• Tencent sees a smooth sail for the soon-to-launch informercial business on the popular video accounts on WeChat, expecting substantial revenue.
  •  Management sees good signs of regulatory impact on platform economy, citing State Council meetings and Politburo meetings in July.
  • Executives also shared forecasts on the corporate’s gaming industry, which was weighing the overall revenue down in Q2.

Many media outlets have picked up Tencent’s Q2 Financial Report, in which the company reported first-ever revenue decline since its listing in 2004.

Tencent chairman and CEO Pony Huateng Ma said the corporate will work on creating new business lines to pop up revenue, including launching infomercials in WeChat’s video accounts. “Approximately half of our revenue comes from FinTech, providing services for corporates, and online advertising. They directly contribute to and benefit from overall economic vitality. The growth of the Chinese economy will provide us with opportunities to boost revenue,” Ma said in the financial report.

Tech Tech China presents an exclusive transcript for a high-level conference that took place soon after Tencent issued the earnings report on Aug 17.

In this conference, Tencent’s Management sat down with analysts from Goldman Sachs, Citigroup, to name but a few, and answered questions on Tencent’s vision on its gaming industry, its alleged divestment from Meituan, and the commercial business that is about to launch in WeChat video accounts.

(Note: “Mitchell” below stands for James Mitchell, Chief Strategy Officer and Senior Executive Vice President of Tencent; “Lau” for Martin Chi Ping Lau, Executive Directer and President of Tencent. Others are the names of the institutions these analysts were representing.)

*Exclusive transcript for the Q2 2022 Financial Report Conference*

+ Will the booming video accounts cannibalize WeChat Moments?

Goldman Sachs: Thank you, Pony, Martin, James and John. ‍‍Hearing all the impressive user and time spent growth of video accounts. So I want to hear what is management’s expectation of the potential room for advertising revenues from this‍‍ video account. If we benchmark with other short-form video platforms, how do we see e- commerce as a potential within that? ‍‍And would there be any time spent cannibalization within WeChat as video accounts continue to grow? ‍‍

Mitchell: Yeah, thank you very much for the question, Ronald. ‍‍So in terms of benchmarking the‍‍ long term revenue opportunity for video accounts, then we provided a couple of references. One is that ‍‍video accounts now represent roughly 80% as much time spent as Wexin moments, and that ratio has been‍‍ rapidly climbing. All else sequel. The ecpm (effective cost per mille) on video accounts will likely be slightly lower than [WeChat] Moments, ‍‍but the advertising intensity will be higher. And so net revenue potential per minute of user time spent will be higher. ‍‍Another way of benchmarking is against the incumbent short form video services. ‍‍Currently, video account has lower aggregate time spent, ‍‍but the cpm (cost per mille) appears competitive with those incumbent services or superior to those incumbent services. ‍‍I think if you take the two together, actually tie out fairly similar‍‍ outcomes to each other in terms of the risk video accounts, cannibalizing‍‍ Wexin moments, then we have not seen such cannibalization and we do not expect to see such cannibalization, ‍‍because the different services provide different user needs, just as the growth of moments, did not cannibalize Wexin chat. ‍‍We know we believe the chat experience and the experience of sharing photos and articles with your friends. ‍‍And, the experience of watching short-form videos provided by AI algorithms, and three discrete internet use cases.

‍‍Lau: In terms of e-commerce, I would say‍‍ we do see e-commerce live streaming to‍‍ to be an opportunity potential, but that would take some time. ‍‍I think in terms of staging, right? We actually have to go from the short-form video to live streaming. As you can see, we actually have been building‍‍ the user habit of life streaming over time, including the very successful launch of some of the‍‍ live concerts. And once we have built a habit of people watching live streaming, ‍‍then we actually need to have‍‍ an ad system right there, which actually can allow some of the merchants‍‍ to bring traffic not just from organic basis, but also by throwing‍‍ at dollars to attract the users into their live streaming commerce. ‍‍And then‍‍ when that happens, then I know we need to recruit merchants to be doing live streaming for the purpose of commerce. ‍‍After all, this is done. I think our ecosystem adventure would start coming into play because our mini programs‍‍ can actually very easily help the merchants to conclude transactions. ‍‍And our private domain advantage can actually help merchants to accumulate customers of their own and establish a longer-term relationship than just‍‍ a one-time transaction. ‍‍So, I think that will be the progression of the live streaming e-commerce and would try to do it on a stage-by-stage basis.

