Tencent's stock dropped 3.6% to $13 as Bloomberg reported that the State Administration of Market Regulation is scrutinizing the company's tangled web of agreements with Sony Music Entertainment (SNE) - Get Report , Warner Music, and Universal Music.
The big record labels have signed away exclusive rights to large portions of their musical portfolios to Tencent Music, with Sony and Warner both taking stakes in Tencent when it went public last fall.
Tencent, in turn, is reportedly in talks to snap up a 10% stake in Universal Music Group, owned by French media giant Vivendi (VIVHY) .
Tencent Music's broad and deep song portfolio has enabled it to generate revenue by sublicensing content, but it has also made the company unpopular in some quarters.
Forced to sublicense music from Tencent, smaller rivals have complained about high fees. In particular, licensing a song in China from Tencent can be double the cost of licensing directly from the major record labels in other parts of the world, the Bloomberg report notes.
Tencent Music is controlled by Chinese tech giant Tencent Holdings (TCEHY) , which oversees a vast array of gaming, internet and social-media holdings.
The investigation comes with Tencent riding second-quarter earnings of 10 cents a share, beating the estimate of analysts surveyed by Zacks Investment Research.
Revenue surged 31% to $859 million.