Earnings Call: Q4 2020

Mar 24, 2021

Ladies and gentlemen, thank you for standing by and welcome to Tencent Holdings Limited 2020 4th Quarter and Annual Results Announcement Conference Call. At this time, all participants are in a listen only mode. After this week's presentation, there will be a question and answer session. Star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ms. Wendy Huang from Tencent Investor Relations. Thank you. Please go ahead. Thank you, operator. Good evening. Welcome to our 2024 quarter and annual results conference call. I'm Wenli Huang from Tencent IR team. Before we start the presentation, we would like to remind you that it includes forward looking statements, which are underlying by a number of risks and uncertainties and 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. This presentation also contains some unaudited non IFRS financial measures that should be considered in addition to, but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non IFRS measures, please refer to our disclosure documents on the IR section of our website. Let me now introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma will kick off with a short overview, including ESG initiatives. President, Martin Lau, will discuss strategy review Chief Strategy Officer, James Mitchell, will speak to business review and the Chief Financial Officer, John Lo, will conclude with financial discussion before we open the floor for questions. I will now turn the call over to Pony. Okay. Thank you. Good evening, everyone. Thank you for joining us. 2020 was unprecedented year with many challenges. Having said that, We delivered solid results. We believe our robust operating and financial results testify to our focus on user value and technology innovation. Let me walk you through some of our key achievements. In social, 20. We are strengthening Weixin's value proposition for users and enterprises. Our new feature video accounts enable public sharing of informative and educational content in video format. Mini Programs continue to deepen penetration in more user cases with annual transaction volume more than doubling year on year. For QQ, we increased stickiness among young users by enriching shared experience and catering to their entertainment and e learning needs. In games, our worldwide revenue grew 36% year on year with increasing contribution from international markets. We reinforced our leadership across mobile and PC by expanding user basis for major games and launching successful new games. 20. In content, we extend IP value across literary, literature, anime, games and long form video to create unique and appealing content. We became career number 1 in China video subscription market. In advertising, we integrate advertising platforms, strengthening Tencent's own properties 20 Mobile Ad Network, a preferred choices for advertisers. In FinTech Services, Payment user engagement and commercial payment volume increased healthily. We will continue to work closely with the regulator and industry partners to deliver 20. In Business Services, enhance our cloud services performance and cost efficiency. Now let me go through the headline number Q4. Total revenue was RMB134 1,000,000,000, up 26% year on year and 7% quarter on quarter. Gross profit was RMB59 1,000,000,000 up 28% year on year and 4% quarter on quarter. 20. Non IFRS operating profit was RMB38 1,000,000,000 up 26% year on year and stable quarter on quarter. Non IFRS net profit attributable to equity holders were RMB 33 1,000,000,000, RMB up 30% year on year and 3% quarter on quarter. Moving to key services. In social, combined MAU operation in WeChat further rose to RMB1.23 billion. Smart devices MAU of QQ was RMB595,000,000. And Marty and James will speak to each of our other key services later. In 2020, we continue to implement various initiatives around our mission of Pac-four Group. We're navigating through COVID-nineteen. Technology play a more significant role in restoring normal life and business activity. We provide users with convenient access to healthcare, education and public services via products and technology. We help enterprise clients to maintain business continuity with various tools and products. Mini Programs and Weixin Pay facilitate consumer spending during the lockdown and expertise digitalization of offline retailer and brand after that. For charities. We have built an efficient online fundraising platform and utilized technology to assist Air Digital Upgrade. In 2020, our flagship event, 9, giving day engaged over 18,000,000 users and 10,000 charities raising RMB3 1,000,000,000 in 3 days. For inclusion, we are bridging the digital 20 divide for the elderly and the disadvantages. Raising relative card Enable senior users to enjoy the benefits of digital payment without hassle. An image to speech in QQ helps visually impaired users interacted with friends. We are also facilitating a rural utilization with the We Conti initiative. For other ESG commitment, We are moving to raw carbon neutrality by leveraging AI, big data and cloud computing. We adhere to privacy by design and deploy advanced security technology to safeguard users' data. Looking forward, we will continue to integrate their social responsibility into our operations, products and services, Creating Long Term Value for All Stakeholders. I will now invite Martin to discuss strategy review. Thank you, Pony, and good evening and good morning to everybody. In this section, I will discuss our strategic investment in innovation, which we believe is the main driver of our business performance in the past and for the future. With a focus on user experience, we pursue continuous innovation to enhance our platforms. We invest in incremental 20 innovation to enrich existing product experiences, and we also invested in transformative innovation to create new products to serve new user needs. Many of these innovations have taken years of patient investment to yield results. 