Earnings Call: Q1 2021

May 20, 2021

Good day, and thank you for standing by. Welcome to Tencent Holdings Limited 2021 First Quarter Results Announcement Conference Call. There Will Be A Question and Answer Session. Please be advised that today's conference is being recorded. Now I'd like to hand the conference over to Ms. Wendy Huang from Tencent IR team. Thank you. Please go ahead, ma'am. Thank you, Amber. Good evening. Welcome to our 2021 Q1 results conference call. Call. Before we start the presentation, we would like to remind you that it includes forward looking statements, which are underlined by a number of risks and uncertainties, quarter and it may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. Call. This presentation also contains some unaudited non IFRS financial measures that should be quarter. We are now in the Q1 of 2019. We are now in the Q1 of 2019. We are now in the Q1 of 2019. Quarter. For a detailed discussion of risk factors and non IFRS measures, please refer to our disclosure documents on the IR section of our website. Call. Let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview. President, Martin Lau will discuss strategy review Chief Strategy Officer, James Mitchell, will speak to business review and Chief Financial Officer, John Lo, will conclude with financial discussion before we open the floor for questions. Call. I will now turn the call over to Pony. Thank you, Wendy. Good evening. Thanks, everyone, for joining us. Quarter. During the Q1, we achieved solid growth across our businesses, and in particular, in our FinTech and Business Services and Advertising Revenue Streams. We are also stepping up investment in areas, including business services quarter, which will be covered in more details in the strategy section. Quarter. Now let me go through the headline financial numbers for the quarter. Total revenue was RMB135 1,000,000,000, quarter, up 25% year on year and 1% quarter on quarter. Gross profit was RMB63 billion, up 19% year on 1st 6% quarter on quarter. Non IFRS operating profit was RMB43 1,000,000,000 up 20% year on year and 12% quarter on quarter. Non IFRS net profit attributable to equity holders was RMB33 1,000,000,000 up 22% year on year and stable quarter on quarter. For our key services, despite intense competition across the China Internet Industry, quarter. We generally retain our further position in activities, including social, games, long form video, news, music, literature, payment and mobile utilities. And we believe we gained market share in cloud services. Combined MAU operation at WeChat was RMB1.24 billion. Mobile devices MAU of QQ was RMB606 1,000,000. Martin and James will discuss our future strategy and progress across some of these activities in detail. And I hand over to Martin for the strategy review. Call. Thank you, Pony, and good evening and good morning to everybody. Today, I will walk you through a few strategic investment areas that we believe will support our long term growth. In the course of 2020, we saw exciting New market opportunities emerging. Now first, businesses are accelerating their movement online and industries are speeding up digitization Across the value chains. 2nd, the audience for games structurally expanded due to the stay at home period. 1st. At the same time, the entire Internet industry is undergoing a new round of Additional Investment in which investors and companies are prioritizing growth over profit. We can see this in our own investee portfolio quarter, where heavy investments are made in areas such as community group buy, electric vehicles and user acquisition. On the other hand, These initiatives boosted market valuation with the market value of our STIX enlisted investees exceeding $200,000,000,000 as of quarter end. On the other hand, our top 5 loss making associates reduced our non IFRS net profit by 7% in the Q1. As for Tencent, we see opportunities to proactively invest in several areas where we can be an early mover and a shaper of industry evolution rather than playing catch up later. First of all, business services. We're adding headcounts and infrastructure to assist the digitalization of various industries. 2nd, games. We're investing in high production value games with global appeal 3rd, short form video content. We're cultivating multiple ecosystems to meet users' emerging needs for more interesting content. 4th, sustainable social value. We announced the establishment of NIO SSVorg to bring technology benefits to the society. Funding these investments will absorb a portion of our incremental profits from existing businesses for 20 21. We expect such investment will deliver very high return over the longer run. In the next few slides, I will discuss the specific opportunities, the progress and achievements we have made so far and the initiatives that we are funding going forward. Now let's start with business services. Since we upgraded our strategy to embrace Industrial Internet in 2018. We have seen products and service providers and customers aspiring to optimize Their connection with consumers digitally. Various industries are deepening digitalization across customer engagement, Operations, Production and Supply Chain, particularly after COVID-nineteen. Meanwhile, enterprises widely adopted online collaboration tools internally to improve their efficiency. Quarter. We have achieved some structural strength in this area. For example, on the scale front, we believe that across our internal usage and external customers, quarter. Our cloud service now runs the largest number of servers in China. And on the platform and software front, we provide leading CRM, collaboration Productivity Solutions in a market where those services are highly valued by enterprises. After a period of disruption due to COVID-nineteen, quarter. Our cloud services moved back to an above industry revenue growth rate in the Q1. To double down on these trends, We're increasing headcounts for product development to enhance our service offering and also expanding our sales team to facilitate client acquisitions and Service. We're strengthening the capabilities and interconnections of our productivity SaaS products and Security Software to extend their leadership positions. At the same time, we're growing the networks of independent software vendors and SaaS partners through strategic cooperations and investments. We are also deepening our smart industry strategy by expanding coverage and enhancing upselling cross sell competences in key verticals such as health care, retail, education and transportation. Turning to games. Quarter. We believe the global industry opportunities and the resources required to capture the opportunities are larger than ever. First mobile devices expanding the total addressable market for games, which was further boosted by the stay at home period. We believe emerging genres and development towards the metaverse will further expand the market. 