements for the protection of children’s personal information, inform the children’s guardians in a noticeable and clear manner, and shall obtain the consent of the children’s guardians.

On May 28, 2020, the National People’s Congress adopted the PRC Civil Code, which came into effect on January 1, 2021. Pursuant to the PRC Civil Code, the personal information of a natural person shall be protected by the law. Any organization or individual shall legally obtain such personal information of others and ensure the safety of such information, and shall not illegally collect, use, process or transmit personal information of others, or illegally purchase or sell, provide or make public personal information of others.

On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the Personal Information Protection Law of the PRC, or the Personal Information Protection Law, which took effect on November 1, 2021. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC, the Personal Information Protection Law provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information, (ii) personal information operators using sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where it is necessary for personal information to be provided by a personal information processor to a recipient outside the territory of the PRC due to any business need or any other need, a security assessment organized by the national cyberspace authority shall be passed.

 

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Regulations on Algorithm Recommendations

On September 17, 2021, the CAC and eight other authorities jointly promulgated the Notice on Promulgation of the Guiding Opinions on Strengthening the Comprehensive Governance of Algorithm-Related Internet Information Services, which provides that, among others, enterprises shall establish an algorithmic security responsibility system and a technology ethics vetting system, improve the algorithmic security management organization, strengthen risk prevention and control as well as potential danger investigation and governance, and improve the capacity to respond to algorithmic security emergencies. Enterprises shall also strengthen their sense of responsibility and assume the main responsibility for the results arising from the application of algorithms.

On December 31, 2021, the CAC, the MIIT, the Ministry of Public Security and the SAMR jointly issued the Administration Provisions on Algorithmic Recommendation of Internet Information Services, or the Administration Provisions on Algorithmic Recommendation, which became effective on March 1, 2022. The Administration Provisions on Algorithmic Recommendation stipulates that algorithmic recommendation service providers shall (i) fulfill their responsibilities for algorithm security, (ii) establish and improve management systems for algorithm mechanism examination, ethical vetting in technology, user registration, information release vetting, protection of data security and personal information, anti-telecommunications and internet fraud, security assessment and monitoring, emergency response to security incidents, etc., and (iii) formulate and disclose relevant rules for algorithm recommendation services, and be equipped with professional staff and technical support appropriate to the scale of the algorithm recommendation service. The provider of algorithmic recommendation services shall not use the services to (i) engage in any illegal activity which may endanger national security and social public interest, disturb economic and social order, or infringe others’ legitimate rights and interest, or (ii) disseminate any information prohibited by laws or regulations.

 

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Regulations on Intellectual Property Rights

Copyright

China has enacted various laws and regulations relating to the protection of copyright. China is also a signatory to some major international conventions on protection of copyright and became a member of the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention in October 1992, and the Agreement on Trade-Related Aspects of Intellectual Property Rights upon its accession to the World Trade Organization in December 2001.

The Copyright Law of the PRC, adopted in 1990 and revised in 2001, 2010 and 2020 respectively, or the Copyright Law, and its implementing regulations adopted in 2002 and amended in 2011 and 2013, provide that Chinese citizens, legal persons, or other organizations will, whether published or not, enjoy copyright in their works, which include music works. Copyright will generally be conferred upon the authors, or in case of works made for hire, upon the employer of the author. Copyright holders enjoy personal and economic rights. The personal rights of a copyright holder include rights to publish works, right to be named as the author of works, right to amend the works and right to keep the works intact; while economic rights of a copyright holder include, but not limited to, reproduction right, distribution right, performance right, information network dissemination right, etc. In addition, the rights of performers with respect to their performance, rights of publishers with respect to their design of publications, rights of producers with respect to their video or audio productions, and rights of broadcasting or TV stations with respect to their broadcasting or TV programs are classified as copyright-related interest and protected by the Copyright Law. For a piece of music works, it may involve the copyright of lyricist and of composers, which are collectively referred to as the “music publishing rights” elsewhere in the Listing Document, and the copyright-related interests of recording producers and of performers, which can be collectively referred to as the “musical recording rights” elsewhere in the Listing Document. The copyright holders may license others to exercise, or assign all or part of their economic rights attached to their works. The license can be made on an exclusive or non-exclusive basis. With a few exceptions, an exclusive license or an assignment of copyright should be evidenced in a written contract. Pursuant to the Copyright Law and its implementing regulations, copyright infringers are subject to various civil liabilities, such as stopping infringing activities, issuing apologies to the copyright owners and compensating the copyright owners for damages resulting from such infringement. The damages should be calculated based on the actual loss suffered by the copyrights owner or the illegal income made by the infringer.

The Provisional Measures on Voluntary Registration of Works, promulgated by the National Copyright Administration on December 31, 1994 and effective on January 1, 1995, provides for a voluntary registration system as administered by the National Copyright Administration and its local counterparts.

The Computer Software Copyright Registration Measures, or the Software Copyright Measures, promulgated by the National Copyright Administration on February 20, 2002, regulates registrations of software copyright, exclusive licensing contracts for software copyright and assignment agreements. The National Copyright Administration administers software copyright registration, and the Copyright Protection Center of China is designated as the software registration authority. The Copyright Protection Center of China shall grant registration certificates to the Computer Software Copyright applicants which meet the requirements of both the Software Copyright Measures and the Computer Software Protection Regulations, which promulgated by the State Council on June 4, 1991 and last amended on January 30, 2013.

 

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The Measures for Administrative Protection of Copyright Related to Internet, which were jointly promulgated by the National Copyright Administration and the MII on April 29, 2005 and became effective on May 30, 2005, provide that upon receipt of an infringement notice from a legitimate copyright holder, an internet content service provider must take remedial actions immediately by removing or disabling access to the infringing content. If an internet content service provider knowingly transmits infringing content or fails to take remedial actions after receipt of a notice of infringement that harms public interest, the internet content service provider could be subject to administrative penalties, including an order to cease infringing activities, confiscation by the authorities of all income derived from the infringement activities, or payment of fines.

On May 18, 2006, the State Council promulgated the Regulations on the Protection of the Right to Network Dissemination of Information, as amended on January 30, 2013. Under these regulations, an owner of the network dissemination rights with respect to written works or audio or video recordings who believes that information storage, search or link services provided by an internet service provider infringe his or her rights may require that the internet service provider delete, or disconnect the links to, such works or recordings. The internet service provider who provides information storage space to recipients of its services to facilitate the provision by such recipient of works, performances and audio-video content to the public shall not be held liable for losses caused by any alleged infringement, provided that such internet service provider has deleted relevant works, performances and audio-video content after receiving a notice from the purported right holder, and the satisfaction of certain other conditions, including that (i) such internet service provider has specifically indicated that such information storage space is provided for the recipients of its services and the name, contact person information and network address of the of the network service provider have been made public; (ii) the works, performances and audio-video content provided by the recipients are not altered; (iii) the internet service provider is not aware and has no reason to be aware that the works, performances and audio-video content provided by recipients of its services are infringing; and (iv) the internet service provider does not derive economic benefits directly from the works, performances and audio-video content provided by the recipients of its services. Additionally, according to the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law to Trial of Civil Dispute Cases of Infringement upon Information Network Transmission Rights promulgated by the Supreme People’s Court on December 17, 2012 and amended on December 29, 2020, in cases where the plaintiff in an infringement claim has raised preliminary evidence to prove that an internet service provider has provided works, performances or audio and video products, if such network service provider can prove that it has provided no more than network services and had no fault, the act of such network service provider will not be considered infringement.

 

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Regulations on Taxation

Value-added Tax

The Provisional Regulations on Value-added Tax of the PRC were promulgated by the State Council on December 13, 1993 and came into effect on January 1, 1994 which were last amended on November 19, 2017. The Detailed Rules for the Implementation of Provisional Regulations on Value-added Tax of the PRC were promulgated by the Ministry of Finance on December 25, 1993 and subsequently amended on December 15, 2008 and October 28, 2011, or collectively, VAT Law. On November 19, 2017, the State Council promulgated the Order on Abolishing the Provisional Regulations of the PRC on Business Tax and Amending the Provisional Regulations on Value-added Tax of the PRC, or Order 691. According to the VAT Law and Order 691, all enterprises and individuals engaged in the sale of goods, processing, repair and replacement services, sales of services, intangible assets, real property and the importation of goods within the territory of the PRC are the taxpayers of VAT. The VAT rates generally applicable are simplified as 17%, 11% and 6%, and the VAT rate applicable to the small-scale taxpayers is 3%.

On April 4, 2018, the Ministry of Finance and the State Administration of Taxation jointly issued the Notice on Adjustment of VAT Rates, which came into effect on May 1, 2018. According to the abovementioned notice, the taxable goods previously subject to VAT rates of 17% and 11% respectively become subject to lower VAT rates of 16% and 10% respectively. On March 20, 2019, the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs issued the Announcement on Relevant Policies on Deepen the Reform of Value-added Tax, pursuant to which that the taxable goods previously subject to VAT rates of 16% and 10% respectively become subject to lower VAT rates of 13% and 9% respectively, effective from April 1, 2019.

 

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Regulations on Anti-Monopoly

The Anti-Monopoly Law of the PRC promulgated by the Standing Committee of the National People’s Congress, or the Anti-Monopoly Law, which became effective on August 1, 2008, prohibits undertakings from monopolistic conducts such as:

 

•

Entering into monopolistic agreements, which means agreements or concerted practices to eliminate or restrict competition. For example, agreements for fixing or altering prices of goods, limiting the output or sales volume of goods, fixing the price of goods for resale to third parties, among others, unless such agreements satisfy the specific exemptions prescribed therein, such as improving technologies or increasing the efficiency and competitiveness of small and medium-sized undertakings. Sanctions against such violations include an order to cease the relevant activities, and confiscation of illegal gains and fines (from 1% to 10% of sales revenue in the preceding year, or a fine up to RMB500,000 if the intended monopolistic agreement has not been performed);

 

•

Abuse of dominant market position. For example, selling goods at unfairly high prices or purchasing goods at unfairly low prices, selling goods at prices below cost or refusing to trade with a trading party without any justifiable cause. Sanctions for such violations include an order to cease the relevant activities, confiscation of the illegal gains and fines (from 1% to 10% of sales revenue in the preceding year); and

 

•

Concentration of undertakings which has or may have an effect of eliminating or restricting competition. Pursuant to the Anti-Monopoly Law and the Rules of the State Council on Declaration Threshold for Concentration of Undertakings as amended on September 18, 2018, require that the anti-monopoly agency (i.e., the State Administration for Market Regulation) shall be notified in advance of any concentration of undertaking if certain filing thresholds (i.e., during the previous fiscal year, (i) the total global turnover of all operators participating in the transaction exceeded RMB10 billion in the preceding fiscal year and at least two of these operators each had a turnover of more than RMB400 million within China in the preceding fiscal year, or (ii) the total turnover within China of all the operators participating in the concentration exceeded RMB2 billion in the preceding fiscal year, and at least two of these operators each had a turnover of more than RMB400 million within China in the preceding fiscal year) are triggered, and no concentration shall be implemented until the anti-monopoly enforcement agency clears the anti-monopoly filing.

In March 2018, the SAMR was formed as a new regulatory agency to take over, among other things, the anti-monopoly enforcement functions from the relevant departments under the MOFCOM, the NDRC and the SAIC, respectively. Since its inception, the SAMR has continued to strengthen its anti-monopoly enforcement. The SAMR issued the Notice on Anti-monopoly Enforcement Authorization on December 28, 2018, which grants authorizations to the SAMR’s province-level branches for anti-monopoly enforcement within their respective jurisdictions, and issued the Anti-monopoly Compliance Guideline for Operators on September 11, 2020, which applies to operators under the Anti-Monopoly Law for establishing an anti-monopoly compliance management system and preventing anti-monopoly compliance risks. On November 18, 2021, the National Anti-monopoly Bureau was officially established to formulate anti-monopoly institutional measures and guidelines, implement anti-monopoly law enforcement, undertake the guidance for enterprises’ anti-monopoly action responding abroad and so on.

 

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According to the Anti-monopoly Guidelines of the Anti-monopoly Commission under the State Council in the Field of Intellectual Property Rights, which was promulgated and became effective on January 4, 2019, or the Anti-monopoly IP Rights Guidelines, the Anti-monopoly Law is applicable when the operator abuses intellectual property rights and conducts acts that exclude or restrict competition. Pursuant to the Anti-monopoly IP Rights Guidelines, analysis of whether the operator has abused intellectual property rights to exclude or restrict competition shall follow the following basic principles: (i) the same regulatory standards for other forms of property rights shall be adopted and the relevant provisions of the Anti-monopoly Law of the PRC shall be followed; (ii) the characteristics of intellectual property rights shall be taken into account; (iii) the operator shall not be presumed to have a dominant market position in the relevant market because of its ownership of intellectual property rights; and (iv) the positive impact of relevant behaviors on efficiency and innovation shall be considered on a case-by-case basis.

On June 26, 2019, the SAMR issued the Interim Provisions on the Prohibitions of Acts of Abuse of Dominant Market Positions, which took effect on September 1, 2019 and was amended on March 24, 2022 to further prevent and prohibit the abuse of dominant market positions. On February 7, 2021, the Anti- Monopoly Bureau of the State Council officially promulgated the Guidelines to Anti-Monopoly in the Field of Internet Platforms, or the Anti-Monopoly Guidelines for Internet Platforms. The Anti-Monopoly Guidelines for Internet Platforms mainly covers five aspects, including general provisions, monopoly agreements, abusing market dominance, concentration of undertakings, and abusing of administrative powers eliminating or restricting competition. The Anti-Monopoly Guidelines for Internet Platforms prohibits certain monopolistic acts of internet platforms so as to protect market competition and safeguard interests of users and undertakings participating in the internet platform economy, including without limitation:

 

(i)

prohibiting platforms from reaching monopoly agreements. A monopoly agreement in the field of platform economy refers to any agreement, decision or other concerted conduct by undertakings to exclude or restrict competition. “Other concerted conduct” refers to the conduct whereby undertakings do not explicitly enter into an agreement or decision, but are actually coordinated through data, algorithms, platform rules or other means, except for price following and other parallel conduct conducted by the relevant undertakings based on their independent expression of intent;

 

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(ii)

prohibiting the concentration of undertakings that has or may have the effect of eliminating or restricting competition; and

 

(iii)

prohibiting platforms with dominant position from abusing their market dominance. The activities which may constitute the abuse of market dominance include, without limitation, sales of commodities at an unfairly high price or purchases of commodities at an unfairly low price, sales of commodities at a price lower than cost without justified reasons, refusing to enter into transactions with transaction counterparties without justified reasons, limit transactions with transaction counterparties without justified reasons, tie-in sales or attaching unreasonable transaction terms without justified reasons, and differential treatment to the transaction counterparties with identical transaction conditions without justified reasons.

In addition, the Anti-Monopoly Guidelines for Internet Platforms also reinforces anti-monopoly merger review for internet platform related transactions to safeguard market competition.

 

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On June 24, 2022, the Decision of the Standing Committee of the National People’s Congress to Amend the Anti-Monopoly Law of the People’s Republic of China, or the Decision to Amend the Anti-Monopoly Law, was adopted and became effective on August 1, 2022. The Decision to Amend the Anti-Monopoly Law strengthens the regulation on the internet platforms, requiring that undertakings shall not use data and algorithms, technologies, capital advantages, platform rules, and other means to engage in monopolistic conduct; and also escalates in full scale the administrative penalties for monopolistic conducts, for the failure to notify the anti-monopoly agencies on the proposed concentration of undertakings, the State Council Anti-Monopoly Enforcement Agency may order to reinstate the original status prior to the concentration and impose a fine up to ten percent of the operator’s last year’s sales revenue, provided that the concentration of undertakings has or may have an effect on excluding or limiting competition; if the concentration does not have the effect on excluding or limiting competition, a fine up to RMB5,000,000 may be imposed on operators. Since such provisions are relatively new, uncertain still remains as to the interpretation and implementation of such laws and regulations.

Regulations on M&A and Overseas Listings

In 2006, six PRC regulatory agencies, including the CSRC, jointly adopted the Regulations on Mergers of Domestic Enterprises by Foreign Investors, or the M&A Rules, amended in 2009. The M&A Rules purport, among other things, to require an offshore special purpose vehicle controlled by PRC companies or individuals and formed for overseas listing purposes through acquisitions of PRC domestic interest held by such PRC companies or individuals, to obtain the approval from the CSRC prior to publicly listing their securities on an overseas stock exchange. In 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by the offshore special purpose vehicle seeking CSRC approval of its overseas listing. If the CSRC or other PRC regulatory agencies subsequently determine that prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies.

The M&A Rules also establish procedures and requirements that could make some acquisitions of PRC companies by foreign investors more time-consuming and complex, including requirements in some instances that the anti-monopoly law enforcement agency be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In addition, the Rules on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors issued by the MOFCOM in 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and prohibit any activities attempting to bypass such security review, including by structuring the transaction through a proxy or contractual control arrangement.

 

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On December 24, 2021, the CSRC published the Administrative Provisions of the State Council on the Overseas Issuance and Listing of Securities by Domestic Companies (Draft for Comments), or the Draft Administrative Provisions, and the Measures for the Overseas Issuance and Listing of Securities Record-filings by Domestic Companies (Draft for Comments), or the Draft Measures, for public comments. These drafts stipulate that PRC domestic companies that seek to offer and list securities in overseas markets directly or indirectly shall complete the filing procedures with and report relevant information to the CSRC. Pursuant to these drafts, if the issuer meets the following conditions, its offering and listing will be deemed as an “indirect overseas offering and listing by a PRC domestic company” and is therefore subject to the filing requirements: (i) the revenues, profits, total assets or net assets of the Chinese operating entities in the most recent financial year accounts for more than 50% of the corresponding data in the issuer’s audited consolidated financial statements for the same period; (ii) the majority of senior management in charge of business operation are Chinese citizens or have domicile in PRC, and its principal place of business is located in PRC or main business activities are conducted in PRC. The domestic enterprises should submit filing documents to CSRC within three business days after the submission of the application for overseas initial public offering, and after completing the filing procedures for an overseas initial public offering and listing. For the purposes of implementing and strengthening the CSRC’s supervision, the issuer will need to comply with continuous filing and reporting requirements after such offering and listing, among others, including the following: (i) reporting material events which arose prior to such offering and listing, (ii) filing for follow-on offerings after the initial offering and listing, (iii) filing for transactions in which the issuer issues securities for acquiring assets, and (iv) reporting material events after the initial offering and listing. In a Q&A released on its official website, the respondent CSRC official indicated that the CSRC will start applying the filing requirements to new offerings and listings. New initial public offerings and refinancing by existing overseas listed Chinese companies will be required to go through the filing process. As for the other filings for the existing companies, the regulator will grant adequate transition period to complete their filing procedures.