+ Management’s forecasts on regulation

BNP Paribas: Firstly, could you update us on any developments in the regulatory backdrop following the recent commentary? ‍‍From the authorities around the healthy development of the platform economy‍‍ and completion rectification. ‍‍Last quarter, you provided some helpful observations, argue, and it would likely take time for these high-level‍‍ directives to filter through specific regulators. And I’d also likely follow a sequence. Are there any developments to highlight? Then, secondly, ‍‍operating cost growth slowed furthering cue to relative to recent quarters, demonstrating good cost control. ‍‍Could you help us think, prove a trajectory of cost growth over the rest of the year? And the key puts and takes? Many, thanks. ‍‍

Lau: Okay, in terms of your first question on the regulatory front, I think you know we have given some of‍‍ the highlight in our strategy section, but I think as you have observed right now, the recent regulatory direction is actually trending toward more positive‍‍ tone for platform economy. ‍‍And‍‍ the key message is 1) to promote well-regulated, healthy, and sustainable development 2) complete‍‍ the ratification, and 3) to carry out regular supervision. And that’s reiterated in both the State Council meetings as well as the Politburo meetings in late July. ‍‍I would say along that the guiding principle, we have seen a number of observations. ‍‍Number one is that there’s actually no new regulation this year that are materially detrimental to the industry. ‍‍The second one is‍‍ there is a resumption of the issuance of Banhao, and it that there are multiple batches that have been issued. ‍‍It addition to that, thirdly, we also have seen initiatives to formulate more supporting‍‍ policies for platform economy across various regulatory bodies. ‍‍For example. ‍‍One is NDRC-led interim ministerial task force‍‍ that has been set up to foster the development of digital economy and coordinate policies on strategic areas, such as big data and internet class. ‍‍And the Ministry of Commerce also announced opinions to promote development, cultural content. ‍‍For example, expanding pilot program of game approval, fostering internationally renowned brands in games. ‍‍We have seen‍‍ quite a few new developments along the line of the general more supportive direction. ‍‍Having said that, we do expect the supporting measures will take time to play out. ‍‍And we look forward to see more of them coming in the near future.

Mitchell: ‍‍We’re on your second question around the impact of the various‍‍ margin initiatives. ‍‍Then Martin talked about the first batch of cost initiatives‍‍ that we’ve already implemented. And for those, I think you’ve started to see the marketing expenses come down quite sharply already. ‍‍You’ve begun to see a partial, they’re not full flow through to lower cost of sales. ‍‍And you haven’t yet in the second quarter, but you were in subsequent quarters, see a flow through to G&A from some of the‍‍ a headcount in compensation adjustments we made. ‍‍Martin also talked about a second batch of expense initiatives, which are more business-specific, which will take effect‍‍ and show through during the second half of the year. ‍‍And then finally, we have some‍‍ high margin revenue initiatives of which the most immediate is video accounts will flow through two. So we believe‍‍ with those 3 sets of initiatives taken together, we can return the business to year on year earnings growth, ‍‍even if the macro environment remains as it is today.

+ The future of gaming may remain bleak, but Tencent is confident to return to earnings growth despite a lagging gaming sector

Jefferies: Thanks management for taking my questions. I have a question regarding the macro headwinds‍‍ that we are seeing globally. I understand that management has different initiatives and cost control measures, ‍‍but just want to get some color with regard to the game insight. ‍‍We are seeing an international game, and domestic games are impacted by soft gamer spending, just want to get some color about‍‍ our gaming strategy on this regard. How would we tackle these macro headwinds going forward? ‍‍And my second question is also relating to the cost side, given that we have done a great job‍‍ in the post-control measure, just want to get some color about the earnings growth‍‍ with all this initiative. ‍‍Should we expect this to happen starting in Q3? Thank you. ‍‍

Mitchell: On the cost control, as we mentioned, we’ve taken a number of steps in the‍‍ first half of the year. Some of those have already borne fruit in the second quarter results. Others will bear fruit in the second half of the year. Will take some further steps. ‍‍And we believe that we can return to earnings growth in the coming quarters, ‍‍even if revenue remains as it is now, in terms of the game business, ‍‍then you’re right. It is a digestion year for different reasons, both for domestic and international games. ‍‍And‍‍ our strategy is to accept that and to focus on really deepening our engagement with users, ‍‍which we’ve talked about in terms of our leadership in total time spent, ‍‍and also focus on developing our capabilities, especially in the international markets, as well. ‍‍Our growth model is not predicated on‍‍ the game business, returning to revenue growth. We believe we can grow earnings and, even with the game business as it is now. ‍‍For the game business, both domestically and internationally were focused on engagement and capabilities. ‍‍And we believe‍‍ and also developing good new games. And we believe that in time, as we move into next year, ‍‍then that will position us very well to resume game revenue growth. But I want to reemphasize that game revenue growth is not a precondition for earnings growth.