2nd, Game players are becoming more discerning and quality sensitive. High production value, innovative and cross platform games can attract and retain large audiences to an extent not previously possible. Thirdly, Chinese game developers are attaining early success in global markets. Call. We believe we're already in the early stages of capitalizing on these trends. Our high DAU franchise games such as Honor of Kings, PUBG MOBILE, Peacekeeper Elite and Lead of Legends uphold our leadership in major genres. Each one of them consistently deliver large loyal audiences as well as solid monetization. On top of that, our internal and investee in studios are working on a large and diverse game pipeline. International revenues now also account for a substantial portion of our game revenues and titles such as PUBG Mobile, League of Legends and Valorant have achieved sustained player recognition globally. Looking forward, we're starting to lead the industry and are committing the necessary additional resources. We are making long term investments in developing large scale high production value games to attract players globally. Quarter. We're funding development of innovative games in emerging verticals. We're building up IP franchises suitable for games and expanding across media. Next, we'll talk about our investment in the short form video arena. China consumers have shown great appetite for watching short form video, and we are investing to address how we see that appetite evolving going forward. First, We're positioning video accounts as a new infrastructure in Weixin, connecting users with real life content and bridging high quality content creators with consumers. We'll provide resources as well as handy creation and monetization tools to attract diverse content creators, incubating a unique content portfolio. We optimized technology to unlock potential of social plus algorithmic recommendations, leveraging the strength to increase exposure of knowledge based content. Besides, we are adding service and bandwidth support the solid organic growth in video accounts. We're confident that these investments will benefit the ecosystem and engage greater audience over time. 2nd, we recently merged Tencent Video and Weishi, our short form video app in PZG, seeking to bring integrated viewing experiences to users Enriched Content Offerings as well as Sharpen algorithmic recommendation. Along with this internal business reorg, We are escalating self commission production to further expand our IP content library, which can facilitate creation of more video clips Finally, we announced our aspiration and to elevate the importance of sustainable social value when making decisions in all our products and services. Quarter. By integrating our existing corporate social responsibility and charitable activities into a new sustainable social value Station SSV org. We created a dedicated team to deploy social value initiatives in a professional and entrepreneurial way. We'll incubate projects in various areas such as basic science, education, innovation, rural revitalization, Carbon Neutrality and Food, Energy and Water provision. Where appropriate, we'll link these projects with our existing businesses. In addition to making charitable donations, we seek to promote the development of self sustainable operations, quarter, which could create new value for related industries and for society. Throughout the process, we'll pursue long term social value rather than economic profits. We are committing an initial capital of RMB50 1,000,000,000 to be funded by our investment gains. Call. We believe that our strategic upgrade and the new initiatives will allow us to make an even more positive impact to the society and usher in a new phase of development for Tencent. Now with that, I'll pass to James to talk about our business review. Thank you very much, Martin. For the Q1 of 2021, our total revenue grew 25% year on year. VAS represented 54% of our revenue within which Games were 32% and social networks 22%. Online advertising was 16% and FinTech and Business Services represented 29% of total revenue. For value added services, segment revenue was RMB72 1,000,000,000 up 16% year on year and up 8% quarter on quarter. Social Networks revenue increased 15% year on year to RMB 29,000,000,000 on moderate growth of digital content subscriptions and in game item sales. Total VAS subscriptions increased 14% year on year to 226,000,000. Video subscriptions grew 12% to 125,000,000 Benefiting from adaptation of IPs such as The Land of Warriors into animated and live action drama series. Music subscriptions 43% to RMB61 1,000,000 due to better content effective marketing campaigns and an improved retention rate. Games revenue grew 17% year on year to RMB44 1,000,000,000 against the high base stay at home period, which started in China in the Q1 of 2020. Growth was primarily driven by mobile games in China and by mobile and PC games in international markets. Sequentially, game revenue increased 12 percent due to Chinese New Year seasonality. For mobile headings, total revenue increased 19% year on year to RMB41 1,000,000,000 Benefiting from robust performance of existing games such as Honor of Kings, PUBG Mobile and Peacekeeper Elite, as well as contributions from new games such as Moonlight Save Mobile Call of Duty Mobile in China. For PC client games revenue increased 1% year on year to RMB 12,000,000,000 As contributions from Valorant and Warframe as well as growth from Crossfire offset a decline in Dungeon and Fighter. For Weixin, we provided more support for our partners and are together building a vibrant content and service ecosystem. And training in video production best practices. On the services front, we provide capabilities to increase penetration of Mini Programs, particularly among SMEs. Our low code development platform enables smaller businesses to create mini programs in a more cost effective way. And we launched new tools to assist system integrators. The number of active meeting programs served by system integrators more than tripled year on year. For QQ, we're leveraging technology to better integrate social and consumption experiences such as seamless connection between instant messaging and games. Users can team up with QQ friends to start a multiplayer game battle with one click QQ Mini Programs facilitate users staying up to date with in game events. Looking forward, QQ's new leadership team will seek to upgrade the product Technology Operations and Content to better serve the social and entertainment needs of younger users. Turning to games, aggregate user engagements and user spending increased year on year despite the high 1Q 2020 comparison period. We released Honor of King's biggest update in January to improve graphics and game experiences and then launched competing marketing campaigns with top tier skins during the Chinese New Year, quarter, which drove the games DAU and paying users to record high levels in February. We reduced the application file size of PUBG MOBILE and enhanced our local market operating capabilities boosting PUBG MOBILE's DAU in countries including Turkey, Egypt and Russia. For League of Legends, we distributed bigger and better Lunar Rebels content Call game mode as well as for Teamfight Tactics contributing to higher global revenue year on year. Beyond these large audience games, we're also cultivating emerging genres. For example, new releases Komori Life and the Walmart Diary ranked among China's top 10 life simulation mobile games by DAU in April. Our pipeline includes action battle arena role playing simulation strategy and survival games. For China, many of these new games Adapted from popular existing game and literature IPs. Internationally, we expect our substantial prior investments in best in class PC console and mobile studios to RMB22,000,000,000 in the quarter, up 23% year on year assisted by 3 factors beyond our ongoing product innovation and ad tech improvements. First, higher ad spend from the e commerce and education verticals. 