20. In communication and social, for example, we started with mobile chat and added social networking, official accounts, payments, mini programs over the years. At the present time, we are incubating video accounts as a new innovation. In the area of games, we create 20. In SaaS, We identified this emerging opportunity in China when we announced our strategic upgrade to the industrial Internet 18. Over the past year, we achieved breakout growth in productivity and communications software. And Ecosystem. We support innovative companies via capital investment and business partnerships to better serve users and enterprises. 20. For the rest of this section, I'll discuss how innovation has driven each one of these areas and how it will continue to drive our sustainable long term growth. Let's first start with Beijing Video Accounts, which represents our recent innovation in the communications and social space. Videoization of content for easy consumption is a key global trend. We saw significant increase in uploads and sharing of short videos with invoicing moments and Chat. Hence, video accounts were created as a separate ID based short form content creation platform within Beijing. Video accounts enable video uploads and sharing as well as live streaming to the public audience through aggregating content providers' digital assets within Weixin such as official accounts and mini programs. Video accounts help reinforce their branding and facilitate user engagement and transactions. Provides an unparalleled channel for businesses to acquire and manage their own customers. 20 as well as educational and entertainment content. We recommend content to users based on social, interest graph and algorithm, which can diversify the mix of users' content consumption. Turning to games. During the year 2020, we launched several new and exciting titles and made breakthrough in new technology applications such as gaming and AI and Cloud Gaming. For new games, we released Valorant on PC for the international markets as well as Moonlight Blade Mobile 20 and Call of Mobile in China. Each game offers unique experience by innovating in character facilities, environmental design, gameplays and Controls and thereby achieving best in class performance. Valorant, a team based tactical shooter, which Riot Games spent over 6 years to develop, was the most successful NIO PC game internationally. In China, Moonlite proprietary game engine honed through 10 years of dedicated development. Code of Mobile, the highest DAU game launched in 2020 in China is a high quality complement to the franchise console and PC versions. For existing titles, 20. For example, Honor Kings is an early adopter of next generation rendering and high dynamic range Imaging Technologies in China, which enhances the visual effects and make animation more realistic, detailed and natural. We also tested game AI Wukong in Honor of Kings, which attracted over 50,000,000 player participants within 4 days of trial. Wukong is the 1st AI agent able to play full mobile game with deep reinforcement learning, and it will be applied to more game genres to enhance the PVE experience. In cloud gaming, we're the 1st mover to launch platforms and games, 20, providing high quality in game experience across different devices, among which, Start Platform is cooperating with leading TV manufacturers 20 to offer MMO games on smart TV. Xianyou platform offers more than 100 mobile games, including Lord of Kings and Peacekeeper Elite to play even on low end phones. Moving on to communication and productivity SaaS. We achieved breakout growth in 2020, especially for Wicom, Tencent Meeting and Tencent Docs. Has also boosted WeCom's customer base to 5,500,000 enterprises. We uphold the open strategy and introduced multiple cooperation models to rapidly grow partnerships with OA application vendors in order to better sign up enterprise clients together. In view of growth needs for virtual meetings, we launched Tencent Meeting in 2020, which accumulated over 100,000,000 users and has become the most used standalone app for cloud conferencing in China. During the year, we launched enterprise version for key accounts and enhanced in meeting capabilities, delivering superior experience for enterprise customers. We developed new solutions, Rooms and Connector, Our signature productivity solution, Tencent Docs, is the 1st mover in China to provide online solutions 20. During the year, we continued to add new features such as AI supported optical character and speech recognition input to enhance user experience and productivity. Through extensive integration with other software such as QQ, QQ Browser and other SaaS products. Tencent Docs expanded use cases and recorded over 100,000,000 monthly active users in 2020, more than double a quadrupled year on year. Mix on HealthTech. Our product metrics includes Tencent Health, 20, providing innovative