+ Reducing loss-making activities for cloud business, and launching the bidding for in-feed ads on video accounts

Daiwa Capital: My questions are more on the cloud business services. You guys mentioned that‍‍ with the more internal strategy shift, focusing more quality revenue growth, such as reducing loss-making activities. ‍‍This has been a major reason. How long do you think this will last? Can you provide some color there? ‍‍At the same time, we are hearing the macro conditions are preventing of a lot of the‍‍ file deployment from many of your customers. Are you also seeing that of a major bigger impact? And just quickly at the margins? ‍‍You know, what are the key areas that we could further improve our profitability, except for introducing more on SaaS, ‍‍past products? ‍‍And a quick follow up earlier, I think you guys didn’t mention on the ads, video accounts‍‍ that you will be progressive, but at the same time, it will be faster than what happened to more Wexin moments. ‍‍So should we be expecting a different growth or trajectory for video accounts, revenue, momentum in the coming quarters? ‍‍Thank you.

Lau: ‍‍In terms of cloud, I would say it is indeed partly‍‍ macro and partly proactive‍‍ initiative from our side to reduce the loss-making activities. Now on the macro side very clearly, ‍‍the most impacted industry vertical is actually internet industry. ‍‍Internet customers basically got impacted the most as the industry faced a macro challenges as a whole. ‍‍And then at the same time, the macro environment also impacted some enterprise clients. ‍‍And even in some‍‍ cases, the deployment already signed contracts deployment, actually. So they got impacted because of COVID-19 resurgence in different cities. ‍‍Those are‍‍ the factors on the macro side. And then on the proactive side, I would say one is actually we reduce loss making activities such as subcontracting and very heavy customization because those tends to‍‍ be loss-making businesses. And at the same time we also refrain from cutthroat pricing. ‍‍So certain projects which clearly are gonna lose money and at the same time, they’re of little value add, for example, if it’s purely a CDN type of business without much‍‍ opportunity for upselling, then we‍‍ in the past, I would still fight for those projects. More recently, we actually tend to give them up. ‍‍Those combination of factors would mean that our revenue actually is seeing less growth, and in past quarter actually declined‍‍ year on year. But I think what we try to drive for is actually an increase‍‍ in terms of gross profit and the narrowing of the losses‍‍ that the business actually incurs over time. And I think we actually making good progress towards those goals. ‍‍

Now, in terms of margins, I would say a very important part. Actually, given we have very large‍‍ existing customer base already, we actually focus our development and our operational and marketing effort on upselling. ‍‍Our existing customers into our higher margin PaaS and SaaS products, especially when these products are internal developed, ‍‍they carry both revenue opportunities as well as margin and improving  and profit generating‍‍ opportunities.

‍‍Now, in addition to that, I would say on the price and on the cost side right now, we actually also try to improve our cost efficiency‍‍ by managing our supply chain better‍‍ by introducing newer technologies, such as newer tag and newer chip technologies. ‍‍In some cases, we actually sort of you know work with the chip developers very closely, and sometimes we’d work with domestic chip developers very closely‍‍ to get cheaper supplies. ‍‍And at the same time, we actually mentioned that as part of the cost effort and as‍‍ a long ‍‍initiative of moving all our domestic inhouse services, all onto our cloud infrastructure. ‍‍We finally, after a few years, ‍‍I have got it done. And this actually helped to increase the scale of our‍‍ cloud infrastructure. And by that, it’s not just about the procurement, but also‍‍ on the same tech infrastructure. It’s supporting both internal and external clients. And that actually helps to‍‍ improve our cost efficiency. And these are all activities which would help to increase our margin.

Mitchell: And on the video accounts, your question was whether the‍‍ advertising would be faster for video accounts than moments and the answer is – Yes it is. And we’ll see in coming days will launch the‍‍ bidding for the video account in-feed ads to supplement the contractual pricing which should contribute to that. ‍‍Thank you.