2nd, FMCG and automobile related advertising revenue benefiting from economic growth. And 3rd 4th quarter consolidation of the bidauto automobile vertical site. We enhanced the transaction capabilities our ad properties and customized marketing solutions for key verticals, including games, retail and automobiles, delivering higher ROIs for advertisers. Looking forward, IDFA deprecation on iOS devices appears to have limited impact on the China ad market so far, While other potential uncertainties include possible regulatory headwinds for K-twelve education and potential delays to the video content release schedule, Our social and others advertising revenue expanded 27% year on year to RMB 19,000,000,000 driven by Moments and Mobile Ad Network, quarter. Our mobile ad network revenue grew rapidly reflecting increased video ad inventories primarily within games, online reading and tool applications. Our media advertising revenue rose 7% year on year to RMB3 1,000,000,000 largely due to increased ad inventory and eCPM within our music apps. During the quarter, we released several popular self commissioned variety shows including Chuang 2021 and Rose Season 5 driving our sponsors for bad revenue. Quarter. Looking at FinTech and Business Services, segment revenue was RMB39 1,000,000,000, up 47% year on year and up 1% quarter on quarter. Quarter. Within FinTech Services, the year on year revenue growth rate was higher than in prior quarters benefiting from an easy base period as Stay at home activity reduced offline consumption in 1Q 2020. Our payment business is also structurally benefiting from the broader digitalization consumer habits and of the economy. Payment volume and revenue increased slightly quarter on quarter despite seasonally reduced e commerce activity. Offline spending picked up as many people stayed in the cities in which they worked during the Chinese New Year holiday, which boosted local spending on retail and dining services. For Business Services, revenue grew at a healthy rate year on year benefiting from resume project deployment and robust demand from industries including enterprise quarter and online video provision. Increased customer uptake of our security communication and CRM solutions drove notable growth in our PaaS and SaaS revenue Both absolutely and as a proportion of our overall business services revenue. Our cloud marketplace now includes thousands of partners, software as a service products. We launched Enterprise App Connected with unified login accounts and data flows across different SaaS products, allowing SaaS providers to develop and deliver their products more efficiently, Thank you, James. For the Q1 of 2021, total revenue was RMB135.3 billion, quarter, up 25% year on year or 1% quarter on quarter. Gross profit was rmb 62.6 billion, up 19% year on year or 6 percent quarter on quarter. Net other gains were RMB 19,500,000,000, up 3 84% year on year or down 41% quarter on quarter. This mainly compressed on IFRS adjustment items, including fair value gains, reflecting increased valuation of the investments, Investee Companies in verticals such as FinTech and Social Media as well as net gains on DIM disposal and disposals of certain investee companies. Operating profit was rmb 56,300,000,000, up 51% year on year or down 12% quarter on quarter. Quarter. Net finance costs were RMB 1,400,000,000, down 19% year on year or 39% quarter on quarter. Quarter. The year on year decrease was mainly driven by reduced interest rate as we capture favorable interest environment in our treasury exercise. Quarter. The Q on Q decrease was primarily caused by ForEx gain this quarter, while we recorded ForEx loss a quarter ago. Share profit of associates and joint ventures was RMB1.3 billion compared to share of losses for the Q1 last year quarter. As we benefited from non IFRS adjusted items, including a nonrecurring fair value gain on the investment of an associate as well as improved performance of certain associates. On a non IFRS basis, we recorded share profit of rmb5000000000 for the Q1 of 2021 comparing to rmb164 1,000,000 a year ago. Income tax expense was rmb 7,200,000,000 this quarter. Effective tax rate for the quarter was 12.9%. IFRS net profit attributable to equity holders was rmb 47,800,000,000, up 65% year on year or down 19% quarter on quarter. Diluted EPS was RMB4.917, up 64% quarter year on year or down 20% quarter on quarter. Now I'll share with you non IFRS financial figures. For the Q1, operating profit was rmb42.8 billion, up 20% year on year or 12% quarter on quarter. Net profit after NCI was rmb 33,100,000,000, Up 22% year on year or largely stable quarter on quarter. Diluted EPS was RMB 3.415 per Up 21% year on year or largely stable quarter on quarter. Moving on to gross margin. The overall gross margin was 46.3%, down 2.6 percentage points year on year or up 2.3 percentage points quarter on quarter. Analyzed by segment, Quarter Gross margin for VAS was 55.1%, down 3.9 percentage points year on year or up 3.6% Quarter on Quarter. The year on year decline was mainly due to: number 1, increased content cost from more airing of dramas and variety shows versus a year ago Number 2, it's revenue mix shift from higher margin PC client games and QQ subscriptions to lower margin digital content services. Quarter. The sequential increase benefit from revenue mix shift towards higher margin mobile games amid favorable seasonality for games. Quarter. Gross margin for online advertising was 45.1%, down 4.1 percentage points year on year and 8.2 percentage points quarter on quarter. The year on year decrease was mainly due to higher revenue contribution from mobile ad network business, which carry a lower Margins sequentially. The decline mainly reflected seasonal seasonality and increased content cost for more airing of drama, series and sports events. Quarter gross margin for FinTech and Business Services was 32.3%, up 4.4 percentage Points Year on Year and 3.8 percentage points quarter on quarter. Both year on year and quarter on quarter margin growth are mainly due to revenue mix shift towards merchant payment and wealth management services, which carry relatively higher profit margin. In addition, On operating expenses. Selling and marketing expenses were RMB 8,500,000,000, up 21% year on year or down 1st The year on year increase was mainly due to increased marketing spending, particularly on business services and games and the consolidation of newly acquired subsidiaries such as Bitauto as well as higher staff force and welfare expenses. Sequentially, marketing quarter. Was lower because of seasonality. As a percentage of revenues, selling and marketing expenses was 6.3% of revenues, largely stable quarter and compared to the Q1 of 2020. G and A expenses were RMB 19,000,000, quarter, up 34% year on year or down 4% quarter on quarter. The year on year increase mainly reflected greater R and