On April 2, 2022, the CSRC published the Provisions on Strengthening the Management of Confidentiality and Archives Related to the draft Overseas Issuance of Securities and Overseas Listing by Domestic Companies (Draft for Public Comments), or the Draft Confidentiality and Archives Management Provisions relating to Overseas Listing, for public comments. In the overseas listing activities of domestic companies, as well as securities companies and securities service institutions providing relevant securities services hereof, should establish a sound system of confidentiality and archival work, shall not disclose state secrets, or harm the state and public interests. Where a Domestic Company provides or publicly discloses to the relevant securities companies, securities service institutions, overseas regulatory authorities and other entities and individuals, or provides or publicly discloses through its overseas listing entity, any document or material involving any state secrets or any work secret of organizations, it shall report to the competent authority for approval in accordance with the law, and submit to the secrecy administration department for filing. Domestic Companies shall not provide accounting records to an overseas accounting firm that has not performed the corresponding procedures. Securities companies and securities service organizations shall comply with the confidentiality and archive management requirements, and keep the documents and materials properly. Securities companies and securities service institutions that provide domestic enterprises with relevant securities services for overseas issuance and listing of securities shall keep such archives they compile within the territory of the PRC and shall not transfer such archives to overseas institutions or individuals, by any means such as carriage, shipment or information technology, without the approval of the relevant competent authorities. If the archives or duplicates of such archives are of important value to the state and society and needed to be taken abroad, approval shall be obtained in accordance with relevant provisions. However, the Draft Administrative Provisions, the Draft Measures and the Draft Confidentiality and Archives Management Provisions relating to Overseas Listing were released for public comment only and there remains substantial uncertainty, including but not limited to its final content, adoption timeline, effective date or relevant implementation rules. As of date of the Listing Document, the Draft Administrative Provisions, the Draft Measures and the Draft Confidentiality and Archives Management Provisions relating to Overseas Listing are still in draft form and there is no schedule for the adoptions of such drafts.

 

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HISTORY AND CORPORATE STRUCTURE

 

 

OVERVIEW

Our business in online music commenced with the launch of online music services by QQ, the communication and social services operated by Tencent in 2003. Between 2003 and 2016, Tencent continued to expand its operations in online music services. In July 2016, Tencent acquired control of China Music Corporation (“CMC”) (being a company incorporated in Cayman Islands in June 2012 and the primary beneficial owner of each of Guangzhou Kugou and Beijing Kuwo) through a series of transactions pursuant to which (i) Tencent injected substantially all of its online music business in the PRC (which primarily included QQ Music and WeSing) into CMC; and (ii) in consideration of the foregoing, CMC issued an aggregate of 1,290,862,550 ordinary shares to a wholly-owned subsidiary of Tencent, Min River. Upon the completion of these transactions, Tencent owned an approximately 61.6% equity interests in CMC³ and CMC became a consolidated subsidiary of Tencent.

In December 2016, CMC was renamed “Tencent Music Entertainment Group.” We conduct our business through our subsidiaries and VIEs.

KEY MILESTONES

Our key business milestones are summarized below:

 

Date		Event
2003		QQ, the communication and social services operated by Tencent, launched online music services.
2004		Kugou Music was launched.
2005		QQ Music was launched.
		Beijing Kuwo Technology Co., Ltd. (“Beijing Kuwo”), was incorporated in China and commenced its operations of Kuwo Music.
2006		Guangzhou Kugou Computer Technology Co., Ltd. (“Guangzhou Kugou”) was incorporated in China and acquired control of, and commenced to operate, Kugou Music.
2012		Guangzhou Kugou commenced offering its live streaming services through Fanxing Live.
2013		Beijing Kuwo launched Kuwo Live to offer live streaming services.
2014		WeSing commenced offering its online karaoke services.
2016		Fanxing Live was rebranded to Kugou Live.

 

3	Upon completion of the acquisition of CMC by Tencent in July 2016, the other shareholders of CMC comprised of investment vehicles of certain of the then directors and officers of CMC, employee share option platforms of our Company and other third party investors independent from our Company.

 

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Date		Event
2017		We acquired 100% equity interests in Ultimate Music Inc., a provider of online music services to smart devices.
2018		Our ADSs commenced trading on the NYSE. We and Sony Music launched electronic dance music label, Liquid State.
2020		We launched Kuwo Changting, our long-form audio app.
2021		We integrated Kuwo Changting with Lazy Audio, a well-established audio platform in China operated by Shenzhen Lanren which we acquired in March 2021 and re-imaged the brand Lazy Audio (formerly branded as Lanren Changting).

CORPORATE STRUCTURE

Our Corporate Structure

For illustrative purposes, we summarize our corporate group structure in the diagram below, including our principal subsidiaries and consolidated affiliated entities as of the Latest Practicable Date:

 

 

Notes:

(1)

Shareholders of Guangzhou Kugou and their respective shareholdings and relationship with our Company are as follows: (i) Linzhi Lichuang Information Technology Co., Ltd. (99.47%), an entity controlled by Tencent; (ii) Ms. Meiqi Wang (0.12%); (iii) Mr. Zhongwei Qiu (0.12%), a nominee shareholder designated by affiliates of PAG Capital Limited, which was a minority shareholder of our Company prior to the listing of our ADSs on the NYSE; (iv) Shenzhen Litong Industry Investment Fund Co., Ltd. (0.08%), an entity controlled by Tencent; (v) Mr. Zhenyu Xie (0.08%), our President, Chief Technology Officer and Director; (vi) Mr. Liang Tang (0.03%), our independent Director who resigned from directorship, effective on the date of the Listing Document; (vii) certain individuals and entities, including Zhuhai Hengqin Red Land Red Sea Venture Capital Co., Ltd. (0.03%), Mr. Jianming Dong (0.02%), Ms. Huan Hu (0.01%), Ms. Yaping Gao (0.01%), Hangzhou Yong Xuan Yong Ming Equity Investment Partnership (Limited Partnership) (0.01%) and Mr. Hanjie Xu (0.01%), as nominee shareholders designated by certain pre-IPO shareholders of our Company; and (viii) Guangzhou Lekong Investment Partnership (Limited Partnership) (0.01%), an employee equity incentive platform of Guangzhou Kugou, with Mr. Zhenyu Xie being its general partner. Guangzhou Kugou operates Kugou Music and Kugou Live.

 

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(2)

Shareholders of Beijing Kuwo and their respective shareholdings and relationship with our Company are as follows: (i) Linzhi Lichuang Information Technology Co., Ltd. (61.64%), an entity controlled by Tencent; (ii) Qianhai Daizheng (23.02%); and (iii) Mr. Lixue Shi (15.34%), our Group Vice President. Beijing Kuwo operates Kuwo Music and Kuwo Live.

(3)

Shareholders of Beijing Gongse and their respective shareholdings and relationship with our Company are as follows: (i) Mr. Qihu Yang (20%), our General Counsel; (ii) Mr. Dejun Gu (20%), the head of our human resources department; and (iii) Ms. Xing Chen (20%), Ms. Yueting Luo (20%) and Mr. Yunheng Liang (20%), all of whom are employees of our Company.

(4)	Partners of Beijing Shangqin are Beijing Gongse (0.0005%) (the general partner), Mr. Qihu Yang (19.9999%), Mr. Dejun Gu (19.9999%), Ms. Xing Chen (19.9999%), Ms. Yueting Luo (19.9999%) and Mr. Yunheng Liang (19.9999 %).

(5)	Partners of Beijing Yuzhong are Beijing Gongse (0.0005%) (the general partner), Mr. Qihu Yang (19.9999%), Mr. Dejun Gu (19.9999%), Ms. Xing Chen (19.9999%), Ms. Yueting Luo (19.9999%) and Mr. Yunheng Liang (19.9999 %).

(6)	Shareholders of Beijing Zhizheng are Beijing Shangqin (50%) and Beijing Yuzhong (50%).

(7)	Tencent Music Shenzhen operates QQ Music and WeSing.

Major Subsidiaries and Operating Entities

As of the Latest Practicable Date, we conducted our business operations across more than 140 consolidated subsidiaries and operating entities, ten of which are our Major Subsidiaries, the principal business activities and dates of establishment of which are summarized below:

 

Name of company		Principal business activities		Date and jurisdiction of establishment
Tencent Music Entertainment Hong Kong Limited (“TME Hong Kong”)		Investment holding and music content distribution		July 6, 2012, Hong Kong
Tencent Music (Beijing) Co., Ltd.		Technical support and consulting services		September 14, 2012, PRC
Yeelion Online Network Technology (Beijing) Co., Ltd.		Technical support and consulting services		September 7, 2005, PRC
Tencent Music Entertainment Technology (Shenzhen) Co., Ltd.		Online music and entertainment related services		February 22, 2017, PRC
Guangzhou Shiyinlian Software Technology Co., Ltd.		Technical support and consulting services		October 29, 2019, PRC
Guangzhou Kugou Computer Technology Co., Ltd.		Online music and entertainment related services		February 20, 2006, PRC

 

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Name of company		Principal business activities		Date and jurisdiction of establishment
Beijing Kuwo Technology Co., Ltd.		Online music and entertainment related services		December 8, 2005, PRC
Tencent Music Entertainment (Shenzhen) Co., Ltd.		Online music and entertainment related services		July 12, 2016, PRC
Guangxi Hexian Investment Management Co., Ltd. (previously known as “Xizang Qiming Music Co., Ltd.”)		Music content investments and other investments		February 8, 2018, PRC
Shenzhen Lanren Online Technology Co., Ltd.		Audio platform		March 27, 2012, PRC

Major Acquisition and Disposal

Transaction with UMG

In March 2020, through one of our wholly-owned subsidiaries we joined a consortium led by Tencent to acquire a 10% equity stake in Universal Music Group, or UMG, from its parent company, Vivendi S.E. (formally known as Vivendi S.A.), at an enterprise value of EUR30 billion (the “Initial UMG Transaction”). To facilitate the Initial UMG Transaction, we completed the investment of 9.94% equity interest in the consortium for an investment consideration of EUR200 million (equivalent to approximately RMB1,531 million) in March 2020. The Initial UMG Transaction was completed in March 2020. The consortium also has the option to purchase an additional 10% equity stake in UMG at the same enterprise value as in the Initial UMG Transaction pursuant to the terms of the transaction documents. In December 2020, the consortium in the Initial UMG Transaction exercised its call option to acquire an additional 10% equity interest in UMG from Vivendi S.E. at the same enterprise value of EUR30 billion as in the Initial UMG Transaction (the “Second UMG Transaction”). To facilitate the Second UMG Transaction, we completed the additional investment in the consortium for an investment consideration of EUR161 million (equivalent to approximately RMB1,270 million) in January 2021. The Second UMG Transaction was completed in January 2021. To the best of their knowledge, our Directors, having made reasonable inquiry, believe that, other than Tencent, one of our Controlling Shareholders, each of UMG and Vivendi S.E. is an independent third party.

Acquisition of Shenzhen Lanren

In January 2021, we entered into a definitive agreement to acquire 100% equity interest of Shenzhen Lanren, which operates Lazy Audio, a well-established audio platform in China, for a total consideration of RMB2.7 billion, primarily payable in cash, plus certain post-acquisition equity awards to Shenzhen Lanren’s management team to be settled in several tranches in subsequent years, subject to fulfillment of certain conditions related to certain employee’s continuing employment post acquisition. Founded in 2012, Shenzhen Lanren provides entertainment in the forms of audiobooks, Chinese comedies, podcasts and other radio shows to customers via its comprehensive audio platform Lazy Audio. It monetizes via different channels, including pay per title, subscription payment for content, and advertising. Lazy Audio has developed into a thriving community with strong user interactions and engagement, providing superior content and services to audio users across China. Our acquisition of Shenzhen Lanren was completed in March 2021. In April 2021, we integrated Kuwo Changting with Lazy Audio and re-imaged the brand Lazy Audio (formerly branded as Lanren Changting). To the best of their knowledge, our Directors, having made reasonable inquiry, believe that, saved for China Literature Limited, one of the ultimate beneficial owners of Shenzhen Lanren prior to the acquisition and a non wholly-owned subsidiary of Tencent whose shares are listed on the Hong Kong Stock Exchange, each of Shenzhen Lanren and its other ultimate beneficial owners was, prior to the acquisition, an independent third party.

 

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SHAREHOLDING STRUCTURE

The Company will have a WVR structure immediately upon the Listing through two classes of Shares (Class A ordinary shares and Class B ordinary shares). See “Major Shareholders” for further details on the voting rights and the beneficial ownership of the principal shareholders of the Company.

CONTRACTUAL ARRANGEMENTS

Currently, substantially all of our users and business operations are located in the PRC and we do not have plans for any significant overseas expansion in the foreseeable future, as our primary focus is the PRC online music and audio entertainment market, which we believe possesses tremendous growth potential and attractive monetization opportunities.

Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services, internet cultural services, internet audio-video program services and certain other businesses. The Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2021 Version) provides that foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider other than providers of e-commerce, domestic multiparty communication, store-and-forward or call center service, and the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision) require that the major foreign investor in a value-added telecommunication service provider in China must have experience in providing value-added telecommunications services overseas and maintain a good track record. On March 29, 2022, the Decision of the State Council on Revising and Repealing Certain Administrative Regulations, which took effect on May 1, 2022, was promulgated to amend certain provisions of regulations including the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision), the requirement for major foreign investor to demonstrate a good track record and experience in operating value-added telecommunications businesses is deleted. However, since it is relatively new and no detailed guidance or implementation measures have been issued, uncertainties still exist in relation to its interpretation and implementation. Such regulatory development does not invalidate our ICP licenses or require us to modify our Contractual Arrangements according to the PRC laws and regulations. In addition, foreign investors are prohibited from investing in companies engaged in certain online and culture related businesses.

 

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We are a company incorporated in the Cayman Islands. Our PRC subsidiaries, including Beijing Tencent Music and Yeelion Online (each, the “Wholly-owned Entity”), among others, are considered foreign-invested enterprises. To comply with the foregoing PRC laws and regulations, we primarily conduct our business in China through the VIEs, including Guangzhou Kugou, Beijing Kuwo, Shenzhen Ultimate Music, Beijing Gongse, Beijing Shangqin, Beijing Yuzhong, Beijing Zhizheng, among others, and their respective subsidiaries in the PRC, based on a series of customary contractual arrangements.

These contractual arrangements enable us to:

 

(i)

receive the economic benefits that could potentially be significant to our consolidated affiliated entities in consideration for the services provided by our subsidiaries;

 

(ii)

exercise effective control over our consolidated affiliated entities; and

 

(iii)

hold an exclusive option to purchase all or part of the equity interests in our consolidated affiliated entities when and to the extent permitted by PRC law.

The Contractual Agreements include equity interests pledge agreement(s) or share of property pledge agreement, exclusive option agreement(s), exclusive technical service agreement(s) or business cooperation agreement(s), loan agreement(s), debt assignment and offset agreement(s), voting trust agreement(s) or power of attorney, spouse consent(s), as the case may be. Please see “History and Corporate Structure – Contractual Arrangements – Contractual Arrangements Relating to Our Consolidated Affiliated Entities” for further details. We do not have any equity interests in our consolidated affiliated entities. However, as a result of contractual arrangements, we have effective control over and are considered the primary beneficiaries of these companies, and we have consolidated the financial results of these companies in our consolidated financial statements under IFRS.

These contractual arrangements may not be as effective as direct ownership in providing us with control over the VIEs. If the VIEs or their respective shareholders or partners fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. Furthermore, if we are unable to maintain effective control, we would not be able to continue to consolidate the financial results of our consolidated affiliated entities in our financial statements. In the three years ended December 31, 2019, 2020 and 2021 and the three months ended March 31, 2022, we derived 99.8%, 99.8%, 99.1% and 98.1% of our total external revenues from our consolidated affiliated entities, respectively. The Company confirms that there is no material deviation of its existing Contractual Arrangements from the standards in LD43-3 on the basis that, as at the Latest Practicable Date, the Contractual Arrangements are in place to comply with current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services, internet cultural services, internet audio-video program services and certain other businesses. For a detailed description of the regulatory environment that necessitates the adoption of our corporate structure, see “Regulatory Overview.” For details of these and other risks associated with our VIE structure, see “Risk Factors – Risks Related to Our Corporate Structure” and the subsection headed “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Corporate Structure” in our 2021 Form 20-F.

 

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Contractual Arrangements Relating to Our Consolidated Affiliated Entities

The following is a summary of our typical contractual arrangements. The Contractual Arrangements by and among us (through our wholly-owned PRC subsidiaries) and each of the VIEs as well as their respective shareholders or partners, are substantially similar to the corresponding contractual arrangements discussed below, unless otherwise indicated. In addition, the spouses of certain shareholders or partners of VIEs have also signed spousal consents, the key terms of which are summarized below.

In the opinion of our PRC Legal Adviser:

 

(i)

the ownership structures of the VIEs and our wholly-owned PRC subsidiaries, and the contractual arrangements among our wholly-owned PRC subsidiaries, the VIEs and their respective shareholders or partners governed by PRC laws as of the date of the Listing Document do not contravene any PRC laws or regulations currently in effect (including the PRC Civil Code), and would not fall within the circumstances as stipulated in the PRC Civil Code which will lead to the invalidity of the contractual agreements; and

 

(ii)

the contractual arrangements among our wholly-owned PRC subsidiaries, the VIEs and their respective shareholders or partners governed by PRC laws as of the date of the Listing Document are valid and binding upon each party to such arrangements and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect.

Based on the advice from our PRC Legal Adviser, our Directors believe that the agreements underlying the contractual arrangements as described above that confer significant control and economic benefits from the VIEs on us are enforceable under the relevant laws. Nevertheless, any violations by the VIE or its shareholder of our agreements with them could disrupt our operations or adversely affect our services. See “Risk Factors – Risks Related to Our Corporate Structure” and the subsection headed “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Corporate Structure” in our 2021 Form 20-F.