+ Advertising model of video accounts

Bank of America: Just a follow question about video account. I think you guys mentioned a quite a bit about‍‍ e-commerce advertisers definitely with the connections to mini programs and WeCom we can see that, but just a wondering down the roll like‍‍ for example, in 1 or 2 years time, what kind of use cases you can foresee from video account advertising beyond‍‍ e-commerce transactions? ‍‍And then related to that how video account will affect the online advertising space specifically? Do you think is more competing for budget on other, let’s say, online media platforms or do you think is creating new advertising demand and why?

Mitchell: Thanks. ‍‍Eddie. So it’s obviously competing with other short form video platforms. Advertisers have a budget for short form video. ‍‍They already split that two ways and going forward they’re increasingly splitting that three ways. ‍‍Advertisers say we’re gonna spend x amount online, y% of that will be on short-form video. ‍‍Previously we didn’t tap into the x%, and now we’ve begun doing. So that’s where we think the budgets will come from. ‍‍

In terms of the e-commerce commentary, then with regard to the second quarter. ‍‍What we called out was really that we saw an uplift in our e-commerce advertising spending in June, ‍‍and an uplift for the first quarter. ‍‍And there’s a number of reasons for that, including the‍‍ proliferation of mini programs and also including some of the changes in the China internet landscape meant that‍‍ some big e-commerce companies which under spent on Tencent properties in the past, ‍‍have begun spending more aggressively on Tencent properties and. ‍‍So there’s been aa market share shift in our favor from those‍‍ a really big companies. So in terms of video accounts, ‍‍advertisers by category, then adjust it with Moments, we expect a broad spread of category. So e-commerce is one, but internet services is another‍‍, consumer goods, food and beverage, automobiles, ‍‍all important as well. And automobiles actually or another area where advertising has been slightly healthier in the last couple of months for us. ‍‍

+ Is the global gaming weakness a post-pandemic phenomenon or a macroeconomic one?

Citigroup: The first one is regarding the global of gaming landscape. Obviously, we mentioned this is the post pandemic, digestion period. Is that fair to assume this digestion period will start to normalize in the next couple of quarters? How should we factor in the inflation issues into the gaming virtual item pricings versus the entertainment of spending priority among the global gamers?

Will gaming industry also face challengers on the backdrop of these global macro weakness? Or if we maintain the virtual item pricing, despite this inflationary environment, will gaming actually become more affordable entertainment choices that we could actually see benefiting from there? So any thoughts that management could help us think about these growth, a prospect of the global gaming industry will be helpful.

Mitchell: Alicia, so on that game, questioning that there’s a great deal to unpack there, and I won’t even begin to start, because it’s actually not the most important thing for us.

Whether the international game industry returns to growth, as we enter next year or takes longer, depends on whether the weakness we’re seeing now is primarily a post-COVID phenomenon, which should cycle out late this year, which would be positive, or whether it’s primarily a macroeconomic phenomenon, which could last for longer, depending on how global economics play out.

And historically, the game industry has not been very, economically sensitive. However, historically, the game industry was more of an upfront purchase model. Now, with much of the monetization of games being driven by in-game kind of cosmetics decisions, one could argue that the game industry has become more discretionary in nature, and there are consumers who have been playing their favorite game, have been purchasing items in their favorite game.And then when conditions are more difficult in terms of employment or inflation, they reduce their spending while still continues playing the game.

The realities we just don’t know when, and no one really knows what the answer is to those imponderables. What we do know is that we have some exciting games in the pipeline. It will be launching Undawn in China, becoming weeks, which are very excited about we have Darktide coming up internationally in the coming months. And then what we do know is the irrespective of whether the game business for us takes a month or quarters to reaccelerate. We can grow the rest of our business and indeed grow our overall earnings, irrespective of what’s happening with that game recovery.

+ Cloud business: enhanced software but elementary monetization?

Citigroup: And then second very quickly on the cloud business. We have make some progress on enhancing and upgrading the various productivity software, and monetization may be still at early stage, but any color on the latest adoption rate for this new solution? Will this slight decline year over year that you mentioned on business services, revenue, a table of in the second half that we could started to see the positive role earlier than expected?