Cost. The Q on Q decline was mainly driven by seasonally lower office travel and entertainment expenses. Within G and A, R and D expenses were RMB 11,300,000,000, up 41% year on year and 1% quarter on quarter. Quarter. G and A and R and D represented 14% and 8.4% of revenues, respectively. As at quarter end, we had approximately 89,000 employees, an increase of 39% year on year and 4% quarter on quarter. Quarter. Let's take a look at the operating and net margin ratios. For the Q1 2021, non IFRS operating margin was 31 point percent, down 1.3 percentage points year on year or up 3.1 percentage points quarter on quarter. Non IFRS net margin was 25.5 percent, largely stable both year on year and quarter on quarter. Finally, I'll share some key financial metrics quarter. Total CapEx was rmb 7,700,000,000, an increase of 26% year on year or decrease of 20% quarter on quarter, Within which operating CapEx grew 20% year on year to RMB 6,600,000,000 due to more spending on servers and Network Equipment to augment our business growth. Non operating CapEx increased 69% year on year to rmb 1,100,000,000, mainly driven by increased expenditure on cloud, data centers and office properties. Free cash flow for the quarter was rmb 33,200,000,000, down quarter. Net cash position declined sequentially to RMB 5,600,000,000 mainly due to net cash outflow quarter. M and A activities partially offset by free cash flow generation. The fair value of our shareholding in listed investee companies Release of subsidiaries were approximately USD 1,400,000,000 or USD 207,000,000,000 as of the end of the Q1. Call. Thank you. We shall now open the floor for questions. Operator, we will take one main question up to one follow-up question each Time. Please invite the first question. Thank Call. Our first question comes from the line of Alicia Yap from Citigroup. Please go ahead. Hi. Good evening, management. Thanks quarter. Congrats on the solid results. I have two questions. The first one is regarding your comment about stepping up the investment in game development. When you say the large scale and high production value games, Do you plan to invest games that will turn into strong global IPs that the gamers will play and maybe remember for their lifetime? Or is that mean we could take multiple years of development before we see any final product? Call. And is this rationale also because of we are seeing growing gamer's traction in markets such as like India, LAT time, EMEA or even in the U. S. That we look into penetrate further that we can leverage our experience in mobile game developments to grow our global share. The second question is on the cloud business. We are seeing or hearing from peers some a little bit slowdown in the industry. So is Tencent Cloud also experienced some industry transition where the existing infrastructure cloud customer, which is already quite sizable and maybe facing industry slowdown and making some penetration effort into new industry vertical? Call or is that fair to say we actually already envisioned this transition better and already started to move more proactively in strengthening these the higher margin SaaS capability that we actually could start to see the cloud revenue to further reaccelerate in the coming quarters. Thank you. Anisha, thank you for the questions and I'll take a shot at both of them, although Martin will likely Supplement. So the short answer to the first question is yes. We absolutely would aspire to make games Players enjoy and ideally play for life. But of course, it's easier to express that aspiration than realize that aspiration. Now You're right to say that creating those lifelong game experiences requires many years of game development. But This is a trend that we've identified many years ago and we have a number of products have indeed already been in development for many years and some of those are games that we're creating in China in our big internal studios like Timmy and Quantum and Morphine and Aurora and some of those games that we're creating outside China at studios which we Invest in around the world. And over the coming quarters years, we hope to bring some of those big budget, long production cycle games to market. Now, as to why we're focused on this now and what changes now versus The past then we are indeed seeing that the global audience for games has grown both before, during and after COVID. And we're seeing particular growth in emerging markets such as the ones you highlight, but also in developed markets. And we're also seeing that Our game players are increasingly willing to form longer term relationships with games that they particularly enjoy such as a League of Legends or Fortnite or in honor of Kings, which have very high retention rates and gamers even if they churn, they come back to And enjoy again. And on our side, while historically our focus was primarily on the China market. As you know, in recent quarters, we've had some hits globally that were developed in China, including PUBG Mobile, including Court of Duty Mobile, all of which gives us more confidence to step up our rate of investment. And step up our rate of Investment and step up our rate of investment means, fund bigger, better games if necessary for longer periods of time. It also means fund more experimental games. It also means invest more in game marketing and game publishing capabilities. And then finally, it means investing in frontier technologies such as cloud based gaming that will further grow the game industry in the future. So that's on your game question. With regards to your cloud question, then I think that we don't necessarily see a transition in the industry this year versus previous years. Rather, our belief is When you're in the cloud business, it is inevitable that if you're renting infrastructure to very big companies, Then those big companies will use the negotiating power to protect their own economics. And as a result, the path to long term economic returns in cloud is not to get big fast Infrastructure, but actually to cultivate platform as a service and software as a service. And that's something that we've been doing now Several years, our platform as a service in particular is a substantial percentage of our total cloud revenues now. And that's an important underlying reason why we believe that we're able to outgrow the industry in the Q1 this year. Just one point to add, right? On the gaming side, I think you emphasized some point is like new creation of IPs and true is Many years before you can see find a product. I think if you look at our recent pipeline of games, which we have announced of more than 40 of them, I think it's Combination, right? Some are original IPs, which will take a very long time to develop. Some are actually existing IPs that we're going to take existing assets, Pretty proven gameplay and we will add our innovation for mobile and then we'll develop it for launch. And then there are also some smaller trial titles, right, niche titles, which would have multiple iterations. It probably certainly will be Developed and released within a shorter period of time and then iterated over time in order to make them bigger. So it's a combination of these different types of titles question comes from William Packer from BNP Paribas. Please go