 

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There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. We have been further advised by our PRC legal counsel that if the regulatory authorities find that the agreements that establish the structure for operating our value-added telecommunication services, internet cultural services, internet audio-video program services and certain other businesses and related business do not comply with regulatory restrictions on foreign investment in such businesses, we could be subject to severe penalties including being prohibited from continuing operations. For a description of the risks related to these Contractual Arrangements and our corporate structure, please see “Risk Factors – Risks Related to Our Corporate Structure” and the subsection headed “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Corporate Structure” in our 2021 Form 20-F.

 

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Contractual Arrangements in relation to Guangzhou Kugou and Beijing Kuwo

 

(i)	Equity Interests Pledge Agreement

Pursuant to the relevant equity interests pledge agreement(s), the shareholders of the relevant VIEs pledged all of their equity interests in the VIEs to guarantee VIEs and their respective shareholders’ performance of their obligations under, where applicable, the exclusive option agreement, exclusive technical service agreement, voting trust agreement and loan agreement (as the case may be). If the VIEs or any of their shareholders breach their contractual obligations under these agreements, each relevant Wholly-owned Entity will be entitled to certain rights, including but not limited to the rights to auction or sell the pledged equity interests. Without the prior written consent of the relevant Wholly-owned Entity, the shareholders of the VIEs shall not transfer the pledged equity interests, create or permit to be created any new pledge or any other security interest on the pledged equity interests.

 

(ii)	Exclusive Option Agreement

Pursuant to the exclusive option agreement(s) entered into by and among the relevant Wholly-owned Entity, the relevant VIEs and the shareholders of the relevant VIEs, the shareholders of VIEs irrevocably granted the relevant Wholly-owned Entity or its designated person, an exclusive option to purchase at its discretion, all or part of the equity interests held by the shareholders of the relevant VIEs at the price agreed by the parties to the extent permitted by PRC law. Without the prior written consent of the relevant Wholly-owned Entity, the shareholders of the relevant VIEs shall not transfer or otherwise dispose of, or create any encumbrances or third party interests upon their equity interests in the relevant VIE. In addition, the relevant VIE irrevocably granted the relevant Wholly-owned Entity or its designated party an exclusive option to purchase at its discretion, all or part of the assets held or entitled to be used by the relevant VIE, to the extent permitted under PRC law.

 

(iii)

Exclusive Technical Service Agreement

Pursuant to the exclusive technical service agreement(s) entered into by and between the relevant Wholly-owned Entity and the relevant VIE, the relevant Wholly-owned Entity or its designated person has the sole and exclusive right to provide specified business support, technical service and consulting service to the relevant VIE. The relevant VIE agrees to accept such services and, without the prior written consent of the relevant Wholly-owned Entity, may not accept the same or similar services provided by any third party during the term of the agreement. The relevant VIE agrees to pay to the relevant Wholly-owned Entity specified service fees, which represents 90% of the annual net operating income of the relevant VIE together with other service fees charged for other ad hoc services provided.

 

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(iv)	Loan Agreement

Pursuant to the loan agreement(s) entered into by and among the relevant Wholly-owned Entity and the shareholders of the relevant VIE, the relevant Wholly-owned Entity provided loans to the shareholders of the relevant VIE solely for the purpose of acquiring equity interests of the relevant VIE. The relevant Wholly-owned Entity has the sole discretion to determine the method of repayment, including requiring the shareholders of the relevant VIE to transfer their equity interests in the relevant VIE to the relevant Wholly-owned Entity or its designated person.

 

(v)	Debt Assignment and Offset Agreement

Pursuant to the debt assignment and offset agreement(s) entered into by and among the assignor and assignee of the equity interests in the relevant VIE and the relevant Wholly-owned Entity, the relevant assignor transferred, and the relevant assignee agreed to undertake, the assignor’s obligations to repay the loan (and its interest) under the relevant loan agreement (as described above). As consideration for the assignee to undertake the assignor’s obligations to repay the loan (and its interest) under the loan agreement, the transfer consideration equal to the amount of outstanding loan under the loan agreement in the share transfer agreement with respect to equity interest of the relevant VIE between the assignor and the assignee shall be regarded as has been paid by the assignee to the assignor.

 

(vi)	Voting Trust Agreement

Pursuant to the voting trust agreement(s) entered into by and among the relevant Wholly-owned Entity, the relevant VIE and the shareholders of the relevant VIE, the shareholders of the relevant VIE each irrevocably granted the relevant Wholly-owned Entity or any person designated by the relevant Wholly-owned Entity as their attorney-in-fact to vote on their behalf on all matters of the relevant VIE by issuing a voting proxy.

 

(vii)

Spousal Consents

The spouses of certain individual shareholders of the VIEs have each signed a spousal consent letter. Under the spousal consent letter(s), the signing spouse unconditionally and irrevocably approved the execution by his or her spouse of the above-mentioned equity interests pledge agreement, exclusive option agreement, debt assignment and offset agreement and voting trust agreement, as applicable, and that his or her spouse may perform, amend or terminate such agreements without his or her consent. Moreover, the spouse confirmed he or she has no rights, and will not assert in the future any right, over the equity interests in the applicable VIEs held by his or her spouse. In addition, in the event that the spouse obtains any equity interest in the applicable VIEs held by his or her spouse for any reason, he or she agrees to be bound by and sign any legal documents substantially similar to the contractual arrangements entered into by his or her spouse, as may be amended from time to time.

 

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Contractual Arrangements in relation to Beijing Gongse, Beijing Shangqin, Beijing Yuzhong and their controlled entities

 

(i)	Equity Interests Pledge Agreement or Share of Property Pledge Agreement

Pursuant to the relevant equity interests pledge agreement(s), the shareholders of the relevant VIEs pledged all of their equity interests in the VIEs to guarantee VIEs and their respective shareholders’ performance of their obligations under, where applicable, the exclusive option agreement, exclusive business cooperation agreement, power of attorney, and loan agreement (as the case may be). If the VIEs or any of their shareholders breach their contractual obligations under these agreements, each relevant Wholly-owned Entity will be entitled to certain rights, including but not limited to the rights to auction or sell the pledged equity interests. Without the prior written consent of the relevant Wholly-owned Entity, the shareholders of the VIEs shall not transfer the pledged equity interests, create or permit to be created any new pledge or any other security interest on the pledged equity interests.

In addition, the partners of Beijing Shangqin entered into a series of share of property pledge agreements with Beijing Tencent Music and Beijing Shangqin, pursuant to which the partners of Beijing Shangqin pledged all of their share of property held in Beijing Shangqin to Beijing Tencent Music. Similarly, the partners of Beijing Yuzhong entered into a series of share of property pledge agreements with Beijing Tencent Music and Beijing Yuzhong, pursuant to which the partners of Beijing Yuzhong pledged all of their share of property held in Beijing Yuzhong to Beijing Tencent Music.

 

(ii)	Exclusive Option Agreement

Pursuant to the relevant exclusive option agreement(s) entered into by and among the relevant Wholly-owned Entity, the relevant VIEs and the shareholders or partners of the relevant VIEs, the shareholders or partners of VIEs irrevocably granted the relevant Wholly-owned Entity or its designated person, an exclusive option to purchase at its discretion, all or part of the equity interests held by the shareholders or partners of the relevant VIEs at the price agreed by the parties to the extent permitted by PRC law. Without the prior written consent of the relevant Wholly-owned Entity, the shareholders or partners of the relevant VIEs shall not transfer or otherwise dispose of, or create any encumbrances or third party interests upon their equity interests in the relevant VIE. In addition, the relevant VIE irrevocably granted the relevant Wholly-owned Entity or its designated party an exclusive option to purchase at its discretion, all or part of the assets held or entitled to be used by the relevant VIE, to the extent permitted under PRC law.

 

(iii)

Exclusive Business Cooperation Agreement

Pursuant to the exclusive business cooperation agreement(s) between Beijing Gongse, Beijing Shangqin, Beijing Yuzhong, Beijing Zhizheng, Guangxi Hexian, Shenzhen Ultimate Music, Guangxi Qingse, or Qianhai Daizheng and our respective and our applicable subsidiary, there is no specific number or percentage of service fees that our subsidiary is entitled to charge for the services provided to each such VIE. Instead, the services fee can be agreed by Beijing Gongse, Beijing Shangqin, Beijing Yuzhong, Beijing Zhizheng, Guangxi Hexian, Shenzhen Ultimate Music, Guangxi Qingse, or Qianhai Daizheng and our respective applicable subsidiary by taking into account the complexity of services provided, the time consumed and seniority of staff involved and other factors.

 

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(iv)	Loan Agreement

Pursuant to the loan agreement(s) entered into by and among the relevant Wholly-owned Entity and certain shareholders or partners of the relevant VIE, the relevant Wholly-owned Entity provided loans to the relevant shareholders or partners of the relevant VIE solely for the purpose of acquiring equity interests of the relevant VIE. The relevant Wholly-owned Entity has the sole discretion to determine the method of repayment, including requiring the relevant shareholders or partners of the relevant VIE to transfer their equity interests in the relevant VIE to the relevant Wholly-owned Entity or its designated person.

 

(v)	Debt Assignment and Offset Agreement

Pursuant to the debt assignment and offset agreement(s) entered into by and among the assignor and assignee of the equity interests in the relevant VIE and the relevant Wholly-owned Entity, the relevant assignor transferred, and the relevant assignee agreed to undertake, the assignor’s obligations to repay the loan (and its interest) under the relevant loan agreement (as described above). As consideration for the assignee to undertake the assignor’s obligations to repay the loan (and its interest) under the loan agreement, the transfer consideration equal to the amount of outstanding loan under the loan agreement in the share transfer agreement with respect to equity interest of the relevant VIE between the assignor and the assignee shall be regarded as has been paid by the assignee to the assignor.

There is no such debt assignment and offset agreement between Beijing Gongse, Beijing Shangqin, Beijing Yuzhong, Beijing Zhizheng, Guangxi Qingse, Qianhai Daizheng or Shenzhen Ultimate Music and their respective shareholders or partners.

 

(vi)	Power of Attorney

Pursuant to the power of attorney entered into by and among the relevant Wholly-owned Entity, the relevant VIE and the shareholders or partners of the relevant VIE, the shareholders or partners of the relevant VIE each irrevocably authorized the relevant Wholly-owned Entity or any person designated by the relevant Wholly-owned Entity as the sole and exclusive proxy of the shareholders or partners of the relevant VIE to vote on their behalf on all matters of the relevant VIE.

 

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(vii)

Spousal Consents

The spouses of certain individual shareholders or partners of the VIEs have each signed a spousal consent letter. Under the spousal consent letter(s), the signing spouse unconditionally and irrevocably approved the execution by his or her spouse of the above-mentioned equity interests pledge agreement or share of property pledge agreement, exclusive option agreement, loan agreement and power of attorney, as applicable, and that his or her spouse may perform, amend or terminate such agreements without his or her consent. Moreover, the spouse confirmed he or she has no rights, and will not assert in the future any right, over the equity interests in the applicable VIEs held by his or her spouse. In addition, in the event that the spouse obtains any equity interest in the applicable VIEs held by his or her spouse for any reason, he or she agrees to be bound by and sign any legal documents substantially similar to the contractual arrangements entered into by his or her spouse, as may be amended from time to time.

INVESTMENT PRIOR TO THE NYSE LISTING

In December 2017, (i) we issued 282,830,698 ordinary shares to Spotify AB, a wholly-owned subsidiary of Spotify (NYSE: SPOT), and (ii) Spotify, in exchange, issued 8,552,440 ordinary shares (after giving effect to a 40-to-one share split of Spotify’s ordinary shares) to TME Hong Kong.

In the first quarter of 2018, we issued a total of 67,370,801 ordinary shares to certain financial and strategic investors for an aggregate consideration of approximately US$239 million and issued a total of 52,024,094 ordinary shares to the then existing shareholders of the Company for an aggregate consideration of approximately US$210 million.

In September 2018, we issued a total of 23,084,008 ordinary shares to Min River, PAGAC Music Holding II Limited, CICFH Culture Entertainment Group, Guomin Holdings Limited and Cityway Investments Limited and a total of 460,724 options to purchase our ordinary shares to certain individuals to acquire all the remaining interest in United Music Entertainment Corporation, an investment holding company that invests in and manages a portfolio of companies in the music industry and an associate of the Company, in each case under Regulation S under the Securities Act of 1933.

On October 3, 2018, we issued a total of 68,131,015 ordinary shares to WMG China LLC, an affiliate of Warner Music Group Corp, and Sony Music Entertainment for an aggregate cash consideration of approximately US$200 million, in reliance on Section 4(a)(2) of the Securities Act regarding private sales of securities.

Immediately prior to our NYSE listing, the shareholders agreement provides for certain special rights granted to the investors, including right of first refusal, right of co-sale, and drag-along right and contains provisions governing the Board and other corporate governance matters. Those special rights, as well as the corporate governance provisions, have automatically terminated upon the completion of our initial public offering on December 12, 2018 on the NYSE.

 

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LISTING ON THE NYSE

On December 12, 2018 we listed our ADSs on the NYSE under the symbol “TME.” Since the date of our listing on the NYSE and up to the Latest Practicable Date, our Directors confirm that we had no instances of non-compliance with the rules of the NYSE in any material respects and to the best knowledge of our Directors having made all reasonable enquiries, there is no matter that should be brought to investors’ attention in relation to our compliance record on the NYSE.

We believe that the Listing on the Hong Kong Stock Exchange will provide our Shareholders with greater liquidity and flexibility amid an evolving regulatory environment.

SAFE REGISTRATION

The SAFE promulgated the SAFE Circular 37 in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. According to SAFE Circular 13, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 2015.

To the knowledge of our Company, Lixue Shi, Zhenyu Xie and Linlin Chen have completed their initial SAFE registrations prior to our listing on the NYSE.

 

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BUSINESS

 

 

WHO WE ARE

Music is a universal passion. No matter who we are, where we come from, we all have our favorite songs, albums or artists. Music enriches our lives by reaching us in deeply personal ways and connecting us with each other through engaging, social and fun experiences. We are pioneering the way people enjoy online music and music-centric social entertainment services.

We offer an all-in-one online entertainment experience for people to discover, listen, sing, watch, perform and socialize around music. To bring a more diversified experience to our users, we have also expanded our platform to offer long-form audio services. We believe music and audio content can deliver experiences that are visual, immersive, interactive, socially engaging and fun.

Just as we value our users, we also respect those who create content. This is why we champion copyright protection and work relentlessly to support our content partners with broad audience outreach and valuable resources and technology. Through years of efforts, we help promote a more sustainable music entertainment industry in China. Our scale, technology, commitment to copyright protection, and ability to promote original works have made us a preferred partner for musicians and content owners.

Today, we are the largest online music entertainment platform in China in terms of MAU, according to iResearch, with 604 million online music mobile MAUs and 162 million social entertainment mobile MAUs in the first quarter of 2022. We also had China’s largest music content library as of March 31, 2022 in terms of number of tracks, according to iResearch.

WHAT WE OFFER ON OUR PLATFORM

 

 

 

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The TME platform is an all-in-one music and audio entertainment destination that allows users to seamlessly engage with a broad range of music and audio content in many ways, including discovering, listening, singing, watching, performing and socializing. We adopt a dual engine content-and-platform strategy to constantly enrich content offerings on our platform, while empowering content creation and distribution and delivering a compelling user experience. Through our vibrant community, technologies, and visual and interactive features, we enhance our user experience, engagement and retention.

 

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Online music services, primarily our QQ Music, Kugou Music and Kuwo Music, enable users to discover, enjoy and share music in personalized ways. We provide a broad range of features for music discovery, including smart recommendations, music ranking charts, playlists, official music accounts and digital releases. We also offer comprehensive long-form audio content including audiobooks, podcasts and talk shows, as well as music-oriented video content including music videos, live performances and short videos.

 

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Social entertainment services allow our users to sing, watch and socialize on our platform. We deliver online karaoke services primarily through WeSing, which enables users to sing along from our vast library of karaoke songs and share their performances either in audio or video formats with friends. We also deliver music-centric live streaming services primarily through the “Live Streaming” tab on QQ Music, Kugou Music, Kuwo Music, WeSing, Kugou Live and Kuwo Live, providing an interactive online stage for performers and users to showcase their talent and engage with a diverse audience base.

Our revenues increased from RMB25.4 billion in 2019 to RMB29.2 billion in 2020, and further to RMB31.2 billion in 2021, and we recorded revenues of RMB6.6 billion (US$1.0 billion) in the first quarter of 2022. We achieved a net profit of RMB4.0 billion in 2019, RMB4.2 billion in 2020, RMB3.2 billion in 2021 and RMB0.6 billion (US$0.1 billion) in the first quarter of 2022.

OUR INNOVATIVENESS AND HOW IT CONTRIBUTES TO OUR LEADERSHIP

The innovativeness of our business is manifest in our position as an early mover and trendsetter in terms of both product and monetization innovations.

 

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Online music services. According to iResearch, we are among the first to introduce the idea of online music to the Chinese audience and first to have successfully deployed an online music subscription model. According to the same source, we are the first in China to offer online music services to over 100 million mobile MAUs. For nearly two decades, we have been spearheading major transformation within China’s online music industry — from launching one of China’s first online music services to introducing China’s first online music subscription model — all designed to fulfill our mission to enable people to create, enjoy, share and interact with music through technologies.

 

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Social entertainment services. According to iResearch, we are among the first in China’s online music and audio entertainment industry to offer online karaoke services. According to the same source, we are the first in China to offer online karaoke services to over 100 million mobile MAUs and currently operate the largest social entertainment services in terms of mobile MAUs within China’s online music industry.

 

•

Pioneer and leader in monetization. We are not only the first to have successfully introduced an online music subscription but have also over time developed innovative, multi-faceted monetization approaches which currently include online music subscription, sales of virtual gifts, advertising and premium memberships, among others. Such diverse monetization methods not only enable us to become the only large-scale, profitable music platform in China, but also lead to a sustainable business model that is highly resilient to industry changes.

According to iResearch, we have been able to launch new products earlier than our main competitor across many major product lines and outperformed them in terms of a number of operating and financial metrics. See “Industry Overview” for a comparison of the operating and financial performances of TME and other key market players. Being the industry’s first to market has given us tremendous first-mover advantages when it comes to understanding users’ needs and preferences and gaining their trust and mindshare. Such first-mover advantages, coupled with our continued dedication to innovations, have allowed us to achieve scale, build operational excellence, invest in advanced technologies, and nurture a massive and loyal user base that all come together to form a solid foundation for our long-term sustainable growth. Driven by our first-mover advantages and continued innovations, we have been leading the major transformation in China’s online music and pan-entertainment industry in the past two decades.