Lau: Now, in terms of the productivity software and the monetization, I would say this is definitely a revenue opportunity, right? It’s one of the revenue opportunities that we have in our coffer but because it’s not the most immediate and sizable in the near future. So that’s why we didn’t talk about it in the strategy update. So instead within the strategy update, we only talk about the ads with individual accounts. The longer term, obviously, this is a revenue opportunity.

In terms at this stage, I would say the adoption is still at the beginning. While it’s encouraging, it’s too small in absolute numbers, and we believe there needs to be a longer conversion and educational process through which we can get the enterprises to start paying for these productivity software. As a matter of fact, if you would notice, this conference call now, we have actually moved from a previous webcast to our own Tencent meeting service. So in in fact, our department has become a paid user of our own productivity software. And we hope the service level is actually satisfactory, and you would actually help us to promote this service to other enterprises.

Now, in terms of the business services and, in particular, cloud, which is the biggest component, I would say for the moment, they’re actually much more focused on making sure that we can grow our gross profit pool. And at the same time, we can narrow our absolute dollar in terms of losses of the cloud business. So this is actually the more near-term objective. And I would say in terms of the revenue growth, I think we are probably pushing it into the next year.

+ Tencent’s comment on the alleged divestment of Meituan, and its investment vision

HSBC: I would like to ask if we can get some comments on recent news on potential for the divestment of your portfolio companies Meituan? Can you tell us your thoughts more broadly on the subject? Whether there is any lesson learn from our early disposal of JD and SEA sticks this year?

Mitchell: So the specific news article you cited was not accurate. We are very focused on returning capital to shareholders, given we believe our share prices is very undervalued and also undervalued in the context of our investment portfolio. If you look at what we’ve done here to date, we’ve returned around seventeen, eighteen billion dollars to Tencent shareholders. We’ve been largely neutral in terms of our investments, divestments in other companies are executing the substantial JD diversity. So our focus from a sort of investments perspective has been buying back and dividend-ing to our own stock, and that would likely remain the case going forward for some period of time. 

In terms of what are the lessons we’ve learned from the JD and SEA distributions, then I would say that we’ve learned how to process some of the logistics sufficiently, which is good, that means we can do future such distributions or sales are more rapidly. We’ve also developed our ability to manage relationships on those transactions. You demonstrate that while we have sharply reduced our stake in JD as an example, we continue to have a very good business relationship with JD and also with SEA on and ongoing basis.

HSBC: How are you thinking about your buyback plans under the backdrop of Prosus and Naspers lowering their holding in Tencent, as well as our long-term and continual investments in strategic areas, like international games, SaaS and video accounts?

Mitchell: In terms of your question as to how we can fund ongoing buybacks and dividends, if you take our second quarter results, we generated annualized free cash flow of mid-teens billions of US dollars. That’s after investing in the car packs and so forth to support video accounts and support international games and support enterprise software. In addition to that, we have disclosed that we have an investment portfolio whose market value was US$90 billion at the end of the quarter. And we have demonstrated with JD and SEA that we’re willing to work down that investment portfolio at the time to more effectively return capital to Tencent shareholders.

In addition to that, we have unlisted or private investment portfolio where the book value is over US$50 billion. And we believe there’s been substantial appreciation on that over US$50 billion book value. And we also look for opportunities to return capital from that a private investment portfolio in the form of dividends, distributions, and buybacks.

I think if you add out of the above the annual free cash flow in the teens billions of dollars, the listed and unlisted investments in excess of $150 billion, then you’ll see that we have substantial ammunition relative to our $370 billion market cap to continue doing dividends and buybacks at an aggressive rate.

And then finally, I think our investors have responded quite favorably to the dividends and distributions. And that encouraged us stood to think about how to continue down that capital return path going forward.

+ Tencent operates more in the virtual world? It is no longer the case.

Morgan Stanley: My first question is related to FinTech or payments business. This is a revenue line which mostly related to consumption of macro economy. So how should we look at that in second half or maybe going into next year?

Mitchell: So on the FinTech business, then I think sometimes people operate onto the mis-apprehension that in the Tencent operates more in the virtual world rather than the physical world and is therefore immune to slow-downs and unaffected by re-accelerations in the broader economy.

And there may have been some truth to that misperception many years ago, but it’s no longer the case today. The FinTech business is our biggest single activity. And if you look at payment, merchant, acceptance businesses, like Visa and MasterCard in the western worlds, then they’re very clearly geared to economic activity. They slowed down a great deal. When western economies slow down and they re-accelerate as western economies are reopened.