ahead. Hi, management. Congrats on the strong numbers and thanks for taking my questions. First question is, in your update today, you've presented investment And to exploit the growth opportunities for the future. In Q1 2021, you invested and delivered 25% profit drop through on your 25% revenue growth. Should we think of Q1 as a relevant benchmark for the rest of the year? And my second question is around regulation. The news flow has continued to be intense. Quarter. Last quarter, you provided a helpful update on regulation of FinTech and your minority investments. Is there any incremental update to share today? Thank you. In terms of the incremental investment plan, I would not say the Q1 is the right benchmark. I think our investment plan is actually stepping up from the Q1 level. So if you Look at the Q1 results, I would say the benchmark is that our non IFRS profit grew by 22% year on year. Quarter. And what we're seeing is that we're going to be investing a portion of the incremental profit into New Areas. And so that means it's somewhere between 0% 22% from a quantitative basis. I think that's the quantification. Now in terms of the regulatory news, I think the most Significantly is basically after the Q1 results, there was a meeting in which the financial and uncertain principles as well as ask the FinTech Companies to have an internal review of their own business and practices. And I think the principles largely are public right now and they are largely focused on All businesses have to be conducted through licensed entities and they ask for transparency. And at the same time, I think there's quite a bit of focus on making sure that there's not going to be systemic risk. And my understanding is it's quite focused on The size of lending business and making sure that there's no over lending or over borrowing by consumers, right? And toward that front, quarter. I would say, as we have emphasized in our last conference call, we are very focused on compliance, we are very focused on risk management, We're very self restrained in terms of the size of our nonpayment financial products, Especially on the lending side. So when we look into the internal review and When we look into what are the things that need to be done in order to make sure that we are compliant with the spirit of The regulators, right? I think it's actually relatively manageable. So that's sort of the update I have on the regulatory side. Question. Good evening and thank you for taking my question. I have two questions here. So on the reinvesting of profits, I think Martin just mentioned that's maybe like 0.2%. But if you look at it, can you kind of walk us through like what are going to be the pecking order of the 3 that you guys question. As you mentioned, our business services and games and not short for video. And also, is it going to be a combination of your equity investments or through actually investment in operation that will have a P and L impact. And that's my first question. And the second question is a follow-up to your game business. I think it's interesting to see that we're seeing a lot of new genre games that Tencent probably has been strong exposure, but also at quarter. There are new genres like Metaverse and etcetera that you Tencent doesn't have that much exposure in your market. So how do you see the opportunities here and What kind of relevant investments and strategic decision that you have to make in order to take advantage of these new genres emerging throughout the world? Thank you. Quarter. So why don't I start on the second question. There are continuing new genres emerging and Some of them are best left to our partners, our investee companies to address. But others Genres that we think we can bring some value to the table, bring some innovation to users and therefore we would address Now I wouldn't say that metaverse is a genre. Metaverse is more of an overarching opportunity In which different kinds of games are played within a single sort of social graph and software suite. If you look at Roblox, then Roblox is arguably a metaverse for younger gamers. But over time, as graphical fidelity improves, Then we believe it's highly probable that you'll see similar metaverses emerge that are consistent with the demands and expectations of older users. And that's a wide open field at the moment. No one has Realize that vision yet, although some people are closer than others. And we certainly believe that we're in a good position to be one of the companies that realized that vision, given our expertise at creating and operating games, Given our history of facilitating social interactions and also given our cloud infrastructure at the Because the metaverse will be very infrastructure intensive. So I think that's on the games question. In terms of the reinvestments question then. I'll let Martin speak to it. But I would just say that from a when we talk about reinvestment in this situation, we're talking about owned and operated businesses primarily. I think that in each of these 3 verticals, we've already been active for a number of years in terms of investing in successful game studios, both in China and globally, In terms of investing in successful short video companies such as Kuaishou in China and investing in And in terms of The areas of investment, I would say, mostly, as James talked about, it's on the operating side. So a big part of it is actually sort of people, right? These are engineers that we're going to hire additionally to create the products, perfect the products and develop better services. And some of these new employees are of higher paid because they It will be bandwidth and infrastructure costs and to some extent, maybe delayed monetization on the video side, for example, right? So these are sort of the Investments that we're talking about, which are actually having a bottom line impact. And in terms of the magnitude, I would say business services, games and video in that packing order. And the nature is slightly different. Business services would actually take a longer time and relatively quickly once you can launch the game and achieve success, but the investment is actually in the development In which there's no revenue, but then you have incurred cost versus video, as I said, right now, there's a continuous increase in terms of number of people in order for us to improve the product, improve the operations, improve the tools and at the same time, in some cases, some extent of delayed monetization on the advertising Thank you. Our next question comes from Han Joon Kim from Macquarie. Please go ahead. Call. Great. Thank you for your time today. I have a 2 part question on advertisement. You guys have talked about a lot of different things and Club. I was wondering if you can kind of help us repackage that into sort of that inventory growth versus kind of ECPM growth And kind of where we're seeing the trajectory there in for that. And that leads into the second part of the question, which is as we go more And a lot of the industry is going towards video. So in theory, I think the ad inventory Creative video in the market does increase. How does that sort of impact the overall market rates, ECPM rates and Sort of where our ad pricing can go from, yes. Thank you. Thank you for the question, Han Jun. Actually, I