solutions to digitize offline healthcare services and benefit the entire industry. Tencent Health, an all in one entry point for online healthcare services, has added more COVID-nineteen related services, such 20. Total active users exceeded 400,000,000. We also included medical insurance e certificate and Electronic Health Card within Tencent Health. Users can bundle medical insurance e certificates with their social basic medical insurance accounts to conduct mobile payment in more than 10,000 hospitals, 200,000 pharmacies across 200 plus cities. Our electronic health card serves as a health information management tool for users and their families 20. Tencent Metapedia, a reliable medical information source, Expanded the number of medical terms to over 120,000, leading in China. We utilized AI technology 20. We enriched content formats from text picture to short video and live streaming. 20. Tencent Media PDF content is distributed via self owned and third party platforms, attracting over 7,000,000,000 page views and video views in the year of 20 20. Health Code is an easy entry point for users to get their ePass automatically based on health information they filled in. During the pandemic, HealthCodes facilitated people's efficient movement in and out of public areas nationwide. Within a year, Health Co served a 1000000000 users with over 65,000,000,000 total visits, becoming the most used ePass for verifying health and Travel Status in China. Finally, complementary to our investment in innovation to drive our core businesses, Investment in ecosystem is also our strategic focus. Through investments, we support innovation for our partners and Investes, which ultimately together better serve users and enterprises. In Consumer Internet, we identified investments which capture emerging opportunities arising from technological advancements and user behavior changes. User value and product experiences are top 20. Our key investment areas include content games, fintech services, e commerce, O2O and education. 20. In industrial Internet, we seek to build close relationships with value chain players to support the evolution of various industries. And Retail. In that process, our communication and social services can also connect users with more services and convenient and efficient manner. Our investment principles are to invest in high quality management teams and best in class companies, which have 20. We aim to support the investees' innovation while enabling them to grow and operate independently. Through our investments, we do not only nurture the growth of start ups, but also create synergies that are value added to users. An additional benefit of our investment strategy is that we can then focus our internal resources, 20 developers, people and bandwidth on driving innovation within our core businesses. This 2 pronged strategy has been pivotal in driving percent sustainable development for the company and the industry as a whole. Now with that, I'll pass to James to talk about our business review. Thank you, Martin. For the Q4 of 2020, our total revenue grew 26% year on year. BAS represented 50% of our revenue, within which online games were 29% and social networks 21%. Online advertising was 18% and FinTech and Business Services represented 29% of our revenue. For value added services, segment revenue was RMB67 1,000,000,000 for the 4th quarter, up 28% year on year and down 4% quarter on quarter. Social network revenue was RMB28 1,000,000,000 representing 27% year on year growth, primarily driven by live streaming services and in game item sales. Sequentially, revenue growth from digital content services was offset by a revenue decline from in game item sales. Total VAS subscription accounts grew 22% year on year to 219,000,000 subscriptions. Our video subscriptions Increased 17% year on year to 123,000,000 subscriptions. We strengthened our market leadership through self commissioned animated series, deeper cooperation channel partners and an expanded OTC user base. Our music subscriptions grew 40% year on year to 56,000,000 subscriptions, benefiting from improved user retention and our payables strategy. Our online games revenue increased 29% year on year to RMB39 1,000,000,000, driven by more smartphone game players and a higher paying user ratio. Revenue decreased 6% quarter on quarter due to normalized user activity and Seasonality. For smartphone games, total revenue grew 41% year on year to RMB37 1,000,000,000, Reflecting robust growth from in house titles, including Peacekeeper Elite, Honor of Kings and PUBG MOBILE, as well as our new massively multiplayer role playing game, New Life Blade Mobile. For PC client games, revenue decreased 1% year on year to RMB10 1,000,000,000 as softness at Dungeon and Fighter offset growth from League of Legends and from Focusing on Weixin, Martin has already discussed our video account strategy and product, but I will touch briefly on live streaming and video accounts, which Real time one to many interactions. Content creators and brands can use live streaming to engage with users via red packets, co hosting and audience dialing. Additionally, Weixin launched the start ups feature, allowing users to share their current emotions and thoughts with pictures or videos and connect with like minded friends. And animated emojis enabled users to express themselves more vividly online. Moving to QQ, we focused on enhancing interactive Within