The same thing is proving true for our payment business. As we mentioned in the introductory remarks, our payment volume growth slowed to low single digits year on year in April and May when cities went through the COVID 19 shocks, and then accelerated to high teens growth year on year in June, and accelerated again in July. And the payment volume growth cordates are quite neat with the payment revenue growth. We had a sharp deceleration, just as Visa and MasterCard did because of the COVID 19 shocks. Now, we’re experiencing an upturn and extent the China economy re-accelerates, then certainly our payment business, also our advertising, and our business services activities should enjoy the benefits just as they’ve suffered during the slowdown period.

Morgan Stanley: Second is a follow up on video accounts. I think we mentioned that our time spend is exceeding 80% of Moments. So does it mean in the foreseeable future, video account will become our #1 kind of advertising channel within the Tencent ecosystem with the revenue even exceeding the Moments? And if we compare with other peers, are we confident that we can have a revenue per time spent, which is at least equivalent or even better than some of the other short-video peers?

Mitchell: In terms of the video accounts and how we stack up versus peers from a monetization perspective, we have been running in-feed ads with individual accounts for several weeks.

Now, those in-feed ads are sold on a contract basis, currently. The eCPM on those contract ads is moderately lower than the eCPM on contract ads on Moments, but it’s higher than the the blended eCPMs for ads on the two incumbent short-video services. We will be rolling out bidding price ads within video accounts in the coming days. From that experience, we will have a clearer picture of what the long-term eCPM is for video accounts based on the two incumbent services.

But based on the data that we’ve seen so far, from both the contract priced ads, and before that, from the quality and the enthusiasm of the sponsors for the live stream concerts on video accounts, I’d say that we’re quite optimistic that the eCPMs were achieved for our video accounts, that should be at least par with at the eCPM of the leading short-video platform in China today.

UBS: I wanted to ask about cost control. It sounds like with payments, with advertising, we’re seeing some improvements in these businesses in just recent months and weeks and sooner or later, we’re gonna have new games coming through.

So one of the investor questions we’ve been getting is, as that happens, are we gonna ramp up some of the social marketing and spending? So I get that if revenues, flattish, then we were seen as we can still get to our earnings growth environment. If we have the opportunity, would we go back to slight investment mode to drive revenue growth?

Lau: I think the assumption is correct. If we have new game, then we actually supported with marketing campaign. And we believe that will be money well spent, especially if it’s on a pretty significant title like Undawn.

UBS: So there’s been some questions recently about just the ramp of video accounts. I’m just wondering what is the candidate, the limiting factor, that the bottleneck to the pace of the ramp? I know in the past, for example, with Moments, we’ve talked about user experience in terms of how fast we crank up the ad load, is that also the key consideration here? What is maybe the priority to determine the pace we can ramp up advertising?

Mitchell: There’s a continual optimization and re-optimization process where we expand the percentage of video accounts, users who can see ads. You show them one ad per use a day. We measure the performance of that ad, we optimize, then we increase the number of ads per use a day. We measure the performance of the incremental ads we re-optimize. And for Weixin moments, that optimization and re-optimization took a long time, because it was the first time we done it at scale these with innovation property, because we didn’t have external accounts to benchmark against for the video accounts. We’re going through that process faster, because we have the experience of moments. I believe, because our machine learning, hardware, and software better now than they were then. By point of reference, I think if you look, the time lag between us launching contract price ads versus bidding ads with many quarters versus for video accounts a few weeks.

Macquarie: Obviously, the use of moment engagement momentum is very strong, so as a very clear rule map that we have and that both well for monetization, just looking at this very holistically, what are the synergies within the Weixin ecosystem? How does that compare with ad formats such as a Moments and official accounts, given our perspective of a funnel strategy?

Mitchell: I think that Martin touched on some of the synergies in the opening remarks, including the fact that when an advertiser buys a video account, they can have that link through to their mini-program, which is their private domain transaction or environment that they value very highly, including the fact that they can have the ad link through to WeCom so that a consumer who’s interested in a high value product, such as a electric vehicle, can then begin a chat with a salesperson for the electric vehicle, OEM or dealer.

Lau: There’s no cannibalization. Right now, both from the perspective of user time spend as well as from ad dollars spent.