wasn't completely clear. I apologize if we misheard sections of it, but we'll try to answer. So on the first part around inventory versus pricing growth, Dan, both are increasing. I think on the inventory side, sometimes the outside world oversimplifies Looking at what's happening with Weixin Moments. In reality, Weixin Moments is a pretty small fraction of the inventory The number of daily impressions we bring to bear and our ad network for example is a much bigger source of raw impressions And our ad network continues to grow our impressions quite quickly as we as the overall China Internet expands and diversifies and as More media owners join our ad network. So ad inventory expanding both for internal reasons Like unlocking more inventory and Weixin moments as well as for sort of more market driven reasons such as the growth of our ad network. And then eCPM growth, Yes, I think that over time given increasing appetite to demand, it's natural that pricing trend sideways upwards that there was a disruption period when there was a sort of supply shock from the short video companies in 2019, but that's Somewhat digested by the industry as a whole now. And in general, what we see is the pricing is flattish for non video and then Increases as videoization occurs. And in terms of videoization in the eCPMs around video, in general, As you would expect, video eCPMs are high, but there are an interesting sort of discrepancies So actually the highest PCPM is often the promotional video ads within the ad networks. Those would typically be for game companies, education companies, perhaps e commerce companies. And there you could be looking at RMB40 plus in Revenue per 1,000 impressions. And then the short video eCPMs are also So quite high and fairly stable just because there's so much short video inventory now in China. And then interestingly, the long form video eCPMs are actually very low. And so whereas in the rest of the world, You would expect that, let's say, Hulu eCPMs would be higher than YouTube eCPMs. In China, it's the other way around. And The eCPMs for drama series and movies and so forth are about half the level of the eCPMs for short video. And I think that's because advertisers currently find it easier to create 5 second Commercials that are suitable for short video and 15 second commercials that are suitable for long video. And also because users have a higher propensity to click through ads Within a short video site, where they're constantly clicking through short videos they do and don't like versus a lower propensity to click through ads on a long video site, which It's more of a lean back experience, but it's a sort of challenge for the China Internet industry as a whole and that it's Forcing monetization and therefore investment toward short video at the expense of long video, eventually it will probably sort of mean revert as Consumers and advertisers recognize the distinctive professionally generated quality of long form video, but that process It isn't yet happening today. So anyway, overall video realization results in high risk CPMs, which is good for the industry and good for us within the industry. Call. Thank you. Our next question comes from Eddie Leung from Bank of America Merrill Lynch. Please go ahead. Good evening. Thank you for taking my questions. Just a follow-up to Alicia And Hanjin Kim's question on games. I understand James' point about Developing Large Scale and High Production Value Games, which could last long term. But For example, you mentioned that there have been some success of other Chinese studios in overseas markets recently. When we look at quite a number of them, actually not those traditional blockbuster games, right? We are looking at, let's say, card games, makeover games, costume changing games. So it seems like they are actually quite That's only my own interpretation. So just wondering if you could share your thought On this one, Joe, between your investment strategy and what we have observed recently. And then secondly, just an accounting question on the sustainable social value organization. Wondering about the timing of the funding. Will it be funded in full Within a short period of time or over a long period of time. And in terms of accounting, we would be treated as a contra item to the investment gains or to be under other expenses? Thank you. Quarter. Eddie, so you raised a good question on game industry trends. And if you take a step back, the game industry globally is a really big industry. It's About $150,000,000,000 in revenue a year, which means that it's bigger than movies and music and literature and so forth put together. Quarter. And when an industry is that big, then you can actually have different and apparently contradictory trends Playing out at the same time. If you look at linear video, then on the one hand, there's an explosion in short video consumption globally. But on the other hand, there's an explosion in the number of people paying for Netflix and Disney Plus and Paramount HBO Plus globally. So those are sort of 2 apparently contradictory trends. People are watching more ad funded short video. They're also watching more subscription funded long video, but the industry is big enough to accommodate both. And I think the same thing is true in the game industry that There is a very clear trend toward in a very casual games where the innovation is around Party Gameplay and where these games are able to onboard large numbers of users very quickly. And the challenge for these games will be establishing competitive moats and also retaining users over The much longer term. And that is a trend or as you say a number of sort of casual Chinese game developers are now doing very well. On the other hand, there's also a trend for high production value games often made by studios who have been focused on these games for 10 years or more often studios with 1,000 plus employees, so to really catch the attention of a global audience in a way that wasn't possible quarter. There I'm thinking about a game like Genshin Impact where Mihaiya has been making this kind of game for 10 years. It has Over 1,000 employees, it's spent many years on the game. I'm thinking about games like our own, publishing mobile and Call of Duty mobile, Which exhibit similar characteristics. So I think that the industry is big enough that both those trends are playing out. And there are Certain studios at Tencent that are more focused on the first approach, the more casual, quirky innovative games and there are other studios in Tencent that are more focused on high production value. But when we talk about our desire to step up our rate of investments, then we're referring primarily To the 2nd group, the desire to take games that we've already conceptualized or we've already begun development in the marketing when we launched the game, so that we give the games the best possible shot to global audience when we do release them. Yes. While we are still in the midst of working on the proper accounting treatment with our auditors, ideally, the treatment will be similar to that donation that is expands upon contribution to a separate pool. However, it hasn't been finalized yet. The other point I would like to make is it's most likely to be treated as non IFRS adjustment As funding