Vertical Communities. For content oriented communities, we introduced the hashtag feature and trending topics within Mini World, which resonated with Generation Z users and increased Mini World's data user engagement. For game communities, we launched joint promotions in celebrity esports competitions for games such as Honor of Kings and Call of Mobile. Users can discuss game related topics within interest groups and mini programs, while obtaining in game incentives. For learning communities, we partnered with educational institutions to offer quiz challenges and question and answer services, fostering a vibrant study environment. Looking at our game activities within China, in Battle Arena Games, Honor of Kings released its biggest ever update in January with a new hero skins and user interface. We upgraded the game's rendering technology to enhance visual effects with minimal performance overhead. For shooting games, Court of Mobile attracts hard 20. For role playing games, Aurora Studio extended the Moonlight Blade IP from PC to mobile And the mobile game ranks the top grossing massively multi player role playing game on iOS during the quarter. By the end of 2020, we've distributed over 1,000,000 Switch consoles in China. Tony mentioned a healthy gameplay system, helps parents manage younger users in game play time and spending. During the Q4, players aged under 18 years old accounted for 6% of game gross received The League of Legends World Championship finals attracted over 45,000,000 peak concurrent users, a record high viewership for esports. Most popular smartphone game by monthly active users for the 2nd consecutive year and its flagship tournament was the most viewed esports competition among all mobile games. We We're increasingly thinking to create games with global appeal. By collaborating with renowned console game and anime IPs, we can bring our new mobile games to wider global Moving to online advertising. Our advertising revenue was RMB25 1,000,000,000 in the 4th quarter, up 22% year on year and up 15% quarter on quarter. We experienced increased demand 20.6% year on year and 15% quarter on quarter, driven primarily by Moments and our mobile ad network. Moments revenue 20. We enable performance oriented advertisers to link their apps with their mini programs, so boosting their transactions and sales conversion. By offering customized in app advertising solutions, our mobile ad network is attracting more ad spend, especially from external game companies and Internet services. Percent year on year and 19% quarter on quarter, reflecting increased video ad revenue and music app monetization. Looking at FinTech and Business Services, revenue was RMB38 1,000,000,000 in the 4th quarter, up 29% year on year and up 16% quarter on quarter. Within FinTech Services, revenue grew year on year and quarter on quarter as our payments and wealth management services were increasingly adopted by consumers and merchants. Total payment volume grew healthily year on year, driven by more daily active consumers and higher payment frequency in verticals, including retail, public 20. Services and groceries. Payment commercial take rates were generally stable. For our wealth management business, aggregated customer assets grew robust Within business services, we expanded our customer base in key verticals and increased our platform as a service revenue robustly, contributing to a faster For Infrastructure as a Service, we developed our StarLake SAT server architecture, powered by the latest generation AMD EPYC Processes. This new architecture provides better AI, security, storage and network capabilities with lower energy consumption and constant Tencent cloud services cost efficiency. Software as a Service, Tencent Meeting Enterprise Version Penetrated Key Accounts in the Energy, Healthcare and Education sectors. Our conference room solutions, Tencent Media Rooms and Connector facilitate high quality real time communication and are compatible with customers' existing audio 20. Hello, everyone. For the Q4 of 2020, total revenue was RMB133.7 billion, an increase of 26% year on year or 7% quarter on quarter. Gross profit was RMB58.9 billion, up 28% year 20 year or 4% quarter on quarter. Net other gains was rmb32.9 billion. This mainly comprised on IFRS adjusted items, representing 20. As well as net gains $1,000,000,000 Operating profit was rmb63.7 billion, up 123% year on year or 45 20. Net finance costs were RMB2.3 billion, down 19% year on year or up 16% quarter on quarter. 20. Year on year decrease reflected lower interest expense as a result of reduced average cost of funds. Q on Q increase was mainly driven by foreign exchange losses. Share profit of associates and joint ventures was rmb1.6 billion compared to share of losses for Q4 2019. The year on year difference mainly reflected non IFRS adjusted items of certain associates and improved performance of certain e commerce and online Games Associates. On an IFRS basis, share profit was rmb2.7 billion for the quarter versus rmb1.3 billion a year ago. Income tax expense was RMB3.7 billion and effective tax rate was 5.9 percent for the quarter. IFRS net profit attributable to equity holders was RMB59.3 billion, up 175% year on year or 54% quarter quarter. For the full year of 2020, total revenue was RMB482.1 billion, up 28%. Gross profit was rmb221.5 billion, up 32%. Operating profit was rmb184.2 billion, up 25%. IFRS net profit attributable to equity holders was RMB159.8 billion, up 71%, and the effective tax rate 20 was 11.1%. Now I'll share with you our non IFRS financial figures. For the Q4, operating profit was RMB38.1 billion, up 26% year on year or flattish quarter on quarter. Net profit attributable to equity holders was RMB33.2 billion, up 30% year on year or 3% quarter on quarter. For the full year of 2020, operating profit was RMB149.4 billion, up 30%. Net profit attributable to equity Gross margin for value added services was 51.5%, up 1.4 percentage points year on year or down 1.1 percentage points quarter on quarter. 