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Himalaya Capital, managed by Li Lu, recently disclosed a new position in Tencent Music. In the first quarter filing, Tencent Music was the largest of several new positions. 6.59 million ADS shares worth roughly $61 million at quarter end. I saw that filing, spent weeks researching the company, and produced a 40-page deep dive.
And after all that work, I still did not buy the stock. So, today I want to explain two things. Why Li Lu's involvement made Tencent Music impossible for me to ignore, and why a stock can genuinely be cheap, genuinely good, and still not be the best place for my money. This is for educational purposes, not financial advice.
To understand why this filing matters, you need to understand who Li Lu is. He was born in China, survived the devastating earthquake as a child, and later became one of the student leaders involved in the Tiananmen Square protest. After the crackdown, he escaped China and eventually arrived in the United States with practically no money and almost no English.
Think about that. At Columbia, he did something extraordinary. In 1996, he became the first student in the university's history to simultaneously receive an undergraduate degree, a law degree, and an MBA. But the part investors will find even more interesting happened after he attended a Warren Buffett lecture at Columbia in 1993.
Li Lu began investing money from his student loans. Monish Pabrai later told the story in more detail, and according to Pabrai, Li Lu would receive the loan before it was due, invested temporary float, and had around $1 million by the time he graduated. Li Lu later founded Himalaya Capital in 1997. He became an early investor in BYD and helped introduce the company to Charlie Munger and Warren Buffett.
And this is where his record becomes difficult to dismiss. In 2004, Charlie Munger entrusted Li Lu with $88 million of Munger family money. Munger later said that capital became four or five times larger. And Li Lu was not merely someone Munger liked. He was the only outside investor Munger trusted with a substantial part of his family's capital.
So, when Li Lu initiates a position, especially in a Chinese company, I pay attention. But, I do not blankly copy him. A 13F is delayed. It only shows certain NYSE-listed long positions, and it tells us what he owned at the quarter end, not what he owns today or why he bought it. Tencent Music owns one of China's largest music ecosystems.
The lazy version of the thesis is that it is simply China's Spotify, but it is not. Tencent Music is trying to control more of the full fan relationships: discovering an artist, listening to the music, paying for subscription, upgrading to SVIP, buying a digital album, getting early concert access, and purchasing merchandise.
By the first quarter of 2026, more than 20 million users had joined its higher-priced SVIP tier. The market's concern is obvious when you look at the user numbers. Online music monthly active users peaked at roughly 644 million and fell to 528 million by the end of 2025. That looks terrible if you stop there.
But, paying users increased from 19.4 million in 2017 to 127.4 million in 2025. The percentage of users who pay rose from 3.2% to 24.1% and the monthly revenue per paying user increased from roughly 8.7 to 11.9 RMB. So, the total audience is shrinking, but the remaining audience is becoming dramatically more valuable.
That is the first major insight. The second is that the business has already replaced its weakest revenue stream. Social entertainment, mainly live streaming and virtual gifts, represented more than 63% of revenue in 2021. By 2025, it was below 19%. Normally, losing a segment that large would destroy a company.
Instead, music subscriptions and other music-related services expanded quickly enough to replace most of it. The latest quarter continued that pattern. In the first quarter of 2026, music-related revenue grew 12.2%. Membership revenue grew 6.6% while music revenue outside membership grew 28%. That includes advertising, concerts, merchandise, artist management, and other ways of monetizing music IP.
Gross margin reached 44.9% and music-related services represented 83% of the total revenue. One example is Jay Chou's Children of the Sun. Tencent Music combined digital and physical products and generated more than 100 million RMB in sales. So, TME is becoming a fan economy and music IP platform. At the time of my deep dive, the stock had fallen roughly 65% from its recent highs.
But, a falling stock is not automatically cheap. The valuation only becomes interesting after adjusting for what Tencent Music actually owns. At the end of March 2026, the company held $5.94 billion in cash, term deposits, and short-term investments. Basically, cash and cash equivalents. It also owns strategic stakes in Spotify, Universal Music Group, Warner Music, GMM Music, and other assets.
After adjusting for debt, the dividend, and the proposed Himalaya acquisition, and those investments, I estimate that the operating business was valued at roughly $10 billion. Against normalized operating earnings and cash flow, my estimate comes to around seven to eight times EV to EBIT with a double-digit free cash flow yield.
This is cheap for a market-leading platform whose core business is improving, but there are real reasons for the discount. ByteDance's Soda Music is growing rapidly with younger listeners. Tencent Music's total users are declining. The Shumali acquisition could dilute the returns. Tencent controls the company and outside shareholders have limited influence.
Most importantly, a Tencent Music idea is not the same thing as directly owning the Chinese operating assets. It is a Cayman Islands security connected to Chinese cash flows through a VIE structure. That does not mean the stock is uninvestable. It means the low multiple cannot be separated from the ownership and geopolitical risk.
So, if the business is improving and the valuation is compelling, why am I not buying it? Because Li Lu and I are playing different games. He manages billions. He needs large, liquid companies where he can deploy meaningful capital. He also understands China at a level that I never will. I manage a much, much smaller capital and more concentrated portfolio.
That gives me a different advantage. I can put most of my capital into few ideas that I believe offer the best combination of quality, downside protection, as well as the upside. Tencent Music are for does not merely have to be cheap. It has to be more attractive than Raia Sash, Kaspi, TAV Airports, and the other companies that I already have in my portfolio.
Right now, Tencent Music simply doesn't meet the standards for me. That is also why I publish deep dives on companies that I do not buy. The job is to compare opportunities, reject most of them, and understand exactly why the winners deserve my capital. The complete Tencent Music research, the valuation work, and the companies that did clear my bar, including Raia Sash and TAV Airports in Turkey, Kaspi, and several other names are covered on my Patreon alongside my portfolio updates.
With one subscription, you get access to the whole library. So, my suggestion is use great investors like Lilu as a source of ideas, not as a substitute for thinking. Lilu's Tencent Music position led me to a genuinely good business at what appears to be a genuinely cheap price. But, my own opportunity set still led me to pass it.
Both conclusions can be true. If you found this useful, please subscribe, like, and comment. I will keep breaking down ideas of great investors, but I will also show you where my conclusions differ from theirs. That's it for today's video, and I'll see you in the next one. Bye.
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