Tencent Music's Shocking Drop: Is This the End Amid Fierce Competition and Plummeting Profits?

Sustainable Growth Advisers (SGA), an investment management company, recently released its fourth-quarter investor letter for its “Emerging Markets Growth Strategy.” This letter provides an insightful look at the performance and challenges faced by this strategy during a notable market period in the fourth quarter of 2025.

The fourth quarter marked a significant divergence in market performance, with leadership primarily driven by beneficiaries of artificial intelligence (AI) and a resurgence in cyclical sectors. In stark contrast, quality growth strategies, including those managed by SGA, struggled to keep pace. For the quarter, SGA's portfolio delivered a return of 0.8% (Gross) and 0.6% (Net), lagging behind the MSCI Emerging Markets (EM) Net Total Return Index, which returned 4.7%, and the MSCI EM Growth Net Total Return Index at 3.3%. Over the entire year of 2025, the portfolio achieved gross returns of 23.8% and net returns of 22.8%, yet again fell short of the indexes, which reported returns of 33.6% and 34.3%, respectively.

Despite the challenging market environment, the portfolio is projecting a promising annual growth of 13% in revenue and 16% in earnings over the next three years. This optimistic outlook is bolstered by a focus on key holdings, including the top five selections that SGA believes will drive future success.

One noteworthy holding mentioned in the investor letter is Tencent Music Entertainment Group (NYSE:TME), which, despite being a significant detractor in the fourth quarter, continues to be a focal point for SGA. As of February 11, 2026, Tencent's stock closed at $16.94 per share, with a one-month return of 2.05% and a notable 32.76% increase over the past twelve months. The company's market capitalization stands at $28.53 billion.

SGA stated: "Tencent Music Entertainment Group (TME) was a detractor during the quarter, as concerns around rising competition and margin dilution weighed on investor sentiment despite strong top- and bottom-line results. The continued growth of Soda Music, backed by Douyin’s traffic, raised questions about their potential impact on long-term competitive dynamics, particularly at the lower end of the market where monetization remains challenging. Additionally, investments in new verticals such as concerts and merchandise, while strategically valuable, are expected to pressure gross margins in the coming year. However, we view these initiatives as attractive as they are accretive to overall profits and should help further differentiate the platform to drive SVIP (Super VIP) adoption, which increases average revenue per paying user (ARRPU). We continue to believe in TME’s long-term growth prospects and competitive advantage given its differentiated content ecosystem, strong brand, and ability to innovate and capture new opportunities across China’s evolving music industry. However, we continued to trim the position in the quarter to a below-average weight on relative valuation after strong performance in the first half of 2025."

SGA also noted that Tencent Music Entertainment Group is not among the 30 most popular stocks among hedge funds. As of the end of the third quarter, 35 hedge fund portfolios held TME, an increase from 31 in the prior quarter. While SGA acknowledges TME's potential as an investment, they suggest that certain AI stocks might present greater upside potential with lesser risk.

This letter not only highlights the performance metrics and challenges faced by SGA’s Emerging Markets Growth Strategy but also emphasizes the broader landscape of investment opportunities. As the market continues to evolve, understanding the dynamics of high-profile companies like Tencent and their competitive environment becomes crucial for investors looking to navigate these turbulent times.

For those interested in delving deeper into investment strategies or exploring other stocks, SGA encourages reviewing their hedge fund investor letters for more insights. The ongoing developments in the market suggest that while some companies face challenges, others may offer promising opportunities, particularly in the rapidly changing tech landscape.

In conclusion, the journey through the fourth quarter of 2025 reveals a complex tapestry of market performance where adaptability and vigilance remain key for investors. With strategic decisions on holdings and a forward-looking revenue growth projection, SGA's approach underscores the importance of navigating the ever-shifting dynamics of emerging markets.