Our innovativeness is also demonstrated by the broad application of leading technologies driven by our continued investment in R&D. We have devoted substantial resources in R&D, as evidenced by the increasing R&D expenses of RMB1,159 million, RMB1,667 million, RMB2,339 million and RMB596 million (US$94 million) in 2019, 2020 and 2021 and for the three months ended March 31, 2022, respectively, representing approximately 4.6%, 5.7%, 7.5% and 9.0%, respectively, of our total revenues during the same periods. As we invested significantly in R&D, we have developed numerous innovative technologies, including AI-powered predictive content discovery model (“PDM”), song recognition technologies and proprietary sound effects, as well as an extensive portfolio of intellectual properties, all of which contributed to our ability to drive user base growth and engagement. According to iResearch, QQ Music is the first in China’s online music industry to adopt an AI-powered PDM with the highest accuracy among its peers. Our award-winning proprietary audio setting, Kugou Viper Sound, as well as QQ Music Super Sound and WeSing Super Voice audio settings, not only bring superior sound quality and a best-in-class listening experience to users, but also foster a large, growing online community for them to share user feedback about our sound effects. See “Business — Technology and Data Capabilities” for more information about our technologies.

 

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OUR STRENGTHS

Leading Platform Creating Value for China’s Music Entertainment Industry

As the largest online music entertainment platform in China, we recognize what comes with our scale is also more responsibilities to create value for everyone in China’s music entertainment industry. We highly value our users and continuously innovate to engage them. Over the years, we focus on bringing a personalized, engaging and interactive music experience to all music lovers. In the first quarter of 2022, we served massive base of 604 million online music mobile MAUs and 162 million social entertainment mobile MAUs.

 

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We help content creators showcase their artistry in music to the largest music community in China. Through our platform, we facilitate discovery and sharing of high-quality music and audio content. We value original works and help emerging musicians build their audience as they grow by providing them with tools to create and distribute their original works. Through innovative monetization models, we reward creativity by promoting broader industry awareness and copyright protection. Our Tencent Musician Platform helps musicians inspire and learn from their growing fan base and fulfill their aspirations through effective promotion, monetization and career enhancement. As of the end of 2021, the number of indie musicians on our Tencent Musician Platform reached 300,000.

Music is a connection to life and emotions, and encompasses great social values. We are committed to using music to inspire people to understand, care about and contribute to their communities. In June 2018, we launched our Tencent Music Charity Program, a program designed to pass the love and energy via music and achieve a bigger social value of music. The program is centered on an open platform and three strategies: caring for music, cultural heritage, and music education.

All-in-one Online Music Entertainment Destination

TME is an all-in-one online music entertainment destination, serving diverse and evolving music and audio entertainment needs of users for every moment in their everyday lives. Through relentless content and product innovations, we elevated our platform to offer a multi-dimensional experience across discovering, listening, singing, watching, performing and socializing, thereby delivering experiences that are visual, immersive, interactive, socially engaging and fun.

Listening and beyond. Users can discover and enjoy music and audio content for every moment — on your phone, in your car and more. We also offer a comprehensive range of features for users to enhance everyone’s discovery and listening experience, including superior sound effects, smart recommendations, music charts and interactive playlists.

Connecting people through music. Our platform was designed with social interactions in mind. Social features such as sharing, liking, commenting, following and virtual gifting are seamlessly integrated in our products. From singing a song to watching music videos and playing a music game with friends, we immerse our users in a socialized music and entertainment experience. Users can share what they listen to, what they watch, what they create and what they think across major social platforms such as Weixin or QQ.

Audio-to-video. We provide video content to bring an immersive audio-video experience to our users. We have been adding visual elements in sound tracks and audio books such as comics and surround sound. To enrich users’ experience, we also offer a vast library of music-oriented video content such as full-length music videos, short videos, behind-the-scenes footage, artist interviews, and music-focused variety shows.

By enabling an all-in-one music and audio entertainment experience, we are constantly broadening and deepening the bonding among users, content creators and us.

 

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Cohesive Content Ecosystem

We want our users to easily find the content they like. Over the years, we have built a content library covering music and audio across all major genres and formats. As of March 31, 2022, we were China’s largest music content library in terms of number of tracks, according to iResearch.

We work with an extensive network of content partners including domestic and international music labels, indie musicians, live streaming performers, and other content creators. We became a preferred partner to our content partners as we help them connect to China’s largest online music user base, stay committed to copyright protection, and provide them with valuable insights and resources to understand user preferences and drive monetization.

With technology, we invest in in-house original content production ranging from trend-setting original songs and music-oriented short videos to variety shows. Our dedication to cultivating indie musicians and promoting their original works further drives the organic growth of our content library. Our content offerings are complemented by massive user-generated content, including millions of online karaoke songs, short- and long-form videos, live streaming of music performances, user comments, and music and audio-related reviews and articles.

This cohesive content ecosystem enables us to continuously attract more content partners, expand our content offerings, and further drive user engagement.

Proven Monetization Capabilities

Our multi-faceted monetization model allows us to achieve growth and profitability at scale, while consistently promoting the development of China’s music industry.

We pioneered China’s online music subscription model and have achieved a massive scale. Our online music paying user base grew steadily from 27.0 million in the fourth quarter of 2018 to 80.2 million in the first quarter of 2022. The paying ratio of our online music services achieved sequential growth for 13 quarters, growing from 4.2% in the fourth quarter of 2018 to 13.3% in the first quarter of 2022.

With online music subscription as the backbone of our monetization model, we have diversified monetization including virtual gift sales which are seamlessly integrated into our social entertainment services. Users can send virtual gifts to show appreciation when enjoying a live music performance, providing performers with an effective way to interact with their fans and monetize their performance.

Innovative Technology

We constantly create value for our users and content partners through leading technology.

 

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Technologies enhancing user experience and engagement. Our powerful AI technology allows us to provide smart recommendations that best match users’ preferences. We have also pioneered a proprietary song recognition technology which allows users to discover a randomly heard track of music without having to know a single key word. Our proprietary song recognition technology achieved the highest accuracy rate globally. In the 2019 MIREX global competition, our song recognition technology broke the world record in the Audio Fingerprinting task with a hit rate of 90.8%. We also offer hundreds of proprietary audio settings that bring superior user listening experience, including our self-developed QQ Music Super Sound, Kugou Viper Sound and WeSing Super Voice. We have deployed a vocal-emotion-enabled AI reading technology to produce audiobooks, contributing to dozens of titles based on well-known literature content.

Technologies empowering content partners. We use technology to help our content partners on copyrights protection and efficient promotion. For example, our real-time content monitoring system scans our platform as well as other online content platforms to detect potential copyright infringement. In addition, we continuously train and optimize our predictive algorithms, to improve efficiency in content curation, distribution and promotion and accuracy of smart recommendations. QQ Music’s AI-powered PDM analyzes trending songs and musicians and valuable insights from users’ extensive discovery footprints on our platform to better understand evolving user preferences. The PDM model is able to accurately predict the popularity of music content and guide musicians to create content that truly resonates with music lovers, or enable efficient distribution of their works to gain popularity. In the MIREX competition, it set a new world record of “accuracy rate of predicting the genuine continuation of a music excerpt” at 91.6% in the Patterns for Prediction task.

Strong Management Team

With extensive experience and industry knowledge, our management team includes pioneers and leaders in the online music and audio entertainment industry in China. With their vision, we are capable of continuously making product innovation, spearheading music copyright protection, building strong partnerships with industry participants, and establishing an extensive online music and audio content library in China. Their success is manifest in our track record of sustainable financial performance, lasting leadership, as well as our contributions to the long-term success of China’s music and audio entertainment industry.

OUR STRATEGIES

Continue Product Innovations

We aim to relentlessly innovate our products and services to further enhance user experience and drive user engagement. We are working to build additional verticals in social entertainment such as audio live streaming and virtual interactive product offerings. We will continue to add more visual, interactive and social attributes to our products and introduce more ways for users to discover and enjoy music and audio content, interact with each other and have fun through immersive experience.

 

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Enrich Content Offerings

We aim to continuously enrich our content offerings by further expanding content partner network, enhancing in-house original content production capabilities, cultivating aspiring musicians, fostering users’ content creation, and exploring innovative content forms. For example, we leverage our PDM model, that enables forecasting and data mining for songs with blockbuster potential by determining intricate user preferences and analyzing melody, lyrics, voice and rhythms, to enable more cost-effective original song production. We will continue to enrich our users’ experience by expanding the breadth and depth of our content to include more types, genres and formats that cater to the diverse needs of our users and provide more relevant and trendy content.

Remain as A Preferred Partner

We strive to extend and deepen our collaborations with partners along the value chain and further invest in technology innovation to empower the online music and audio entertainment industry. We will leverage our industry resources to help content partners reach a boarder audience base and offer more comprehensive assistance in copyright protection, content production, promotion, career training as well as commercial realization. We are also committed to making our content and products more accessible in people’s everyday life. For example, we have expanded our music content coverage on IoT devices such as in-car audio systems, smart speakers and TV.

Strengthen Monetization Capabilities

We aim to drive user engagement by continuing to enhance products, content offerings and user experience across our platform. As engagement increases, we believe that monetization will follow. We enjoy a massive user base while the paying ratio of our online music services has further room to grow compared to the average paying ratio in the U.S. in 2021, according to iResearch. We believe there is significant monetization upside from growing our paid music user base. In addition to paid membership, we will further strengthen our monetization capabilities, including growing advertising services and diversifying monetization use cases within the social entertainment services. Building on our successful track record, we will continue to explore new monetization models that are complementary to our overall user experience.

 

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OUR HISTORICAL PERFORMANCE

During the Track Record Period, our revenues derive from (i) online music services and (ii) social entertainment services and others. The following table sets forth a breakdown of our revenues, in absolute amounts and as percentages of total revenues, for the periods indicated.

 

		For the Year Ended December 31,																								For the Three Months Ended March 31,
		2019								2020								2021								2021								2022
		RMB				%				RMB				%				RMB				%				RMB				%				RMB				US$				%
		(in millions, except for percentages)
																										(unaudited)								(unaudited)
Revenues
Online music services			7,152				28.1				9,349				32.1				11,467				36.7				2,749				35.1				2,616				413				39.4
Social entertainment services and others			18,282				71.9				19,804				67.9				19,777				63.3				5,075				64.9				4,028				635				60.6
Total revenues			25,434				100.0				29,153				100.0				31,244				100.0				7,824				100.0				6,644				1,048				100.0

Our revenues generated from online music services steadily increased from 2019 to 2021, driven by our continuous efforts in improving content, product features and user experience. Our online music paying users had more than doubled from 33.7 million in 2019 to 68.6 million in 2021 and increased significantly from 60.9 million in the three months ended March 31, 2021 to 80.2 million in the three months ended March 31, 2022, demonstrating our success in cultivating users’ willingness to pay for quality music content and creating long-term value for content creators and China’s music industry as a whole. Our online music services revenue slightly decreased by 4.8% from RMB2,749 million in the three months ended March 31, 2021 to RMB2,616 million (US$413 million) in the same period in 2022, mainly due to a decrease in advertising revenues and, to a lesser extent, a decrease in sublicensing revenues as result of restructuring of agreements with certain music labels. The decrease in advertising revenues were mainly due to the regulatory restrictions on advertising format and downturn in market and economic conditions amid the resurgence of the COVID-19 in some major cities in China. Specifically, since the second half of 2021, the MIIT has launched a series of regulatory campaigns which imposed certain restrictions on splash ads in order to improve user experience on online platforms, including restricting the use of splash ads to redirect user traffic and allowing users to skip splash ads. Such restrictions have generally compromised advertising effectiveness of splash ads on China’s online platforms, which in turn led to a decrease in our advertising revenues. During such periods, our subscription revenues still recorded a strong growth of 17.8% from RMB1,692 million in the three months ended March 31, 2021 to RMB1,993 million (US$314 million) in the same period in 2022, which was driven by a strong increase in the number of paying users by 31.7%. For information about the impact of termination of exclusivity on our sublicensing revenue, see “Recent Developments — Recent PRC Regulatory Developments — Anti-Monopoly Law Enforcement.”

 

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Our revenues generated from social entertainment services and others increased by 8.3% from RMB18,282 million in 2019 to RMB19,804 million in 2020, primarily driven by the growth in revenue from our online karaoke services, as well as live streaming services. Our revenues generated from social entertainment services and others experienced year-over-year decrease in 2021 and in the three months ended March 31, 2022, mainly due to increased market competition and weakened macroeconomic environment that has negatively impacted our users’ consumption on our platform. China’s music-centric social entertainment services market in which we operate is rapidly evolving and increasingly intensified. In recent years, China’s music-centric social entertainment services market has been characterized by shifting user needs and preferences, increasing competition, and heightened regulations. In particular, we are facing increased competition from not only other online music platforms but also providers of new content formats, such as audio and short-form videos, which has and is expected to continue to, put pressure on our short-term growth in terms of the overall user base and monetization of our social entertainment services. For further details, see “Industry Overview — China Music-Centric Social Entertainment Services Market Overview — Competitive Landscape,” and “Industry Overview — China Music-Centric Social Entertainment Services Market Overview — Emerging Trends, Challenges & Opportunities in China’s Music-Centric Social Entertainment Services Market.”

The following tables set forth our key operating metrics for the periods presented:

 

		For the Year Ended												For the Three Months Ended
		December 31,												March 31,
		2019				2020				2021				2021				2022
Mobile MAUs(1) (in millions)
Online music services			653				644				622				615				604
Social entertainment services			240				240				203				224				162
Paying users(1) (in millions)
Online music services			33.7				49.4				68.6				60.9				80.2
Social entertainment services			11.6				11.7				10.3				11.3				8.3
Monthly ARPPU(1) (RMB)
Online music services(2)			8.8				9.4				8.9				9.3				8.3
Social entertainment services(3)			131.3				141.1				160.0				149.7				161.8

 

Notes:

 

(1)	For definitions, see “Glossary of Technical Terms.”

(2)	The revenues used to calculate the monthly ARPPU of online music services include revenue from subscriptions only. The revenue from subscriptions for the periods indicated was RMB3,563 million, RMB5,560 million, RMB7,333 million, RMB1,692 million and RMB1,993 million (US$314 million), respectively.

(3)	The revenues used to calculate the monthly ARPPU of social entertainment services include revenue from social entertainment and others, including advertising services provided on our social entertainment platforms.

For online music services, we continued to strengthen the engagement of our core user base by enhancing original content production, expanding and diversifying music content library, and launching innovative product features. These efforts led to a continued increase in the number of paying users over time during the Track Record Period. We experienced a gradual decrease in our already-massive base of mobile MAUs during the Track Record Period, primarily due to churn of our users. As advised by iResearch, it is normal that once an online platform reaches a substantial scale, some users could from time to time be drawn to other forms, content and services of online music and entertainment as a result of increasingly intensified competition from other platforms. Our historical loss of mobile MAUs was mainly due to increasing competition within the online music and entertainment industry as users may be constantly looking for new content, product formats and diversified user experiences. In addition to evolving competition dynamics among platforms, the churn of users on a scaled platform is a common industry phenomenon faced by all key players in China’s online music market, according to iResearch. In light of intensified competition, at the current stage, we place more emphasis on the quality of the growth of our online music services (in terms of paying ratio and paying users) than the growth rate of our overall user base, and we strategically slowed down our investments in user acquisition. We believe that what distinguishes us from our peers is our monetization potential, capability and proven track record, which are largely manifest in our ability to continuously increase our number of paying users who are willing to pay for high-quality music content on a subscription basis.

 

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For social entertainment services, we experienced a decrease in mobile MAUs and paying users of our social entertainment services during the Track Record Period, primarily due to increased market competition. Going forward, we will continue to improve our competitiveness through ongoing product innovations and new initiatives in social entertainment, such as audio live streaming and virtual interactive product offerings.

For additional information, see the section headed “Financial Information.”

 

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A UNIQUE ONLINE MUSIC ENTERTAINMENT EXPERIENCE

We have four major apps — QQ Music, Kugou Music, Kuwo Music and WeSing — through which we provide online music and social entertainment services to address the diverse music entertainment needs of a massive audience in China. We also offer Lazy Audio, our dedicated long-form audio app as an effective complement to our flagship music-centric mobile apps. These apps are highly complementary to each other as they focus on different content categories and target diversified groups of audience. Over the years, we have purposely built them to serve the broad user demographics across China with content curation and recommendation that suits their differentiated tastes and preferences. Specifically, within our online music apps, QQ Music offers a comprehensive range of music content, focusing on popular artists and users in metropolis cities in China. In contrast, Kugou Music has a mass market focus which results in user penetration in broader geographies, while Kuwo Music primarily focuses on selected genres and segments, such as DJ mixes and children’s songs.

Set forth below are the screenshots of these major apps.

 

From a content library perspective, QQ Music, Kugou Music and Kuwo Music are substantially integrated as they share access to all of the tracks that we license from music labels. At the same time, we have a high degree of user overlap between our online music services and social entertainment services as a result of the complementary nature of our products that organically direct user traffic from our online music services to our social entertainment services, and vice versa. We also adopt a holistic approach to operate our online music services and social entertainment services in terms of content sharing, user engagement, technology development and support, and monetization.

 

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Besides our major apps, we also offer certain ancillary products, services and initiatives designed to engage both users and content creators through diversified music formats and mediums. All of these form part of our broader music entertainment ecosystem, which essentially distinguishes us from our peers, especially those who currently offer a single music app with limited content formats and mediums. For example, we offer 5Sing, an online service that enables lyricists, songwriters and musicians to connect, communicate and trade original music works with each other. We also offer TME Live, our proprietary online-and-offline music concert initiative, as well as Tencent Musician Platform, an online service for selected aspiring musicians to upload original music content to our platform that can be streamed and downloaded by our vast user base. Different from our major music apps which focus on serving individual users, these ancillary services and initiatives were developed to serve our large, growing network of content creators, including both established and emerging artists. Through these ancillary services and initiatives, we are able to continuously diversify our content offerings, strengthening the bonding between artists and their audience. See “— Our Content Strategies — Cultivating Aspirating Artists” for more information about Tencent Musician Platform. We currently do not rely on these ancillary services and initiatives to generate any material revenues or profits. However, by allowing users to listen, sing, watch and share music in different ways and in a variety of use cases, they greatly complement our major music apps and form an essential part of the all-in-one music and audio entertainment ecosystem that offers a one-stop experience to all users.