source is basically our investment gain, which Martin has talked about earlier. Those investment gains also recorded as non IFRS adjustment. All this type of contribution will be Captured under other gains in our financial statements. And in terms of the funding timing, I think once the infrastructure has been set up, we will contribute the 1st set of funding Into the pool. And I think usually, we might fund once or twice in a year in respect of the SSP initiatives. All right. Thank you. Our next question comes from Alex Yao from JPMorgan. Please ask your question. Thank you, operator, and good evening, management. Thank you for taking my question. The first one is to follow-up the question on your investment strategy this year. You guys have been investing consistently for future growth in the past several years, Particularly for the 3 years that you plan to step up investments, all these have been around for quite some time. Quarter. What make you to decide to further step up the investment in this year? What are the new opportunities and the challenges You are seeing that we are not aware of. And then the second question is regarding your the social organization you just established. We understand that you guys will further pursue social responsibility. Call. As a company, how do you plan to align value creation to the society and the value creation to the shareholder? Thank you. Call. So Alex, in terms of the stepped up investment, I think it's A bit of both, right? The most important driver is that we have seen an acceleration of market trends as we have detailed in our strategy section, which include expanding business Around the businesses moving online, and we have seen an expansion in terms of the game users, and we also see The next stage of the short video content growth. So I think that's the main driver of Our decision to step up because of COVID, because of new trends emerging quickly, we want to put in additional resources so that we can actually stay Part of that is also the fact that the industry is actually moving faster ahead, right? So If you look at the history of Tencent, we have always tried to stay ahead of the curve, invest ahead of the curve and be a shaper in terms of the industry trend. But if the entire industry is actually moving faster, then we actually sort of have to step up that gas pedal in order to stay even more ahead of the others. So I think that's sort of the secondary reason in terms of why we are stepping up the overall investment. Now in terms of social responsibility, I'll answer it from a partly from a philosophical Quarter, right? I think running a company, building a company is like building a person, right? So you try to do the right things and over time, you Believe that good things will happen to that person. You don't really sort of at every step of your way calculate what is the individual gain in some of the movement that you make. So I think that's sort of our overall belief, right, when we build up an organization, if you do The right things, good things will happen. On a more granular basis, I would say, if we actually sort of leverage our technology and leverage our products To deliver bigger social good, I think overall will be better received by our users, by our customers by the government and by our employees. And when that happens, I think it's going to be good for the shareholders over the long run. Thank you. Our next question comes from Gary Yu from Morgan Stanley. Please go ahead. Hi, good evening, management, and thank you for the opportunity to ask question. I have one more follow-up question on the investment strategy. So in the statement, it specifically mentioned that we intend to invest a portion of 2021 incremental profit for these investments. Question. Should we assume that beyond 2021, then we probably expect the normal growth trend to go back to organic growth? And then hopefully some of these investments will start to bear fruits in the form of faster growth in the future. And when we look at kind of Management, how to evaluate the potential returns of these investments. What are the key metrics that management usually follow To evaluate investment in business service, video accounts and games, respectively. And what kind of rate of return should we expect from these investments? Thank you. Well, I have to disappoint you in saying there's no specific quantitative metrics. I think a lot of times in our industry, you actually sort of look at the trend, you look at the right things to do and then you put in the resources. And over time, if you actually sort of are right and if you do it well, the return is usually so much greater than what you can anticipate. But if you do all the calculations and say, oh, this is actually the rate of investment and you Invest according to that calculated mode, then usually you won't be able to deliver over and beyond what the users want and you will not be able to be a leader at the trend and usually that means you're not going to even reap that return. So I think that's sort of essentially what it is. I think what we are saying is This year, we are stepping up the investment. That's a strategic move. And that increase in investment will actually continue. We will start to see some benefits over time. Now exactly what's the timing, I think it's hard to predict. But I think the It's fair to say, at least at this point in time, right, that financial impact will probably be biggest as we start stepping into the investment. Thank you. Our next question comes from Robin Chu from Bernstein. Team. Please go ahead. Thank you. Thanks management and thanks for taking my question. I guess two questions please. The first one is, Could we get an update on WeChat E Commerce? You very helpfully provided us with some numbers for 2020. Just wanted to get your thoughts on how that's trended so far in 2021, Your growth expectations for e commerce growth, especially independent merchant growth for this year And whether the company is doing anything proactively to drive growth or is it mainly just the organic process? The second thing on WeChat video accounts, wondering if you could share some metrics in terms of the progress so far, whether it's time spent or video views. And again, strategically longer term, do you envision this being more of a PGC versus UGC type of ecosystem? And yes, how do you any specific sort of examples of how you're trying to improve content steps? Call. Thank you. Robin, so on the e commerce within Weixin, we're very pleased with the progress. I think we said last quarter that GMV was growing at a triple digit rate year on year last year and the GMV continued to grow at a triple digit rate year on year in quarter of this year despite challenging base period because of people staying at home and conducting more e commerce transactions Last year, in terms of the specific initiatives we're undertaking to stimulate growth, we talked about Some of them earlier in facilitating companies smaller companies Making mini programs, building an ecosystem for intermediaries to assist Merchants, offline merchants in opening and operating their mini program experiences. So I don't think there's necessarily a single silver bullet at this point. We have the traffic. We have the payment solution. We have Increasingly