20. On a year on year basis, we continue to benefit from revenue growth of higher margin self developed smartphone games. Sequentially, margin decrease was primarily driven by revenue mix shift from higher margin PC client games to lower margin digital content services. Gross margin for online advertising was 53.3 percent, downward percentage points year on year or 2.4 percentage points quarter on quarter. Year on year decrease was due to higher revenue contributions from mobile ad network business, which carries lower margin. Sequentially, margin increase reflected lower related content costs due to delays of spot events broadcast. Gross margin for FinTech and Business Services was 28.5%, up slightly year on year and quarter on quarter. For the full year of 2020, our gross margin increased 1.1 percentage points to 54.1%. Over 20 Online advertising gross margin increased 2.4 percentage points to 51.4%. Gross margin for FinTech and Business Services increased 1.1% 20.8%. On operating expenses, selling and marketing expenses were RMB10 1,000,000,000, up 49% 20.7% year on year or 12% quarter on quarter. As a percentage of revenues, selling and marketing expenses represented 7.5% for the quarter. Both quarter on quarter year on year increase reflected greater marketing spend on online games business services and digital content services, including those associated with consolidation impact of Bitauto and Huya. G and A expenses was RMB19.8 billion, up 24% year on year and 15% quarter on quarter, mainly reflecting greater R and D and Salesforce. Within G and A, R and D expenses was RMB11.2 billion, up 26% year on year or 13% quarter on quarter. 20. G and A and R and D represented 14.8% and 8.4% of revenues, respectively. At the quarter end, we had approximately 86,000 employees, up 37% year on year or 11% quarter on quarter. For the full year 2020, certain marketing expense was RMB33.8 billion, up 58% and represented 7% of revenues. The increase from new reflected greater marketing spend for online games and recent consolidations and Remote Work. R and D expense was RMB39 1,000,000,000, up 28% and represented 8.1% of revenues. G and A expenses, excluding R and D, was RMB28.6 billion, up 24% and represented 5.9% of revenues. For the Q4 2020, gross margin was 44%, largely stable year on year or down 1.2 percentage points quarter on quarter. Was 28.5%, largely stable year on year or down 1.9 percentage points quarter on quarter. Non IFRS net margin was 25.8%, largely stable year on year quarter on quarter. For the full year 2020, Gross margin was 46%, up 1.6 percentage points. Non IFRS operating margin and net margin were 31% and 26.3%, respectively, both remain broadly stable. Let's move on to earnings per share and annual dividend. For 2020, on an IFRS basis, basic EPS was RMB16.844 and diluted EPS was 20.523. Non IFRS Basic EPS was RMB12.934 and Dansu EPS was RMB12. RMB689. Subject to the approval of the shareholders at the AGM to Kyoto on 20th of May 2021. We are proposing an annual dividend of HKD1.6 per share payable to shareholders on the 7th June 2021. This represents an increase of 33.3 percent from last year. Finally, Total CapEx was RMB9.7 billion, down 43% year on year or up 11% quarter on quarter. Operating CapEx increased by 13% year on year to RMB8 1,000,000,000 as we continue to ramp up investment in servers and network equipment to augment our business growth. 20. Operating CapEx decreased 83 percent year on year to RMB1.6 billion, mainly due to high base in Q4 2019 for office land purchase. Free cash flow was RMB27.7 billion, down 11% year on year or down 2% quarter on quarter. Net cash position was at RMB11.1 billion, which increased sequentially due to free cash flow generation and foreign exchange 2 effects partially offset by net cash outflow from M and A activities. Fair value of our shareholdings enlisted in that piece distributing subsidiaries Thank you. We will now open the floor for questions. Operator, we will take one main question and one follow-up question each time. Please invite the first question. Operator? Thank you. Your first question comes from Robin Shi from Bernstein. Please go ahead. Thank you. Thanks for the Could I ask 2 questions? Firstly, could management give some examples of how you plan to accelerate the growth in video accounts in terms of, For example, number of creators, depth of video content and user engagement. And if you had any quantitative targets for Time spent or users by the end of 2021. 