Online Music Services

We deliver our online music services primarily through QQ Music, Kugou Music and Kuwo Music, each of which has attracted a large and avid user base. We purposely built these mobile apps to serve the different user demographics across China with music that suits their differentiated tastes and preferences. Through QQ Music, we offer a comprehensive music library and a broad range of music-oriented video content, with a focus on popular artists and leading hits for younger music lovers in metropolis cities in China. Kugou Music offers a broad set of entertainment features, with a mass market focus and strong user penetration in broader geographies. Kuwo Music primarily focuses on selected genres and segments, such as DJ mixes and children’s songs, to cater to users’ diverse music preferences. While maintaining complementary focuses of content curation and recommendation, QQ Music, Kugou Music and Kuwo Music are substantially integrated in terms of our comprehensive content library as they share access to the tracks that we license from music labels.

 

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Users may use basic features on QQ Music, including streaming, without logging in. To purchase subscription packages and enjoy additional features, such as creating personal playlists, users need to log into QQ Music, which requires a Weixin or QQ account. Users may register with and access our online music services on Kugou Music and Kuwo Music using their mobile phone numbers, or through their Weixin or QQ accounts.

We make enjoying music simple and fun through discovery and personalization:

 

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Listening experience and beyond

 

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Personal homepage. Users have their own customized homepages where they can manage their playlists and access recently downloaded and/or streamed music content. It also provides various functions, such as following artists, purchasing subscription packages, tracking activity data and changing app themes.

 

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Advanced music player. We offer various functions to enhance user experience, such as sound quality optimization, shuffle play, day/night modes and music caching. We have also developed a variety of audio settings that fit different songs, environments, moods and output devices. Our cloud-based services enable users to synchronize their playlists on different devices. A wide selection of proprietary sound effects is at users’ option, catering to their diverse music tastes and preferences. For instance, Kugou Viper Sound innovatively developed a three-dimensional sound effect to resemble music live, offering users a novel and fun music listening experience. For those users who prefer a simpler music listening experience, we offer QQ Music Lite which comes with a core set of music streaming functions with a minimalistic user-friendly interface design.

 

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Attractive video content. To make music listening more fun, we added visual elements to our content offerings, allowing users to enjoy a visual feast while playing a song. For example, by embedding music videos in music streaming pages, we created video-based music products, further catering to the needs of users for consuming music videos and bringing in a more immersive audio-video experience. Additionally, as we deepen our collaboration with Weixin Video Accounts, we will continue to enrich the music video content on both TME platforms and Weixin Video Accounts, and our musicians are continuously benefiting from such in-depth collaboration in music promotion.

 

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Music discovery

 

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Search. Users can discover music content through our powerful search engine. They can search music content across playlists, music charts, artists and genres. Our award-winning song recognition tool allows users to discover a randomly heard track of music without having to know a single key word.

 

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Smart recommendations. With our algorithms that intelligently inform us of our users’ evolving music tastes, we recommend music to users as part of their search as well as through daily songs, new songs, music radios and users’ favorite songs based on what they listen to. We have been improving the efficiency in content curation and accuracy of smart recommendations by utilizing deep learning and data analytics, which has resulted in a substantial increase in average daily streams and user engagements for both our online music and social entertainment services. As we expand our content library, we continue to improve our knowledge about music and our users’ preferences by refining our music metadata tagging. This allows us to further enhance our music discovery and recommendation capabilities.

 

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Music charts. Committed to promoting healthy and sustainable industry development, we have compiled a variety of music charts across different genres and languages that are widely recognized by music lovers, artists and labels.

 

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Curated playlists. We offer curated playlists covering a wide variety of genres, themes, languages and moods. We are also adapting to the preferences of younger music users by adding genres such as urban, electronic dance music (EDM), animation, comic and gaming, as well as Chinese Ancient Style. Our extensive playlist offerings include curated playlists created by our music editorial team, machine-generated playlists, and user-generated playlists. We also encourage users to create their own playlists to share, thereby further amplifying their exposure within our online music community. Our interactive playlists can be jointly built and edited by multiple users, allowing users to break through the barriers of time and place while dynamically integrating listening with social interaction.

 

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Official music accounts. Users can subscribe to their favorite official music accounts operated by both established and aspiring artists, columnists and other music industry key opinion leaders. Through their official music accounts, owners can upload and share songs, videos, literature, photos and other music-oriented content.

 

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Social experience

 

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Facilitate interactions among friends. Our platform delivers a superior and unique social music experience. Users can share their songs or playlists via Weixin or QQ and other major social platforms. While listening to a song, users can interact with others listening to the same song by posting and exchanging comments. They can also create their own lyrics posters and share them with friends.

 

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Help users connect with those with shared interests. We provide users with various exciting ways to interact with their favorite artists, including enjoying digital singles and albums released by artists. As we aspire to connect people through music, our social and community-building efforts also focus on interactions among not only friends and families but also strangers with a shared passion for music. For example, we offer Putong Community, an innovative feature we introduced in QQ Music, to enable music lovers with common interests to socialize, interact and support their favorite artists. We have also launched Putong Planet, which allows users to swipe through visualized user profiles and interact with those who are listening to the same song. Besides, our Leap of Heart function enables one user to listen to songs another user is listening to with just a simple, one-click. Furthermore, we have upgraded the synchronized listening feature in QQ Music to encourage interactions among friends.

 

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These efforts all enable users to stay connected with their friends and even strangers through music, to discover music that is trending around them and to share music with those they care about. This in turn allows us to gain useful insight to improve music discovery and recommendations for our users.

 

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Our Long-form Audio Offerings

We provide extensive, diverse long-form audio content offerings covering a broad range of selected genres and segments such as audiobooks, podcasts, cross talks and talk shows. In April 2020, we launched Kuwo Changting, our dedicated long-form audio mobile app, and have been quickly rolling out audio channels and content offerings within QQ Music and Kugou Music. As part of our long-form audio content strategy, in March 2021, we completed the acquisition of 100% equity interest of Shenzhen Lanren, which operates Lazy Audio, a well-established audio platform in China. In April 2021, we integrated Kuwo Changting with Lazy Audio, and re-imaged the brand Lazy Audio (formerly branded as Lanren Changting during the relevant periods). Lazy Audio is designed to cater to avid audio users by providing an immersive and interactive audio experience through comics and surround sound.

As we grow our long-form audio offerings, we have designed our products to unlock significant value from both music and standalone long-form audio application. This approach allows us to leverage our massive existing music user base to drive penetration of our long-form audio content offerings.

Social Entertainment Services

As users are increasingly looking for a variety of entertainment that goes beyond listening to music on our platform, we offer users simple and entertaining ways to sing, watch and socialize, whether it is with a friend, a group of friends, or other users on our platform. Our music-centric social entertainment services include online karaoke social community and live streaming of music performances.

Online Karaoke Social Community

Karaoke is a popular way of enjoying music in China, whether at a weekend party, a family event or a simple social gathering. This is what inspired us to introduce our online karaoke social community in 2014—to make it easier for users to sing and have fun with friends. Our online karaoke social community is a platform for users who want a simple stage to share their love of music and singing, or a springboard to launch their careers as the stars of tomorrow.

We deliver online karaoke services primarily through WeSing, China’s leading online karaoke social community, as well as the “Sing” function on Kugou Music. We currently offer millions of karaoke songs covering a broad range of genres, and we continue to review and update our karaoke song library to keep it fresh, current and popular. Over these years, we have continued to establish WeSing as a social entertainment platform with singing at its core. Our focus is to engage users by demonstrating the power of singing in socializing, celebrating and supporting our community in a meaningful way, and creating tools that deliver a more personalized and enjoyable singing experience. We currently require users to register with and access services and functions on WeSing using their Weixin or QQ accounts, as WeSing is primarily used by users to socialize with their friends on Weixin or QQ through music. Such linkage between WeSing and Weixin or QQ has in turn also enriched Tencent’s content ecosystem by providing Weixin or QQ users with convenient access to our content. In 2019, we introduced the WeSing Lite app with streamlined functionality designed to attract users who may appreciate a simpler interface.

 

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Users can sing along from our vast library of karaoke songs and share their performances, either in audio or video formats, with friends, mostly with users already connected on Weixin or QQ. Karaoke songs recorded by users significantly augment our user-generated music content library.

WeSing has functions and features designed to drive user engagement, social interaction and entertainment, including:

 

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Singing features. Users can record their karaoke songs in audio and video formats. They can not only sing alone, but also sing duets with celebrities or other users and then make a complete song to share with their friends. Users also receive a system-generated assessment of their performance which helps them continue improving their singing. In addition, users may edit recordings of karaoke songs with a large selection of special audio and visual effects, or record songs at offline mini-KTV booths and share their performances online. To make the singing functions more accessible to mass users and improve recording performance and online singing experience, we have continuously upgraded the audio and video recording tools, including multi-genre remix, auto-tune and quick sing, making it simpler and fun for users to create and publish recordings. We have also improved the chorus functionality to allow even the shyest user to join a chorus while retaining their anonymity by not displaying their face.

 

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Virtual karaoke rooms. Users can create virtual karaoke rooms and invite their friends or others to join an online karaoke party anytime and anywhere. In a singing room, users can sing and interact with each other by voice and text chatting, sending virtual gifts and holding sing-offs for most likes and gifts. Our Friend Karaoke Room also enables families and friends to sing, chat, play and socialize, bringing the offline karaoke experience online for our users to enjoy real-time social interactions. We have also upgraded WeSing’s online karaoke rooms to offer a broader suite of online singing experience, including different party sizes ranging from solo and duet to small and large groups, as well as catering to different needs, such as singing-on-demand, sing along on demand, singing practice and cross-room activities.

 

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Online singing groups. Users can discover and join a larger online singing group of people sharing common music interests. Online singing groups provide users with a great way to create online music communities, meet new like-minded friends, improve their singing performances and have fun socializing online. We also introduced an online service model featuring on-demand vocal accompaniment. This effectively mobilizes karaoke stars on the platform with potential commercialization opportunities to reward their singing talent.

 

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Live performance. Users can stream their singing performance through interactive live streaming sessions where users can interact with others by chatting and giving virtual gifts.

 

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Value-added services. While users may access our basic karaoke functions free of charge, they can also purchase virtual gifts to send to their favorite singers and subscribe for memberships that come with value-added functions, such as higher soundtrack resolution, additional app themes and access to singing tutorial programs.

 

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Multi-media content enrichment. We use full-screen videos for our user interface design on the recommendation page to make content browsing more immersive and engaging. We also enhanced the recommendation algorithms for greater content exposure and interaction experience. In turn, such technology improvements have incentivized users to publish more content, generating a virtuous cycle for users to create, publish and share content on the platform.

 

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Content creation. We have continued to popularize the music creation process within WeSing, encouraging more users to become content creators. We also provide users with a virtual stage background and avatar for video recording, as well as the option to create a personalized short video by simply recording their voices with a semi-finished video supplied by WeSing.

Live Streaming of Music Performances

Live music performances provide real-time interactions compared to recorded content. They can be exciting, exhilarating and engaging. Through technology, online live streaming has become an emerging entertainment alternative catering to millions of China’s music lovers. This motivated us to provide a venue for performers to express themselves, share their creative work and for audiences to enjoy a completely different, interactive, music entertainment experience.

We offer live streaming of music performances primarily through the “Live Streaming” tab on QQ Music, Kugou Music, Kuwo Music, WeSing, Kugou Live and Kuwo Live. Having these multiple live streaming platforms built in our core music apps allow us to organically attract the massive online music user bases of each of our music apps to our live streaming offerings and seamlessly serve their diversified social entertainment needs for visual and interactive content. Professional artists and other performers alike can stream their singing and other performance to a vast online audience, fostering a vibrant online social music entertainment community.

We offer users the option to register with and access our live streaming services using their Weixin or QQ accounts. Alternatively, users may also register with and access our live streaming services using their mobile phone numbers, without Weixin or QQ accounts.

Our live streaming platforms cultivate an engaging and interactive environment for both the live streaming performers and the audience to create, discover, socialize and have fun together, mainly featuring the following:

 

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Music-centric live streaming content. Our live streaming content features a broad range of performance categories such as singing, instrument playing and DJ performances by both professional artists and other performers. Most of our live streaming users also use our online music or online karaoke services. Our data analytics and AI technology enable us to provide recommendations of relevant live streaming content based on what our users are listening to or singing on our platform. For example, when a live streaming performer on Kugou Live performs a song, a message bubble pops up instantaneously on Kugou Music notifying users listening to the same song. This allows users to seamlessly access this performer’s live streaming sessions on Kugou Live. As an integral part of our overseas expansion strategy, we will seek to bring our quality live streaming content to international users across geographies.

 

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Music events and talent shows. To further diversify our live streaming content offerings, we offer virtual concerts performed by professional artists as well as music events, music variety shows and fan meetings on our live streaming platforms to allow our users to support and interact with their favorite artists through various ways.

 

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Social features. Our social features make everyone a part of the show. Performers and users interact in various formats, such as voice and text chatting, video chatting, rating a performer’s performance and sending virtual gifts. On our platforms, live streaming performers can engage in a variety of real-time singing and performance contests against each other, where users can send virtual gifts to their favorite performers. Users can also request to have a favorite song performed by a live streaming performer by sending a virtual gift. At any time during a live streaming session, users may choose to follow a performer they adore to receive notifications of future performances.

 

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New forms of interaction. We bolster social and young attributes by adding new forms of content such as mini live-streaming reality shows and new features such as universal duet that encourage users to interact. In the fourth quarter of 2021, we launched China’s first virtual music carnival, TMELAND, and hosted its first online music festival on the New Year’s Eve in an immersive virtual setting. At TMELAND, users across our different platforms can use their personalized 3D avatars to socialize with each other in a variety of digital scenarios such as virtual live streaming and virtual concerts, immersing themselves in a music entertainment experience that merges the real and virtual worlds.

We encourage our live streaming performers to sing and engage in other music performance on our platform. Our live streaming platform becomes a large stage for performers to captivate and engage audience with similar interests and easily access attractive revenue opportunities, enabling them to develop their artist image and pursue their goals of becoming popular artists. Live streaming performers on our platform include professional artists, aspiring performers as well as ordinary people who want to share their music.

We seek to establish and maintain stable, mutually beneficial relationships with live streaming performers. In particular, as part of our content strategies, we nurture promising live streaming performers and help them reach a wider audience and make a living from their performances. We provide them with performance training and promotion support to increase their exposure. Our platform further provides a differentiated way for live streaming performers to engage with their audiences and reach a larger audience base to raise their profile in the industry.

We help popular live streaming performers release new singles and albums. This not only enriches our comprehensive music content offerings but also attracts more traffic to both of our music and live streaming services, increasing user engagement and loyalty on our platform.

 

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Live streaming performers are required to enter into a cooperation agreement with us. Such agreements generally contain provisions that require the performer to live stream on our platform with typically a one-to-three-year term. We have a revenue sharing model in which the performers (and their talent agencies, if applicable) share with us a percentage of the virtual gift sales generated from their live streams.

Other Music Services

We offer other services to drive user traffic, deepen user engagement and increase monetization. Such services primarily include (i) sales of music-related merchandise, including Kugou headset, smart speakers, WeSing karaoke microphones and Hi-Fi systems, (ii) services that help smart device and automobile makers build and operate their branded music services on their devices and vehicles, and (iii) online music event ticketing services.

In order to provide users a consistent and cohesive listening experience, we started to forge Internet of Things (IoT) partnerships with leading manufacturers of cars, smart speakers and smart watches in 2019, which provided further channels for user acquisition. As a new music content consumption channel, IoT enhances our ability to effectively roll out and promote new music content to a wider audience in a broader set of use cases in users’ daily lives, making our services more accessible and more convenient to our users. We also expanded our coverage of a broader set of music usage scenarios, integrating with smart speakers, in-car audio systems and TV and making inroad in the public performance market.

OUR CONTENT

We are dedicated to building the most comprehensive and up-to-date content library covering our users’ favorite music and audio content across both genres and formats.

Diverse Music and Long-Form Audio Content Library

We offer a diverse range of professional as well as user-generated recorded and live music content and long-form audio content across various formats. This content generally spans five different types:

 

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Songs. We have China’s most comprehensive music library, according to iResearch, with over 90 million music tracks in total as of December 31, 2021.

 

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Features songs performed by both established and aspiring artists in China and around the world.

 

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Underpinned by a comprehensive original content production system leverages our technology capabilities and deep understanding of music as well as internal and external resources to systematically create, evaluate and promote music.

 

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Represents a variety of themes such as latest top hits, internet hits, time favorites and movie soundtracks.

 

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Covers a broad range of music genres, including pop, rock, indie, hip hop, R&B, classical, jazz and electronic music in various languages including Mandarin, Cantonese, English, Korean and Japanese.

 

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Categorized by listening habits, settings and moods, such as workout, travel, study and work, relaxation and many more.

 

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Adapts to the preferences of younger music users by covering a wide range of genres such as urban, EDM, animation, comic and gaming, as well as Chinese Ancient Style.

 

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Live streaming of music performances. Professional artists along with aspiring and other performers stream music and other performances in real time to our online audiences. These live streams allow users to experience and enjoy live music performances and interact with the performers in a variety of ways. Additionally, we offer live streaming of more professionally organized online concerts and music events for more established artists.

 

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Recorded video and audio. Various recorded music-oriented video content, such as full-length music videos, short videos, both professionally- and user-generated, behind-the-scenes footage, artist interviews, music-focused variety shows and music awards shows, as well as audiobooks, podcasts and talk shows covering a diverse set of topics on children, education, history, and humanity, among other things.

 

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Karaoke songs. Millions of online karaoke songs and the related user comments, which further expand the breadth of our music content offerings, enhancing our user experience and engagement.

 

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Reviews and articles. We supplement our music content offerings through an enormous library of reviews and articles about music and artists, written or curated by our in-house editorial team. We place links to the featured music in the articles to provide users with even more choices of content.

Our Content Strategies

Partner with Music Labels and Leading Industry Players

Currently, we focus on licensing top hits and premium content from major domestic and international music labels for a broad audience base. All the tracks that we license from music labels are generally available to users across our online music apps and, to the extent permitted by the terms of our licensing agreements with the licensors, our social entertainment products, except under certain circumstances where the artists or rights owners require us to publish their content under specific subscription packages or in a specific format. See “– Content Sourcing Arrangements.”