user trust and confidence and merchant trust and confidence. And so it's more just an ongoing process of organically Assisting all of the participants in what's becoming an increasingly vibrant and ecosystem and one that's very differentiated from the other platforms or retailers in the market. Now in terms of video accounts, I would say both The number of users using it as well as the user time spent on average has been growing on organic basis and solid basis. Now in terms of further cultivating the content ecosystem, I think what we wanted To be able to do is actually a funnel, right, in which it would include as many UGCs as possible, But then we will also provide all the tools and all the operating procedures and guidelines as well as the monetization tools. So in order to help these UGCs To really leverage our tools and make themselves into more professional providers of video content. Quarter. And as a result, right, they will become PUGCs over time, and these PUGCs would be offering in different areas. So their content will be more nutritious and will be differentiated from the pure entertainment related content, which are now in the other platforms. So that's sort of the way that we are trying to curate Ecosystem for video accounts. Thank you. Our next question comes from Thomas Chong from Jefferies. Please go ahead. Hi, good evening. Thanks management for taking my questions. I have a question relating to the payment side. Given that digital currency is getting increasingly popular in China, what's our strategy on this one? And in terms of the monetization on payment, are there any other new business model question that we can tap into these opportunities. And then my second question is relating to The advertising side. Given that management has talked about more stringent rules in the education sector As well as a special event. How should we think about the trend on the advertising in the next couple of quarter. Thank you. I think in terms of digital currency, I think we have already Talked about it before in that WeBank is actually a participant within the trial for digital currency, And we will be developing in order to get WeBank to be supporting that. And over time, as we continue to develop Our payment as well as our other platforms would actually sort of try to see whether we can provide more support for digital currency. The main reason is because digital currency is essentially a substitution for cash. And as a result, You can actually look at it as another form of cash that will be running through the banking system and then eventually running Through the 3rd party payment system and getting into the merchants. So from that front, we are very clear that it would be Quite conducive for our overall payment platform as well as for WeBank. So that's why we'll be in a very active way in the continuous rollout of digital currency. Now in terms of the payment Business. I think we have a very solid payment business and The business model is actually multifold, right? In that for the large merchants, we actually sort of have a tick rate on the payment for the online players, in particular, and you will have a very solid payment tick rate. And at the same time, there will also be multiple value added services that we provide to the different merchants quarter. Such that we can actually sort of capture some kind of economics. And I think that business model is actually quite solid, and we'll continue to build on it. On the advertising side, given the size and scale of the China advertising market, I think it would be naive to There will ever be a period going forward when every industry is a green light and over performing and All cylinders firing all across the Chinese economy. And so when we look at the landscape today, of course, there are uncertainties. The impact of IDFA deprecation has actually been, I think, less than widely feared for a number of reasons. We are in a period when there's some sort of content airing uncertainty, That should begin to clarify from July 1 onwards. So we're in the latter stages of that period. And then we also mentioned in the prepared remarks has become one of the top 5 advertiser categories online. So what happens in that sector could have Some moderate consequences industry wide. But if you take a step back and look at the broader picture, then I think that all of us would agree that we'd Much rather be in a world where the primary challenge is K-twelve after school education regulations than a world where the primary challenges is COVID-nineteen pandemic ripping out of control that appeared to be the case this time last Year. So, while there will always be challenges, I think that in the grand scheme of things, the ad industry is in Much better place now than it was a year ago. Operator, let's take the last question from the queue. Certainly. Our last question comes from Jerry Liu from UBS. Please ask your question. Hey, yes. Thank you for squeezing me in. Yes, I just have 2 quick ones. First on Yes. If I look at the gross margins this quarter, it was a little lower than the last 2 first quarters. Quarter. So just wanted to dig a little bit more into the drivers and what's the implication for margins here the rest of the year. Quarter. I assume maybe the video mix is up a little bit, but curious about what the drivers look like within especially the gaming business. And then secondarily on going back again to the incremental investments we're laying out this year. Quarter. If the focus here for us is more engineers and long term development of games, etcetera, Versus some of the other peers in the sector, really a lot of what they're spending is on users and near term promotions, etcetera. I think in terms of the drop in the FAS margin, there quarter. A few reasons. Number 1 is the higher live broadcast portion This is due to the consolidation of the various Yes. And the organic growth of some of our live broadcasting services. At the same time, there's mix shift of PC versus mobile games as PC sort of have a higher Margin Profile. And in terms of other low margin projects, just like the digital subscription services also dragged down the product or gross margin. Call. Yes. In terms of the investment, I would say your observation is correct, right? That's the reason why we're saying we will be Investing a portion of our incremental profits as opposed to other more e commerce and transaction related Peers in the market in which it may be all of their incremental profit in some cases and in some cases it may be all of their profit. And so I think that's a correct observation. I also want to point out that We do pick up some of the incremental investments industry wide, right, because as you look at our Investment Associate Losses. In the prepared remarks, we did point out that it actually has a 7% hit to our non IFRS profit. So we have already, to some extent, weathered it in the current quarter. Thank you, operator. I think operator? Call. I'll now hand the call back to Ms. Wendy Huang for closing remarks. Quarter. Thank you. If you wish to check out our press release and other financial information, please visit the IR section of our company website at Thank you. So that does conclude our conference for today. Thank you for participating. You may all disconnect.