2nd question, if I look at the deferred revenue balance, It seems to imply that cash gain billings showed quite a meaningful deceleration in Q4 despite the launch of I just wanted to get your thoughts on why that was. If anything, one off happened and your expectations for growth in the first half of twenty twenty one. And if you had any color on launches like, For example, DNF or League of Legends, what your expectations are? Thank you. Okay. I'll take the first question. In terms of video accounts, I think you have actually hit on the important points, which is You need to have a double flying view, right? You need to have more content and As such, you actually sort of need to attract more content developers as well as help them to be more active on our platform. And at the same time, you actually need to have more viewership and they actually serve as So, mutually reinforcing. Now, in terms of how do we actually sort of 20. And on that front, the key thing is we actually already have got a very good set of content creators and these are content creators. Part of them are actually new creators 20. And they are converted from our official accounts. In the past, they have been writing articles and now they convert themselves into content creators 20. Content creators on other platforms also join us. And the main reason that they actually join us is because of the fact that there is The distinction that our platform provides, which is essentially have the content you actually sort of subject yourself to algorithmic recommendation and after that you basically lose your viewership and then the mix content you In our platform, we actually have a very strong set of tools and connections so that you can actually convert the 20. And at the same time, for a lot of the existing OA content creators. We actually provide a lot of touch points for them to connect their video accounts with other Such as official accounts, live streaming and meeting programs, right. So basically, one key objective and initiative that we're doing is Keep on increasing these touch points and providing the tools so that there is much better connection between the public domain and private domain, So that we create a very unique platform for these content providers. And then on the viewership side, right, we would continue to improve the algorithmic recommendation, And at the same time, as you can see, we're actually providing pretty unique content On our platform, right? These are content not just for entertainment purpose, but also for educational as well as informational purposes. And a lot of the content providers are first time short video creators and these are all unique supplies which would help And finally, when we actually provide content, we not only use the algorithmic recommendation, We also have social signals, which actually help the viewers to see a different kind of world. And with all these together, we felt we can, on one end, increase on the supply on the other end, we can increase on the consumption and they will sell to reinforce themselves over time. I can say the video accounts in terms of both 20. Users as well as the user time have been increasing pretty healthy, but we're not in a position Robin, thank you for the second question as well around game billings. So you're correct, sir, that both The game billings and the game revenue declined quarter on quarter in Q4. And there's 3 points perhaps to make around that. One is that, As you know, for China, the work from home period was very pronounced in the first half of last year and then relaxed 20 last year. And then because we convert our billings into reported revenue with a time lag, that flowed through into lower reported revenue in the 4th The second point is that for us, the Q4 is historically a low season for game billings. You didn't see that every year in our history, usually due to one time events. So for example, if you look at the Q4 of 2019, You didn't see the normal seasonal decline in billings, in part because we consolidated Supercell, which added many billions of renminbi to our deferred revenue Moving from 3Q 'nineteen to 4Q 'nineteen. But at this period, we didn't have any sort of unusual benefits, and so the usual seasonality And then third and finally, the seasonality was more pronounced than a normal year this year because So for some of our biggest games in China, we began running our Chinese New Year activities around 30 days before the Chinese New Year holiday And for the 2019 to 2020 period, that meant the activities commenced in late December, and so we had the deferred revenue on our balance As of December 31 versus 2020 going into 2021, the activities commenced in January. So they only I came on to our balance sheet in the Q1. You also asked about the outlook for the first half. As you know, we don't provide 20. In particular, payments in fintech. So all else equal, if this year, we're back in a work from office mode, which we seem to be, then I think it would be natural to Those two trends temporarily reverse. But that's very much a short term phenomenon for people who Focused on the next quarter. Focused on the next several years, I think the more important takeaway is that the work from home period really which positions the game industry alongside several other industries we're active in such as online education and healthcare, sustained multi year Thank you. Your next question comes from Alicia Yap from Citigroup. Please ask your question. Hi. Thank you. Good evening, management. Thanks for taking my questions. Congrats on the solid second result. I have two questions. First question is, as we see increasing overlap of Internet service among all Internet Companies in China. So in addition to user, which is the core asset for most of these companies, The