Given the reach of our platform and our ability to help users discover music, we have become one of the most preferred and effective platforms for music labels and artists to gain exposure to and gauge the popularity of their music with their audience base. Over the years, we have developed long-term relationships with a broad range of music labels including major domestic and international labels that provide us valuable opportunities to collaborate on new album releases, music events and other initiatives. We also collaborate with established artists and major music labels to promote and release digital albums for our massive user base.

 

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We are continuously diversifying across content type, genres and formats on our platform. Additionally, while broadening our offering of copyrighted music, we have also been working closely with industry participants, artists and other partners to create and produce more differentiated content, and co-produced dozens of chart-topping songs across gaming, film, literature and comic categories.

We also seek to deepen our partnerships with the broader Tencent ecosystem to create new music entertainment experiences and content. For example, in 2021, we deepened collaboration with Weixin Video Accounts in order to enrich the music video content on both our platforms and Weixin Video Accounts and leverage Weixin to expand our promotional capabilities. Additionally, users may send songs from our music library directly to their friends on Weixin, or update their Weixin status when they sing or finish a recording on WeSing, sharing the experience with their Weixin friends.

Enhance In-House Original Content Development Capabilities

We continue to invest in original content production to meet user demands for diverse forms of music entertainment. We have established a comprehensive set of original content production capabilities that leverage our technology capabilities and deep understanding of music as well as internal and external resources to systematically create, evaluate and promote music. Our 5Sing platform, for instance, has become a vibrant online community for lyricists, songwriters and musicians to pair, communicate and trade, and together they contribute to more captivating original music content. We also leverage our proprietary PDM model, that enables forecasting and data analytics for songs with blockbuster potential by determining intricate user preferences and analyzing melody, lyrics, voice and rhythms, to enable more cost-effective original song production. See “— Technology and Data Capabilities — Technology” for details. Furthermore, we have developed a number of content promotion tools that integrate our internal and external promotion resources, providing a one-stop service to help artists and songs reach the targeted audience and gain popularity. Powered by these advanced tools and technologies, our artists have created quality and popular works, serving a wide range of users’ tastes and adding a great complement to our content library.

Cultivate Aspiring Artists

We are not just a platform for established artists but also one for discovering and cultivating rising music talents. We provide opportunities for newer generations of aspiring artists to fulfill their ambitions to sing and perform by supporting them in areas such as content curation, marketing, promotion, monetization and career training. We are proud to have promoted the singing careers of many new music stars who got their start on our platform. We also work closely together with music labels to identify and cultivate aspiring artists on our platform.

 

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Cultivating original works and enriching the indie musician ecosystem through our Tencent Musician Platform leads to our content differentiation. Tencent Musician Platform is our online service for selected aspiring musicians to upload original music content to our platform that can be streamed and downloaded, demonstrating our strong capability in incubating talented musicians and bringing their original works to hundreds of millions of music lovers in China. We support our indie musicians with useful tools and collaborative opportunities to realize their full potential, and create, grow, engage and monetize their art and audience base. We do this in part by providing them access to valuable resources, from song production and domestic and overseas promotion, all the way to artist and repertoire development, incentive plans, performance resources, copyright protection and career training. For example, the theme song of our QQ Music’s 2021 year-end music review, for which we managed the entire production, release and promotion process, achieved over 20 million first-day streams, setting a streaming debut record within the indie musician category. In 2021, we also introduced a feature that allows artists to easily publish video content simultaneously across various TME and Tencent platforms, such as Weixin Video Accounts, QQ Music, Kugou Music, Kuwo Music and WeSing, making it easier for musicians to reach a broader audience. We believe these attractive cross-platform opportunities differentiate us from other online music platforms.

 

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Tencent Musician Platform has also established the sustainable and diverse monetization models for musicians and the industry. In 2021, we launched an upgraded 100 Million Yuan Incentive Plan, which incentivizes eligible musicians to collaborate with us in music creation, as well as provide comprehensive incentive mechanisms to help high-quality content and artists gain exposure across our platforms.

Our ongoing support to indie musicians resulted in a growing number of indie musicians on our platform. By the end of the fourth quarter of 2021, the number of indie musicians on the Tencent Musician Platform reached 300,000.

Foster Users’ Content Creation

To further extend the breadth of our content offerings, we allow users to upload content in the forms of karaoke songs, live streaming performance, short-and long-form videos and other formats of music-oriented content. This user-generated music content further engages users and enhances their experience, both as content creators and as audience.

We leverage our data analytics and AI technologies to recommend content generated by karaoke singers and live streaming performers to help increase their exposure.

Furthermore, we added additional video and long-form audio formats to our content offerings and continued to launch social media initiatives and additional lite versions of our apps to attract a broader group of users. We also developed innovative ways for users to enjoy personalized content by consistently improving our music content tagging process and analyzing our platform’s data repository to better fulfill users’ music tastes and preferences. We believe that all of these initiatives are strategic, long-term investments that will improve our user experience, attract more customers to contribute to more user-generated content on our platform, driving a virtuous cycle for sustained growth and monetization.

Explore Innovative Content Forms

We constantly innovate brand-new forms of content that our users love. For example, we leverage TME Live to create new online-merge-offline music scenarios. In terms of its efforts online, TME Live held 56 diverse live performances throughout 2021, including the 2021 Tomorrowland. TME Live’s series of electronic music performances sponsored by e-commerce, automotive and other advertisers, helped brand owners dynamically resonate with users and maximize their brands’ emotional impact, while simultaneously fostering new business models. TME Live collaborated with the Tencent Musician Platform to showcase live performances in key cities via the 2021 Force Stage Plan, offering talented musicians the chance to participate in nationwide tours to reach a broader audience both online and offline.

 

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In addition, in the fourth quarter of 2021, we launched China’s first virtual music carnival, TMELAND, and hosted its first online music festival on the New Year’s Eve in an immersive virtual setting. Participants flocked to the event to party virtually with their friends and world-renowned DJs such as Vicetone, Luminn and DEXTER KING in the form of brand-new 3D avatars. With personalized 3D avatars, users across our different platforms such as QQ Music, Kugou Music and Kuwo Music can socialize with each other in a variety of digital scenarios such as virtual live streaming and virtual concerts, immersing themselves in a music entertainment experience that merges the real and virtual worlds.

Content Sourcing Arrangements

Content is the foundation of our platform. We license from, and pay royalties to, the following major rights holders to obtain the vast majority of the music content offered on our platform.

 

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Music labels and music copyright owners

 

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We have strong partnerships with a wide range of music labels and other copyright owners. We license musical recording rights and/or music publishing rights underlying music content mainly on terms ranging from one to three years from domestic and international music labels.

 

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We pay for music labels for licensed music content based on licensing fee and revenue-sharing incentive royalties. Under such fee arrangements, the amounts of licensing fees and incentive royalties depend on multiple factors including the type of content, the popularity of the performers, as well as our relationships with the licensors. Payments under the licenses are generally made in installments throughout the duration of the licenses.

 

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Our licensing agreements with music labels and music copyright owners are on a non-exclusive basis.

 

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We have arrangements with other online music platforms in China to cross-license our respective licensable rights in musical works. We believe these arrangements benefit not only particular market players like us, but also the industry at large by increasing cooperation in copyright protection and allowing users to access more songs across different platforms.

 

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The licensing agreements will specify whether we have the right to sublicense the content we source from music labels and copyright owners.

 

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Our licensing agreements with music labels and copyright owners generally expire upon the end of the term, which typically range from one to three years, unless otherwise terminated earlier pursuant to the relevant provisions in certain circumstances, such as a material breach of contract.

 

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Individual artists

 

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We also enter into licenses with individual artists or their agencies to bring a broader and more diverse range of content offerings on our platform. See “— Our Content Strategies — Cultivate Aspiring Artists” for more information about Tencent Musician Platform, an online service designed to nurture aspiring individual artists.

 

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We typically pay these individual artists performance-based licensing fees. We may also make prepayments and/or pay fixed content fees to certain individual artists, depending on various factors including their historical performance and popularity among users.

 

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The licensing agreements between us and individual artists are either on a no more than three years’ exclusive basis, or on a non-exclusive basis.

 

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Subject to the contract terms with specific individual artists, we may sublicense the relevant individual artists’ content to other parties.

 

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The agreements between individual artists and us generally expire upon the end of the term, which is typically three years, unless otherwise terminated earlier pursuant to the relevant provisions in certain circumstances, such as a material breach of contract.

 

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Live streaming performers and their agencies

 

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User-generated content from live streaming performers (and their talent agencies, if applicable) is covered by revenue-sharing arrangements, under which they are entitled to a percentage of the revenue generated from sales of virtual gifts attributable to their performance on our live streaming platforms. Payment to live streaming performers (and their talent agencies, if applicable) is typically settled periodically. We generally seek to maintain the revenue sharing ratio at a level that we believe is comparable to those of our peers in the industry. According to iResearch, such revenue-sharing arrangements with live streaming performers on our platform (and their talent agencies, if applicable), including the revenue-sharing ratios, are generally in line with industry norm.

 

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Our agreements with live streaming performers (and their talent agencies, if applicable) will specify certain qualitative and quantitative requirements that they must meet in order to be entitled to their share of the revenue.

 

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Live streaming performers (and their talent agencies, if applicable) own the intellectual property rights of the live streaming content they create, and we are permitted to use such content on our platforms pursuant to our agreements. In addition, users uploading user-generated content on our platform typically agree to grant us the associated copyright of such content. For additional details concerning our copyright protection with respect to user-generated content, see “– Intellectual Property – Copyrights” and “Risk Factors – Risks Related to Our Business and Industry – We allow user-generated content to be uploaded on our platform. If users have not obtained all necessary copyright licenses in connection with such uploaded content, we may be subject to potential disputes and liabilities.”

 

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Our agreements with live streaming performers or their agencies are either on an exclusive or non-exclusive basis.

 

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Our agreements with live streaming performers (and their talent agencies, if applicable) generally expire upon the end of the term, which usually ranges from one to three years, unless otherwise terminated earlier pursuant to the relevant provisions in certain events, such as a material breach of contract.

HOW WE GENERATE REVENUES

We generate revenues primarily from (i) online music services and (ii) social entertainment services and others.

Online Music Services

Our revenues generated from online music services were RMB7,152 million, RMB9,349 million, RMB11,467 million and RMB2,616 million (US$413 million), accounting for 28.1%, 32.1%, 36.7% and 39.4% of our revenues in 2019, 2020 and 2021 and the three months ended March 31, 2022, respectively.

 

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Paid Music and Audio Content

Currently, we offer users subscription packages across our QQ Music, Kugou Music and Kuwo Music products to access our content. Our basic subscription packages are priced at RMB8 per month for a fixed amount of downloads per month of our music content offerings and access to certain pay-for-streaming content. Users may also subscribe for our premium memberships at a price ranging from RMB15 to RMB18 per month to access a different combination of add-on features and privileges including additional personalized app themes and avatar designs, more sound effects that enhance listening experiences, and faster streaming and download speed. We also offer discounts on the subscription packages, as well as certain privileges and benefits that are only available to paying users, to encourage user spending and paying user conversion and retention on our platform.

 

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In the first quarter of 2019, we launched the “pay-for-streaming” model where selected songs are made available only for streaming (as opposed to streaming and downloading) by paying users during the term of the subscription. We believe the adoption of the pay-for-streaming model has since been driving the number of paying users and paying ratio of our online music services. We will continue to implement effective monetization measures as we nurture users’ willingness to pay for premium music content.

In addition to monthly subscription, we also allow users to stream and/or download singles and albums on a paid on-demand basis. Songs were first released on our platforms are available for streaming and/or downloading within a given “promotion” period after the release only by the users who have purchased those songs, and the songs will be made available under the pay-for-streaming model when the promotion period expires under this model.

Furthermore, we also offer users subscription packages to access our audio content at Lazy Audio. Paying users on our Lazy Audio platform are granted free, unlimited access to certain popular and carefully curated audio content during the subscription period. We also offer our paying users a variety of other privileges and benefits, including priority access to certain audio content and discounts on audiobooks.

Advertising Services

We offer various advertising services to advertising customers across our platform. Our advertising offerings mainly include full-screen display ads that automatically appear when a user opens our mobile apps and industry standard banner ads of various sizes and placements on the interfaces of our platform.

Social Entertainment Services and Others

Our revenues generated from social entertainment services and others were RMB18,282 million, RMB19,804 million, RMB19,777 million and RMB4,028 million (US$635 million), accounting for 71.9%, 67.9%, 63.3% and 60.6% of our revenues in 2019, 2020 and 2021 and the three months ended March 31, 2022, respectively.

 

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Users are attracted to our online karaoke and live streaming platforms primarily by engaging music performances from our online karaoke singers and live streaming performers. We generate revenues from online karaoke and live streaming services primarily from sales and consumption of virtual gifts, including consumable, time-based and durable virtual items. Consumable virtual items are mainly used as gifts sent to online karaoke singers and live streaming performers by the audiences as a way for them to show support and appreciation for the performance. During the live streams, special visual items, such as diamond rings or cars, will be displayed on the screen when these gifts are sent to the singers or performers. Users may also send virtual gifts to online karaoke performers if he or she likes the recordings uploaded by the performers. We also offer users the option to purchase virtual items which provide them with certain privileges or recognized status over a period of time, such as badges displayed for a certain period of time on the users’ profile pages. While purchasing and using these virtual gifts is not a prerequisite for using the features in our products, it provides a way for users to participate in online karaoke and live streaming, which drives user engagement and loyalty.

In addition to virtual gift sales, we also generate revenue from online karaoke and live streaming services through sales of premium memberships and other monetization models. For online karaoke, users can subscribe for memberships to include higher soundtrack resolution and access to video clips of vocal tutorials. For live streaming, selected live streaming performers can produce and sell their own digital albums through our platform if they share a portion of their revenues with us. Revenues generated on our platform are shared with our karaoke singers and live streaming performers or their agents, typically based on a percentage of the revenue generated from the sales of virtual gifts attributable to their performance. Furthermore, similar to the advertisements displayed on our online music apps, we offer various advertising services across our online karaoke platform.

Moreover, we generate revenues from sales of music-related merchandise, including Kugou headsets, smart speakers, WeSing karaoke microphones and Hi-Fi systems.

BRANDING, MARKETING AND SALES

The focus of our marketing efforts is to further strengthen our brands, including QQ Music, Kugou Music, Kuwo Music, WeSing, and Lazy Audio, and to expand our entertainment ecosystem to connect more users, artists and content providers. We aim to deliver best-in-class entertainment content and services in order to garner strong word-of-mouth referrals and enhance our brand recognition.

We primarily rely on word-of-mouth referrals and benefit from our strong brands to attract users to our platform. We also engage in diverse marketing activities both online and offline to enhance brand awareness. Specifically, our marketing campaigns increase platform traffic through search engine marketing and social media. Moreover, we host or participate in various forms of music-related events and activities to further boost our brand recognition, such as cooperation with established artists, singing competitions, TV and internet music talent shows, music festivals, campus campaigns, artist tours and fan events, to enhance our brand recognition. We also continue to deepen our presence into schools and college campuses through online and offline activities such as on-campus competitions and graduation ceremonies.

We continue to implement new technologies, introduce new features and tools, as well as improve user experience in order to encourage users to access our platform more frequently and for longer periods of time, and ultimately to increase our monetization efficiency on our platform. We also use direct marketing tools deployed through our platform interfaces to convert our users into paying users.

 

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CONTENT MONITORING

We are committed to complying with the applicable laws and regulations regarding the provision of content through the internet. We leverage our technology to implement procedures to monitor and remove inappropriate or illegal content from our platform. Text, images and videos are screened by our content monitoring team, aided by systems that periodically filter our platform. For example, our video recognition technology enables us to effectively monitor live streaming for content violations. We have also developed an effective copyright infringement monitoring system that detects potential copyright infringement by other platforms or our users. We have also adopted various public reporting channels to identify and remove illegal or improper content. Our legal team may also take further actions to hold the content creators accountable for any illegal or inappropriate content.

We focus on the monitoring and screening of user-generated content. We require live streaming performers and users to register on a real-name basis to upload content to our platform and require them to agree not to distribute content in violation of any third-party rights or any applicable laws or regulations. We require users and live streaming performers to comply with our terms of service which strictly prohibit inappropriate content across our platform. Our terms of service set forth in detail prohibited content and actions including, but not limited to, provocative or inflammatory language, full or partial nudity, sexually suggestive language and body movements, abusive language or actions towards other users, acts and threats of violence, and information facilitating or promoting illegal transactions or activities. We also monitor live performance delivered on our platform using a combination of human and machine screening in order to identify and remove any illegal or inappropriate content in accordance with applicable laws and regulations, as well as any content that violates the intellectual property rights of other parties. Users can also report any violations of our terms of service or other inappropriate behavior using the “report” function within our mobile apps. As live performances are user-generated content, in order to avail ourselves of the copyright infringement safe harbor, we are required under the PRC copyright laws and regulations to implement “notice and take-down” policies on such content, which mitigates the likelihood of being held liable for copyright infringement as a result of distributing infringing content on our platform. See “– Intellectual Property – Copyright.”

Due to the massive amount of content displayed on our platform, we may not always be able to promptly identify content that is illegal, improper or may otherwise be found objectionable by the regulatory authorities. See “Item 3. Key Information—3.D. Risk Factors – Risks Related to Our Business and Industry – The content available on our platform may be found objectionable by the PRC regulators, which may subject us to penalties and other regulatory or administrative actions” in our 2021 Form 20-F.

TECHNOLOGY AND DATA CAPABILITIES

Technology

We focus on continuously improving our technology to deliver superior user experience and enhance our operational efficiency. Over the years, we have been innovating and improving our technologies to help users discover and enjoy content and help artists find their target audience and realize greater value.

 

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We have a large dataset and we devote substantial resources to analyzing data in order to obtain useful insights into our users’ music entertainment and social behaviors. We believe our technology will allow us to better understand and respond to user preferences, deliver a superior user experience, and further differentiate our services from our competitors.