Macquarie: My second question would be in terms of our international game, and also how that aligns with our investment strategy? So our broader investment strategy would be to emphasize on strategic growth. And right now, we’re in the face of rebalancing up our portfolio. Given the recent news headlines about Tencent potentially raising stake in a global game company, how should we think about global M&A opportunities? How does that align with Tencent’s international game strategy?

Mitchell: In terms of our international game strategy. There are sort of three in a prongs for delivering new games. One is the existing international investees bringing new games to market. And some of those investees, consolidated investees, such as Riot and Supercell are very well known to investors. But in the last 5 years, we’ve invested in a range of other investees, such as a Stunlock that the less well known to investors, but with the success of V Rising, or with we hope the forthcoming success of Darktide. We believe there will be more understanding of the value with these international studios.

And then secondly, we have our big domestic studio, such as Quantum, TiMi, Aurora and Morefun that are developing games that will be released both in China and overseas, such as Undawn.

And then thirdly, we continue to be quite active in terms of acquiring new game studios. So we called out the fact that with Miniclip, so you probably know a consolidated subsidiary has acquired SYBO. And SYBO brings with it the game, Subway Surfers. And Subway Surfers has 30 million daily active users, which is actually a gigantic number. Normally in China, when we look at international games studios, the revenues very impressive, the products very impressive, but in the daily active users are an order of magnitude smaller than what equivalents would achieve in China, because the China game market has many users. But 30 million daily active users, it’s a big number by anyone’s standards, including our standards. So as you can see from SYBO and it’s 30 million people playing Subway Surfers each day, we continue to be active in acquiring game studios outside China.

+ FinTech development strategy

JP Morgan: Can you share with us your thoughts on FinTech development strategy? For example, is Tencent applying for a financial holding company license? Does Tencent need to establish a separate credit scoring unit and apply for a relevant license? Are you guys going to build your FinTech business in a similar or different way compared to comparable size FinTech peers?

Lau: In terms of our FinTech development, I think it’s actually relatively stable and progressing quite well. As you can see, FinTech is already a pretty significant part of our overall business. And in the past year, we have been engaging with the regulatory authorities to make sure that each part of the FinTech business is completely compliant and we’ve gone through a lot of business changes to make sure that these are all done.

In terms of the financial holding company, we are are still working with the regulators on the licensing part. And I would say whether we’re gonna be getting a financial holding company license, it would not have a major impact on our businesses.

The key goal is actually to understand what will be satisfying the regulators’ most stringent requirements. If the the end result of the exercise is that we will be applying and the regulator will give us one license, that would be great. And we believe it would not have and an impact on our business. Our business can continue to be conducted. Likewise, for the other specific questions about whether you need a license here, or you need a license there, or whether you need to make some changes to the current practice. We believe we have actually been through the examining exercise for the past a year and a half. We’re pretty comfortable that we know exactly what we need to do in order to continue to grow our FinTech business.

+ Tencent’s philosophy for monetizing video accounts

JP Morgan: As for video accounts monetization, am I getting it right that you guys are monetizing this ad property in a philosophically different way compared to your approach on Moments? And thinking about the long-term monetization potential, would you say you will round ads loads in a similar level as the current peers in the market, given that the ad load on Moments, after years of monetization, is still significantly below general purpose of feeds-based products?   

Mitchell: On the video accounts monetization, has the philosophy changed versus Moments monetization? No, the philosophy is exactly the same. And that we prioritize the user experience.

First, you can see that privatization is paying off because the number of video views within video accounts grew over 200 % year on year. Now, there are some differences between now and when we began monetize in Moments. One difference is that the benchmarks are much clearer, short-form video than they were for Moments. A second difference is that the machine learning software and hardware is better. A third difference is arguably that the cost to the consumer of an ad load within short-form video is lower than within a social network such as Moments. Because within short-form video, the consumer is continually previewing videos are swiping through those. She doesn’t want to watch and accepting goes she does want to watch. And so if in the same way, she sees an advertisement that she doesn’t want to watch, she swipes through it, she doesn’t view that is necessarily detracting from her overall engagement with a short-form video product.

That’s why if you look at the two incumbent short-form video services in China, they’re able to maintain ad loads of roughly 14% to 16 %. For moments, as you may know, the ad load, we show 3 to 4 ads per user a day. Given not all users see all of those ads for various reasons, the effective ad load is closer to 2% to 3%. We do expect video accounts to transcend to overtake Moments in terms of ad load, given where the two incumbent peers are already at today.