 

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Search and discovery engines. We provide users with a quality and fun music entertainment experience by leveraging our powerful music search and discovery engines underpinned by strong data analytics capabilities. This not only helps users discover and enjoy music content more easily, but also guides artists to find target audience and realize greater value. At TME platforms, we not only allow users to search for their desired music content in our massive library with high accuracy and relevancy, but also use advanced proprietary technologies to curate and distribute music content catering to their specific tastes and interests. For example, according to iResearch, QQ Music is the first in China’s online music industry to adopt an AI-powered PDM with the highest accuracy among its peers. Using the proprietary deep learning content value assessment algorithms, the PDM is capable of predicting the next hit song by analyzing recent popular music trends and user preferences for precise content discovery and distribution to interested users. The extraordinary performance of the PDM was recognized by the MIREX, a global benchmarking event that examines state-of-the-art music information retrieval approaches. In the MIREX 2020 competition, QQ Music’s PDM set a new world record of “accuracy rate of predicting the genuine continuation of a music excerpt” in the Patterns for Prediction task.

In addition, we also pioneered the song recognition technology in China using advanced audio fingerprinting technology. This cutting-edge technology is capable of automatically recognizing any song embedded in a short video clip or surrounding within seconds. Complementary to our powerful music search engines, the intelligent song recognition technology enables users to discover a randomly heard track of music without having to know a single key word to start a search. This, combined with the smart recommendations for music of similar genres, types and artists, offers users a quality and fun music discovery experience, thereby effectively improving user loyalty. According to iResearch, our song recognition technology has the highest accuracy rate globally, which was evidenced by numerous awards and recognitions. In the 2019 MIREX global competition, our song recognition technology broke the world record in the Audio Fingerprinting task.

We have been continuously improving our efficiency in content curation and accuracy of search and discovery engines, which we believe has resulted in a substantial increase in average daily streams and user engagements for our services.

 

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User-experience enhancements. We offer a variety of sound effects to enhance our users’ listening experience. Our award-winning proprietary audio setting, Kugou Viper Sound, as well as QQ Music Super Sound and WeSing Super Voice audio settings, not only bring superior sound quality and a best-in-class listening experience to users, but also foster a large, growing online community for them to share user feedback about our sound effects. In addition, we provide various special visual effects and camera filters to users recording videos on our platform. Our technology makes our products a part of everyday life, such as our QQ Music Running Station that recommends music to match a jogger’s running tempo. In 2021, for WeSing, we introduced an immersive chorus accompaniment sound effect, to mimic a large-scale graduation ceremony, as well as a multi-dimensional scoring system to sharpen our recording tools. These improvements have led to a more enjoyable user experience while recording songs, which in turn spurs increased engagement among users. Additionally, as part of our overall videolization initiatives, we have built and continue to optimize our shared middleware and architecture, which is crucial to our ability to further enhance video content offerings across our platforms.

 

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Innovative use cases of cutting-edge technologies. In order to bring users a more immersive, vivid, and smooth listening experience, we have deployed a vocal-emotion-enabled AI reading technology to produce audiobooks, contributing to dozens of titles based on well-known literature content such as Battle Through the Heavens. Additionally, we endeavor to use the state-of-the-art virtual reality technology to offer a brand-new, immersive music entertainment experience. In the fourth quarter of 2021, we launched China’s first virtual music carnival, TMELAND, and hosted its first online music festival on the New Year’s Eve in an immense virtual setting. At TMELAND, users across our different platforms such as QQ Music, Kugou Music and Kuwo Music can use their personalized 3D avatars to socialize with each other in a variety of digital scenarios such as virtual live streaming and virtual concerts, immersing themselves in a music entertainment experience that merges the real and virtual worlds.

Data Security and Privacy

We believe data security is critical to our business operation. We have adopted and implemented comprehensive internal rules and policies to govern how we may use and share personal information, as well as a robust suite of protocols, technologies and systems in place to ensure that such information will not be accessed or disclosed improperly. Specifically, we have established privacy policies across our platforms, including QQ Music Privacy Protection Guidelines, Kugou Music Privacy Policy, Kuwo Music Privacy Policy and WeSing Privacy Protection Guidelines. These privacy policies provide guidance on the type of personal information we collect, how we use, share and protect users’ personal information, and users’ privacy rights under applicable laws. In particular, we only collect personal information to the extent necessary to enable us to provide our services in compliance with applicable laws and regulations. All users must acknowledge the terms and conditions of the user agreement, including our privacy policies, before using our products and services.

From an internal policy perspective, we have established a comprehensive suite of platform-wide policies and procedures, including TME Data Security Management Protocols and TME User Information Security Management Protocols, to guide our data security and privacy protection practices:

 

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Data collection. We collect user data only to the extent necessary for our product functions and services upon receipt of the consent from our users. For example, we collect certain basic information, such as QQ or Wexin account number or phone number, for user account registration and verification purposes. To enable precise content curation and distribution to offer superb music discovery experience, we may access and analyze users’ playlists and listening history on our platforms. In the event that users purchase any paid music and audio content, or music-related merchandise, users need to provide certain personal information, such as name and address, to facilitate the transactions. We notify users of the types, potential uses, duration of data preservation and users’ rights, among other things, with respect to the data we collect from them.

 

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Data usage. We fully disclose the potential uses of personal information and data that we collect from users in our privacy policies. In the event that we need to use the personal information and data for purposes other than as disclosed in the privacy policies, we will notify the users and seek their explicit consent before we proceed.

 

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Data protection. We limit access to our servers that store our user and internal data on a “need-to-know” basis. We also adopt an advanced data encryption system designed to ensure the secured storage and transmission of data, and prevent any unauthorized member of the public or third parties from accessing or using our data in any unauthorized manner. Furthermore, we implement comprehensive data masking of user data for the purpose of fending off potential hacking or security attacks. In addition, we have adopted an incident response plan, which provides a well-defined, organized approach for handling any potential threat to servers and data, as well as taking appropriate actions when the data breach concerns personal information. We provide group-wide regular trainings to our employees that focus on cybersecurity awareness topics critical to our business operations, including the best practices to protect data from loss, modification, leakage or theft.

 

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Data storage and retention. We require that personal information and data we collect in China be stored and preserved within China. While we only preserve user data to enable our product functions and services, users have the option to delete their personal information generated when using our products and services, such as listening history and playlists. Upon termination of our products or services, we will destruct or anonymize user data that we collect within a reasonable period in compliance with applicable laws and regulations.

 

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Data transmission. Subject to certain exceptions specified in our privacy policies, transmission of any personal information and data that we collect with our users without their explicit consent is prohibited. For certain services that are jointly provided by our business partners, including Tencent and its associates, and us, we may share the relevant personal information and data with such business partners to the extent necessary to enable our services and improve user experience. We take extensive precautionary measures to ensure the integrity and security of data in transit to our business partners. These measures may include (i) requiring our business partners to handle the personal information and data we transmit in accordance with our standards, requirements and protocols, including providing the same level of protection, (ii) requiring our business partners to deliver written confidentiality undertakings before any data is transmitted, (iii) obtaining internal approval from the personnel in charge of data security, (iv) requiring our business partners to return or delete the personal information and data that we transmitted after the termination of services, and (vi) preserving the review log for future inspection.

During the Track Record Period and up to the Latest Practicable Date, we did not experience any material information leakage or loss of user data. As a result of the internal rules and policies, during the Track Record Period and up to the Latest Practicable Date, we were in compliance in all materials aspects with regulatory requirements in respect of data security and privacy.

 

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CUSTOMERS AND SUPPLIERS

Our customers are mainly individual paying users that purchase online music and/or social entertainment services on our platform. As a result, we do not have any material concentration in customers. Our top five customers accounted for less than 10% of our total revenues for each of the years ended December 31, 2019, 2020 and 2021 and for the three months ended March 31, 2022.

Our suppliers mainly include copyright owners, live streaming hosts (including their talent agencies), technology service providers and other service providers from whom we procure copyrighted content, live streaming services, technology services and other services. We do not have any material concentration in suppliers. Our top five suppliers accounted for less than 30% of our purchases for each of the years ended December 31, 2019, 2020 and 2021 and for the three months ended March 31, 2022, and none of them individually accounted for more than 10% of our purchases for each of such periods.

We are currently not subject to any risk of concentration of content suppliers and we do not rely on any single content supplier to procure content. We believe our scale and market position have made us a preferred partner for a wide variety of content suppliers, which significantly helps minimize any risks of termination of contract by any individual content supplier. We maintain long-term relationships with our key content partners including both music labels and other content providers such as talent agencies managing live streaming performers.

We have adopted multiple internal control measures to further mitigate the risks of termination of contract by content suppliers. For example, we have adopted specific standards and parameters when selecting content suppliers to ensure their diversity in terms of size, geographic location, content type and genre and target audiences while to minimize concentration to a limited number of content suppliers. In the form of agreement that we enter into with content suppliers, we have included terms that give us the rights to seek remedial measures if the content suppliers commit material breach of their obligations. We also have internal rules and procedures in place that require designated personnel to follow up closely with content suppliers to identify quality or performance problems as they arise and proactively plan and negotiate contract renewal.

INTELLECTUAL PROPERTY

Copyrights

We are committed to copyright protection and we strive to continue playing a leadership role in improving China’s music and audio copyright environment.

 

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We take various measures to ensure content offered on our platform does not infringe upon copyrights of third parties. Once it is licensed, we closely monitor copyrighted content on our platform for compliance with the scope of the licenses and therefore to attempt to detect and remediate infringement of third-party copyrights on our platform in a timely manner. We also seek additional contractual protection from the agreements between us and the content creators or licensors. For example, we typically require the licensors to represent in the licensing agreement that they have the legitimate right to license the content and require them to indemnify for losses arising from any claims of infringement or violation of laws and regulations. With respect to user-generated content, we also rely on the safe harbor provision for online storage service providers under PRC copyright laws and regulations, and we have adopted measures intended to minimize the likelihood that we may be held liable for copyright infringement as a result of distributing user-generated content on our platform. Such measures include (i) requiring users to acknowledge and agree that they will not upload or perform content which may infringe intellectual property rights, (ii) restricting users on our blacklists from uploading or distributing content, (iii) using best reasonable efforts to seek licenses from the relevant copyright owners once they are identified and verified and adopting contractual protections for works licensed from labels and other copyright owners; and (iv) implementing “notice and take-down” policies to be eligible for the safe harbor exemption for user-generated content. According to the PRC Legal Adviser, to the extent these measures, especially the “notice and take-down” policies, are properly implemented in compliance with applicable laws and regulations, our failure to obtain complete copyright licenses for user-generated content does not constitute a violation of current PRC copyright law.

We also actively enforce our rights against third-party platforms that infringe upon our content rights, using a combination of human and machine monitoring to detect unauthorized use of copyrighted content on other platforms. More specifically:

 

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Monitoring. Leveraging our advanced audio and video fingerprinting technology and massive data base, we are able to continuously screen and identify infringing content displayed on third-party platforms in China.

 

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Enforcement of our rights. When our system identifies an infringing use of our content on a third-party platform, our system automatically generates an alert email to our legal and copyright protection personnel, which promptly serves a take-down notice to the infringing platforms requesting that the infringing content be removed. Following the take-down notice, our legal and copyright protection personnel will review the relevant evidence and initiate the removal procedures to ensure timely removal of infringing content, and they may also file complaints with the National Copyright Administration or initiate legal proceedings.

 

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Follow-up. Once a take-down notice is served or a legal proceeding initiated, our copyright system starts to track the relevant platforms to check if the infringing content has been timely removed.

Other Intellectual Properties

In addition to copyrights of our content, other intellectual properties are also critical to our business. We rely on a combination of patent, copyright, trademark and trade secret laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions, to protect our intellectual property rights. As of March 31, 2022, we had applied for the registration of 4,063 patents, among which 2,308 patents have been granted by the National Intellectual Property Administration and overseas. One of our patents has been recognized with the Nineteenth China Patent Award by the National Intellectual Property Administration and one of our patents has been recognized with the Twenty-second China Design Award by the National Intellectual Property Administration. In addition, one of our patents has been recognized with the Eighth Guangdong Patent Silver Award by the People’s Government of Guangdong Province. As of the same date, we had applied for 5,385 trademarks, among which 3,410 had been registered with the Trademark Office of the National Intellectual Property Administration and overseas. We had also registered 552 software copyright with the Copyright Protection Center of the PRC. Our “酷狗” (Kugou) trademark has been recognized as a well-known trademark by the Beijing Higher People’s Court.

Despite our efforts to protect ourselves from infringement or misappropriation of our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain and use our intellectual property in violation of our rights. In the event of a successful claim of infringement against us, or our failure or inability to develop non-infringing intellectual property or license the infringed or similar intellectual property on a timely basis, our business could be harmed. See “Item 3. Key Information—3.D. Risk Factors — Risks Related to Our Business and Industry — Failure to protect our intellectual property could substantially harm our business, operating results and financial condition” in our 2021 Form 20-F.

 

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EMPLOYEES

Our ability to recruit and retain qualified employees is critical to our continued success. As of March 31, 2022, we had 6,015 full-time employees. Substantially all of our employees are based in China. The following table sets forth a breakdown of our full-time employees by function as of March 31, 2022.

 

Function		Number of Employees				Percentage (%)
Research and development			2,924				48.6
Content management and operation			1,763				29.3
Sales and marketing			537				8.9
Management and administrative			791				13.2
Total			6,015				100.0

We enter into employment contracts with our full-time employees, which contain standard confidentiality and non-compete provisions. In addition to salaries and benefits, we provide performance-based bonuses for our full-time employees and commission-based compensation for our sales and marketing force.

As required by relevant PRC laws and regulations, we participate in various employee social security plans that are organized by municipal and provincial governments for our PRC-based full-time employees, including pension, unemployment insurance, work-related injury insurance, medical insurance and housing insurance. We are required under PRC law to make contributions from time to time to employee benefit plans for our PRC-based full-time employees at specified percentages of the salaries, bonuses and certain allowances of such employees, up to a maximum amount specified by the local governments in China.

We believe that we maintain a good working relationship with our employees, and we had not experienced any material labor disputes as of the Latest Practicable Date. None of our employees is represented by labor unions.

COMPETITION

We compete for users and their time and attention mainly with other online music and audio entertainment providers in China. We also face general competition from online offerings of other forms of content, including long- and short-form videos, karaoke services, live streaming, radio services, literature, and games provided by other online service providers. We compete to attract, engage and retain users based on a number of factors, such as the diversity of content, product features, social interaction features, quality of user experience, brand awareness and reputation. Some of our competitors may have greater financial, marketing or technology resources than we do, which could enable them to respond more quickly to technological innovations or changes in user demands and preferences, license more attractive content, and devote greater resources towards the development, promotion and sale of products than we can. For a discussion of risks relating to competition, see “Risk Factors — Risks Related to Our Business and Industry — We operate in a competitive industry. If we are unable to compete successfully, we may lose market share to our competitors.”

 

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INSURANCE

We do not maintain any liability insurance or property insurance policies covering our equipment and facilities for injuries, death or losses due to fire, earthquake, flood or any other disaster. We do not maintain business interruption insurance, nor do we maintain key-man life insurance.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE

Environmental Sustainability

As we stay committed to sustainable development of the music industry, we also strive for long-term environmental sustainability. Our primary environmental sustainability efforts include:

 

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Building green low-carbon workplaces. We are committed to reducing our environment footprints. Our impact on the environment is mainly associated with the consumption of electricity, water and paper in our daily office activities. We have undertaken a variety of initiatives to improve our energy consumption efficiency and build a green, low-carbon workplace. For example, we strictly control the use of printing paper in all workplaces and encourage employees to print double-sided when possible using recycled paper. We also post water conservation stickers, signs and posters in bathrooms, cafeterias and other places where employees congregate. Our physical office spaces in Shenzhen, Beijing, Guangzhou and other Chinese cities are in compliance with applicable work safety and environmental protection standards.

 

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Maintaining energy-efficient data centers. We lease our data centers from third parties. When choosing data centers, we take into account a variety of environmental factors, such as energy use, efficiency improvement and greenhouse gas emission. We require that appropriate environmental management system certification, such as the national environment management system GB/T24001 and the international environment management system ISO14001, should be obtained for each data center.

 

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Collaborating with stakeholders. We are committed to engaging stakeholders and the broader public in our environmental sustainability efforts. For example, we collaborate with the Ministry of Natural Resources of the PRC and the World Wide Fund for Nature, the world’s leading conservation organization, to offer educational activities designed to arouse public awareness in biodiversity protection through music.

Social Responsibility

We are dedicated to fulfilling our responsibilities as a corporate citizen and leveraging our market position to create a lasting positive impact on China’s online music industry.

 

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Multi-party cooperation. Leveraging our market position, we collaborate with a wide array of stakeholders to promote innovations, copyright protection and the long-term sustainable development of China’s music industry. For example, in December 2020, we signed a strategic cooperation framework with the Shanghai Conservatory of Music to join efforts in nurturing music talents. We are also an executive council member of a number of leading industry associations, including Internet Society of China, the China Association of Performing Arts, and the China Netcasting Services Association.

 

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Public welfare and philanthropy. We are committed to using music to inspire people to understand, care about and contribute to their communities. In June 2018, we launched our Tencent Music Charity Program, a program designed to pass the love and energy via music and achieve a bigger social value of music. The program is centered on an open platform and three strategies: caring for music, cultural heritage, and music education.

 

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Caring for music. We believe music goes beyond entertainment and emotional connection — it can also serve as a unifying force for positive social change. We focus on community outreach bringing the healing power of music to people in need. For example, we have since 2017 produced digital albums on a pro bono basis for Zhou Bohan, who is a young autistic pianist in China, advocating for social attention and care on people with autism. Amid the COVID-19 pandemic, we broadcasted benefit concerts organized by Global Citizen rallying funds to combat the spread of the virus around the world. In 2021, we released a charity album Hearing the Inaudible Sound for people with mid- and high-frequency hearing loss and launched the 2021 Little Red Flower Music Season campaign, where hundreds of musicians took part to compose songs for charity.

 

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Cultural heritage. As part of our cultural heritage initiatives, we sent teams to travel across remote border areas in China to preserve local folk music heritage. In addition, we partnered with the China Association of Performing Arts in August 2018 to launch the New Ethnomusicology Project. Under this project, we will produce a series of ethnic music digital albums on a pro-bono basis, bringing together musicians across China to share original music reflecting diverse backgrounds and cultures of ethnic minorities. In November 2020, we released a music charity album The Rhyme of China 2020 in partnership with Xinhua News Agency “The Sound in China” to promote traditional Chinese culture and music. Additionally, we collaborated with Sanxingdui Museum in May 2021 to invite musicians to compose songs in Chinese Ancient Style for artifacts preserved by the museum.

 

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Music education. In August 2018, we teamed up with the Chen Yidan Foundation to establish Music Garden Space, an initiative aimed at providing a range of music education to children of ethnic minorities and from remote regions while also offering music training to local teachers in these regions. In 2019, the first Music Garden Space was built in Dongsheng Village in Beichuan Qiang Autonomous County, Mianyang, Sichuan. We plan to establish 100 Internet music rooms at rural primary schools in 10 provinces, including Xinjiang, Hebei and Sichuan. With our “Bijie Dafang Tianhe Poverty Relief Workshop” project, Kugou Music also built a 300 square meter building for local primary schools. In addition to the Music Garden Space initiative, we also hosted summer camps and online music lessons, helping children from minority ethnic groups and remote regions to realize their music dreams and ambitions.

Corporate Governance

We actively improve internal management systems, regulate corporate behaviors, and have formed a scientific and efficient corporate governance mechanism with well-defined decision-making, execution, and supervisory responsibilities and powers. We implement sustainable development in our operation process, clarify ESG management work procedures, and promote the continuous improvement of our ESG management. We periodically review our ESG visions and policies and continue to evaluate, determine and address our ESG-related risks. We have continued to improve our management of ESG matters through a series of measures, including, taking into account ESG matters in strategic planning, conducting and regularly refreshing a materiality assessment to identify and assess all material ESG issues, developing and regularly reviewing ESG policies, and regularly monitoring ESG performance against our goals. Our Investor Relations Department is responsible for ESG work coordination and reporting to management and the Board of Directors as appropriate. Comprising business leaders and personnel from various functional departments of the Group, our ESG working group is responsible for daily ESG work and collecting ESG-related data and materials to compile our annual ESG reports.

ESG Risk Identification and Management

We identify and evaluate material environmental, social and climate-related risks through a thorough analysis and assessment process. We have established a three-layer risk management system, comprising of our business operation team, internal control department and internal audit department, to monitor these risks and facilitate our actions to address them. We routinely summarize and review material ESG risks identified over the short, medium and long term, based on which we formulate our ESG initiatives and internal control plans.

 

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We actively oversee the identification and monitoring of the actual and potential environmental, social and climate-related risks on our business, strategy and financial performance, and take these issues into account during the course of our business, strategic and financial planning. We will assess the likelihood of such risks occurring and the estimated magnitude of any potential impact. We may also engage independent third parties to evaluate the ESG risks and review our existing strategy, target and internal controls. Necessary improvement will then be implemented to mitigate any major ESG risks identified.

We value opinions and suggestions from the stakeholders, including but not limited to our employees, business partners, investors, non-governmental organizations, industry associations, the media and regulatory agencies. We conduct internal interviews across various departments and collect responses from stakeholder surveys relating to their significant ESG concerns. By doing so, we can quickly identify material issues, effectively respond to the expectations and requirements of all stakeholders, and enhance our ESG practice’s applicability and pertinence. For example, we collected a total of 1,084 valid responses and more than 100 suggestions in 2020. Based on the feedback and through a benchmarking analysis across domestic and foreign peers, we created a materiality matrix for the key ESG topics, with a primary focus on attracting and retaining talents and the protection of privacy and data security.

During the Track Record Period and up to the Latest Practicable Date, our business, results of operation and financial condition had not been materially adversely impacted by ESG risks including those relating to health, work safety, environmental, social or climate-related issues. We do not operate any production facility and the potential impact of environment related regulatory development on our operation and financial conditions is limited. As an online music entertainment company, we do not currently foresee any materials risks in this regard. However, we have been committed to mitigating any potential risks in the mid- to long-term. For instance, we proactively monitor risks posed by climate changes, assess their potential impact on our business operations, and take appropriate actions to mitigate such risks. The primary risks posed by climate changes to our business include physical risks and transition risks. The physical risks mainly result from extreme climate hazards and long-term chronic risks. In addition, sea level rise and other risks may result in depreciation and loss of physical assets. We have formulated emergency measures for extreme climate hazards to minimize the risk of interruption to our operations and loss of assets. In addition, as part of our carbon neutrality initiatives, we have taken steps to deal with transition risks arisen from China’s accelerated transformation to a low-carbon economy. To this end, we endeavor to limit our carbon emissions and promote green operations during the ordinary course of business.

PROPERTIES

As of the Latest Practicable Date, we owned an aggregate of 9.7 thousand square meters of properties in Guangzhou, China, and we had also entered into an agreement to acquire the land use right for an aggregate of 6.8 thousand square meters of properties in Shenzhen, China. We intend to use these self-owned properties in China as office space.

 

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As of the Latest Practicable Date, we rent an aggregate of 93.9 thousand square meters of office space, including our headquarters in Shenzhen and offices in Beijing, Guangzhou and some other cities in China. These facilities are currently accommodating our management headquarters, most of our product development, content acquisition and management, sales and marketing as well as general and administrative activities.

As of the Latest Practicable Date, the lessors of some of our leased properties had not provided us with valid title certificates, relevant authorization documents or permissions evidencing their rights to lease such properties to us. As a result, the relevant lease agreements may not be valid, and there are risks that we may not be able to continue to use the underlying leased properties should our use was challenged by any third parties or regulatory authorities.

 

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In addition, we have not registered the majority of our lease agreements with the relevant regulatory authorities due to the lack of cooperation from our landlords in registering the relevant lease agreements. The failure to register the lease agreements for our leased properties will not affect the validity of these lease agreements, but the competent housing authorities may order us to register the lease agreements in a prescribed period of time and impose a fine ranging from RMB1,000 to RMB10,000 for each nonregistered lease agreement if we fail to complete the registration within the prescribed timeframe.

Furthermore, some of our leased properties are not used in accordance with the designated purposes of such properties. The land administrative departments may retrieve the land and impose a fine on the landlords for unauthorized change of designated usage of land and we may incur additional costs for relocation.

As of the Latest Practicable Date, we were not aware of any material claims or regulatory actions being contemplated or initiated by regulatory authorities, property owners or any other third parties with respect to our interests in or use of the leased properties. We believe if the leased properties issues prevent us from continuing the lease of any properties and we need to move, we can relocate to other comparable and duly leased alternative premises without any material adverse effect on our business and financial conditions. Based on the foregoing, our PRC Legal Adviser is of the view that the leased properties issues will not have a material adverse impact on our business, results of operations and financial condition.

LEGAL PROCEEDINGS AND COMPLIANCE

Legal Proceedings

We have been and may become a party to various legal or administrative proceedings arising in the ordinary course of our business, including matters relating to copyright infringement, commercial disputes and competition. As of March 31, 2022, there were 590 lawsuits pending in connection with alleged copyright infringement on our platform against us or our affiliates with an aggregate amount of damages sought of approximately RMB72.9 million (US$11.5 million). We are currently not a party to, and we are not aware of any threat of, any such legal or administrative proceedings that, in the opinion of our management, are likely to have any material and adverse effect on our business, financial condition, cash flow or results of operations. See “Risk Factors — Risks Related to Our Business and Industry — Pending or future litigation or regulatory proceedings could have a material and adverse impact on our reputation, business, financial condition and results of operations.”

 

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On December 6, 2018, we became aware of an arbitration (the “Arbitration”) filed by an individual named Mr. Hanwei Guo (the “Claimant”) before the CIETAC. The Arbitration named Mr. Guomin Xie, who previously served as our Co-President and Director and resigned from such positions due to personal reasons in June 2019, CMC, and certain affiliates of CMC as respondents (the “Respondents”). In 2012, Mr. Xie co-founded CMC and the Claimant became an investor in CMC’s business by acquiring stakes in entities including CMC, Ocean Interactive (Beijing) Technology Co., Ltd. (“Ocean Technology”) and Ocean Interactive (Beijing) Culture Co., Ltd. (“Ocean Culture”). CMC was acquired by Tencent in 2016 and subsequently was renamed Tencent Music Entertainment Group. As a result, Ocean Culture and Ocean Technology also became our PRC consolidated entities. The Claimant alleged that Mr. Xie defrauded and threatened him into signing a series of agreements in late 2013 to relinquish his investment interests in multiple entities, including CMC, Ocean Culture and Ocean Technology (together, the “Ocean Music Entities”), and transferring his equity interests in the Ocean Music Entities to Mr. Xie, CMC and certain other Respondents at below-market value. The Claimant seeks an award from CIETAC ruling, among other things, that (i) such agreements, pursuant to which the Claimant allegedly transferred his interests in the Ocean Music Entities to Mr. Xie, CMC and other Respondents, be declared invalid; (ii) Mr. Xie, CMC and other applicable Respondents return to the Claimant all of his initial equity interests in the Ocean Music Entities; and (iii) Mr. Xie pays damages in the amount of RMB100 million (US$15.8 million). In addition, on December 5, 2018, the Claimant filed an Application and Petition for an Order to Take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. § 1782 (the “Discovery Petition”) in the U.S. District Court of the Southern District of New York (the “District Court”), whereby he seeks permission to serve subpoenas for production of documents on Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley & Co. LLC, each of which is an underwriter in our initial public offering (the “IPO Underwriters”), for use in the Arbitration. We and the IPO Underwriters opposed the Claimant’s Discovery Petition by filing Oppositions in the District Court on December 21, 2018. On February 25, 2019, the Discovery Petition was denied by the District Court. On March 27, 2019, the Claimant filed a notice of appeal with the United States Court of Appeals for the Second Circuit regarding the denial of the Discovery Petition. On July 8, 2020, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s denial of the Claimant’s petition. Such affirmation is final and conclusive. In March 2021, the Claimant amended his claims in the Arbitration so that, among other things, to the extent that the Claimant’s equity interests in the Ocean Music Entities cannot be returned to the Claimant as a result of the merger of CMC’s operations and Tencent’s former music businesses, each of Mr. Xie and we shall pay the Claimant damages in an amount equal to the fair market value of 4% of our share capital as of the date of enforcement of the final arbitration decision, minus the amount the Claimant has already received, plus accrued interests. In April 2021, CIETAC entered an award for the Arbitration. The award dismissed substantially all of the Claimant’s claims, including those against CMC, except that Mr. Xie shall pay damages in an amount of RMB661 million (US$104.3 million) to the Claimant. Mr. Xie subsequently applied in court to set aside the CIETAC’s award, and the court case has been filed. As of the Latest Practicable Date, no court hearing on merits had been held in relation to this case. See also “Item 3. Key Information—3.D. Risk Factors — Risks Related to Our Business and Industry — We, certain of our consolidated entities in the PRC and Mr. Guomin Xie, our former Co-President and Director, were named as respondents in an arbitration proceeding in the PRC” in our 2021 Form 20-F.

 

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From time to time, we may be involved in legal proceedings in the ordinary course of our business. In September 2019 and October 2019, respectively, the Company and certain of its current and former directors and officers were named as defendants in two putative securities class actions filed in the U.S. District Court for the Eastern District of New York (the “Federal Court Action”) and the Supreme Court of the State of New York, County of New York (the “State Court Action”). Amended complaints in both actions were filed in February 2020, at which time Tencent, based on its status as our controlling shareholder, was named as a defendant in the Federal Court Action, and the IPO Underwriters were added as defendants in both actions. Both actions, purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of their trading in the ADSs, assert violations of Sections 11 and 15 of the Securities Act of 1933, alleging that the registration statement dated December 12, 2018 in connection with our U.S. initial public offering (the “IPO Registration Statement”) contained actionable misstatements or omissions about an alleged anti-competition investigation conducted by the PRC regulatory authorities related to our then existing exclusive music licensing agreements. In the Federal Court Action, the plaintiffs also assert violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 on the basis of the same allegations concerning the IPO Registration Statement, as well as allegations that our annual report dated April 19, 2019 on Form 20-F also contained actionable misstatements or omissions about the same alleged investigation. On April 14, 2020, the Company served a motion to dismiss the Federal Court Action, which was fully briefed and submitted to the court on May 15, 2020. On May 8, 2020, the Company filed a motion to dismiss, or in the alternative, stay, the State Court Action. By order dated August 21, 2020, the State Court Action was stayed in all respects, pending resolution of the motion to dismiss the Federal Court Action. On March 31, 2021, the Company’s motion to dismiss the Federal Court Action was granted by the U.S. District Court for the Eastern District of New York. On April 29, 2021, the plaintiffs in the Federal Court Action filed a motion for leave to file a second amended complaint, which was granted on December 27, 2021. A second amended complaint was filed in the Federal Court Action on January 10, 2022. On February 18, 2022, the Company served a motion to dismiss the second amended complaint filed in the Federal Court Action, which was fully briefed and submitted to the court on March 11, 2022. We believe that these actions are without merits because (i) the Federal Court Action had already been dismissed in its entirety by the federal court on March 31, 2021; and (ii) the second amended complaint filed by the plaintiffs on January 10, 2022 fails to materially alter the nature of the allegations. Because these actions remain in their preliminary stages, we cannot predict their timing, outcome or consequences. Additionally, since the plaintiffs have not enumerated the total damages sought, we are currently unable to estimate the potential loss, if any, associated with the resolution of such lawsuits, if they proceed. We intend to defend the actions vigorously. To our best knowledge, we reasonably believe that the Directors are not implicated of any misconduct or wrongdoing in respect of any of these class actions and no adverse bearing on their character, experience, integrity and ability to discharge their duties as directors, including fiduciary duties and duties to exercise skill, care and diligence to a standard that commensurate with their position as directors of a listed company in Hong Kong. Based on the foregoing, we do not expect these class actions to have a material adverse impact on our business operation, and we are of the view that these class actions do not reflect negatively on the Directors’ suitability under Rules 3.08 and 3.09 of the Listing Rules. For risks and uncertainties relating to the pending cases against us, see “Item 3. Key Information—3.D. Risk Factors — Risks Related to Our Business and Industry — We and certain of our Directors and officers have been named as defendants in several shareholder class action lawsuits, which could have a material adverse impact on our business, financial condition, results of operations, cash flows and reputation” in our 2021 Form 20-F.

 

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Regulatory Compliance

In July 2021, the SAMR issued an Administrative Penalty Decision to Tencent regarding its acquisition of CMC in 2016. Pursuant to the decision, we shall implement a rectification plan to, among other things, terminate exclusive music copyright licensing arrangements within 30 days from the date of the decision. We shall also discontinue any arrangement where we offer high advance licensing payment to and seek preferential licensing terms from copyright owners without reasonable grounds. To comply with such decision, Tencent and we have terminated exclusivity arrangements with upstream copyright holders subject to certain limited exceptions as permitted in the decision, and we will pursue non-exclusive collaborations with upstream copyright holders in accordance with the requirements in the decision. We had terminated the exclusivity with upstream copyright holders and ceased to enter into any new arrangements where we offer high advance licensing payments to and/or seek preferential licensing terms that may be deemed incompliant by the SAMR, from copyright holders pursuant to the Administrative Penalty Decision by late August 2021. We were not required to compensate the upstream copyright owners and did not make impairment to the relevant copyrights as a result of the termination of exclusive music copyright licensing arrangements pursuant to the Administrative Penalty Decision.

Save as disclosed above and in the section headed “Risk Factors,” we were in compliance with the applicable laws and regulations currently in effect in all material aspects during the Track Record Period and up to the Latest Practicable Date.

LICENSES, PERMITS AND REGULATORY APPROVALS

The following table sets out a list of material licenses and permits held by our Major Subsidiaries as of the Latest Practicable Date:

 

License/Permit		Holder		Expiration Date
Value-Added Telecommunication Business Operation License (business type: online data processing and transaction processing business (business e-commerce only), excluding internet financial services categorized as online lending information intermediaries; information services (internet information services only), including culture and audio-video program, excluding information search and inquiry services and instant information interaction services)		Guangzhou Kugou		May 26, 2026

 

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License/Permit		Holder		Expiration Date
Value-Added Telecommunication Business Operation License (business type: domestic VSAT communication business (nationwide); domestic fixed-network data transmission business (Beijing, Zhejiang and Guangdong); network hosting business (Beijing, Zhejiang and Guangdong); internet data center business (Beijing, Ningbo and Guangzhou); content distribution network business (Beijing, Zhejiang and Guangdong); domestic internet protocol virtual private network business (Beijing, Zhejiang and Guangdong); internet access services (Beijing, Zhejiang and Guangdong); information services, excluding internet information services (nationwide))		Guangzhou Kugou		September 27, 2023
AVSP		Guangzhou Kugou		February 20, 2025
ICO License		Guangzhou Kugou		May 28, 2025
License for Production and Operation of Radio and TV Programs		Guangzhou Kugou		March 31, 2023
Commercial Performance License		Guangzhou Kugou		September 30, 2022
Publication Business Permit		Guangzhou Kugou		March 31, 2026
Value-Added Telecommunication Business Operation License (business type: information services (internet information services only), excluding information search and inquiry services and instant information interaction services)		Beijing Kuwo		March 5, 2026
Value-Added Telecommunication Business Operation License (business type: information services, excluding internet information services (nationwide))		Beijing Kuwo		July 23, 2024
AVSP		Beijing Kuwo		January 29, 2025
ICO License		Beijing Kuwo		June 27, 2024
License for Production and Operation of Radio and TV Programs		Beijing Kuwo		June 30, 2023
Commercial Performance License		Beijing Kuwo		December 25, 2022
Publication Business Permit		Beijing Kuwo		April 30, 2028
ICO License		Tencent Music Shenzhen		July 16, 2024
Commercial Performance License		Tencent Music Shenzhen		June 26, 2023
Publication Business Permit		Tencent Music Shenzhen		May 31, 2026

 

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License/Permit		Holder		Expiration Date
Value-Added Telecommunication Business Operation License (business type: information services (internet information services only), including culture, excluding information search and inquiry services, information community services, instant information interaction services and information protection and processing services)		Shenzhen Lanren		September 17, 2024
ICO License		Shenzhen Lanren		September 5, 2023
Value-Added Telecommunication Business Operation License (business type: information services (internet information services only), including culture, excluding information search and inquiry services, information community services, instant information interaction services and information protection and processing services)		Shenzhen Lanren		September 17, 2024
ICO License		Shenzhen Lanren		September 5, 2023
License for Production and Operation of Radio and TV Programs		Shenzhen Lanren		June 1, 2023
Publication Business Permit		Shenzhen Lanren		May 31, 2026
Certificate for the Pilot Institution of Online Audio and Video Industry in Guangdong		Shenzhen Lanren		N/A

 

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