proprietary content and also the content IP is actually seems to be the key differentiated Asset. So actually Tencent do have both of these users and also content. Could management share your thoughts on how Tencent could further capitalize on these various digital entertainment content portfolio that you have to enhance the user experience and also further expand the monetization potential? And then the second question is Roughly, very quickly on the Tencent Cloud. Just curious to see what are some of the key challenges that the Tencent Cloud is phasing when trying to penetrate to the different enterprises. Is that related to the lack of the IT talent 20 enterprise or is it the IT budget constraint or is it related to the vertical solutions that are available and how Tencent actually helped to support this enterprise to further adopt the cloud service. Thank you. Alicia, perhaps I'll answer the first question. So I think that over time, there's a general trend for value to migrate from traffic towards Content. And that's something that we're very aware of. And really, for the past decade, we've been investing aggressively in swimming up And then you can see that in our game business, where we've moved from being a distributor to a publisher, and most recently to primarily a 20. You can see that in music, where we increasingly have upstream label coverage in China as well as Global Leaders, such as Universal Music and Warner Music. You can see that in Ray Kelly and Literature. So that's A trend that we really embrace and we think that will validate the strategy we've been embarked One interesting thought experiment is if you look at the world of traditional Video Linear Entertainment. And while there are many excellent companies competing in this space, one company, Disney, has Developed IPs such as Frozen, also with acquired IPs such as Cars or Star Wars. And There are many reasons, but I think one key reason is that Disney has an unparalleled ability Not only provide the linear video entertainment, but also to provide an interactive experience in the form of a theme park that really Now, of course, the bottleneck to that business model is that theme parks are expensive and rare and Only a limited number of consumers can enjoy them at any point in time versus we're in a world where we're providing interactive entertainment experiences through our games, which universally available, very cheaply and expensively available to users. But what we see is increasingly that the game's I think that's China literature novel. It's also been evolved into a comic book, into an animated TV series, into a live action TV series Okay. I'll take the second question with respect to the I would say The number one challenge is really the business reason for them to adopt Key Business Proposition for converting themselves into a cloud service. And I think The evolution of the mobile Internet has really sort of continuously provide this kind of The businesses have to go online, right? And the businesses when the businesses go online, their suppliers So there's a chain reaction that's happening initially pretty slowly, but now with increasing speed, especially it's Accelerated by the pandemic, right? In the past, when retailers look at e commerce, it's a nice to have. It's an additional business, but during the pandemic they realized it's actually a must have. So by having the 20 business proposition for them to move online and to adopt cloud solutions. I think that's number 1. Number And suddenly you say, oh, new admin online. Yes, it's more efficient. Yes, it's more cost effective over time, It involves the change of behavior of a lot of internal procedures and people's behavior. And I think in order to overcome that, the number one reason has to be very strong. And at the same time, when we actually can create 20 examples and role models through which a certain case have been created within the industry, then it's much easier 20. So that's exactly what we're doing. We're trying to Create the role models and then trying to make them into a more common set of solution and then populate it to other players within the industry. The third one is about IT resources within those enterprises, right? And that's the reason why we have been working with a lot of ISVs and System Integrators so that they can actually help the companies once they have the key reason and value proposition to move online And at the same time, they have a clear blueprint to do that and then the IT resources actually they can find 20 in the 3rd party world. And I think that's addressing one set of issues. The other side is about Tencent Cloud in particular, right. As a challenge, I think we do face many challenges and we are tackling them 1 by 1. The first one being just building relationship with Enterprises. That's not easy, right? And we have been making good traction in the year of 2018, 2019, especially During the pandemic, it's very hard to build new relationships. And even though you have signed up new contracts, it's hard to implement. So that's The reason why our cloud growth was a little bit impacted in the first half and the third quarter of last year, but then As the world returned to normal, we have seen the relationships and the implementing projects back on continuously building up our technology so that our product is actually competitive. Our cost is competitive and that's the reason why we have invested in a lot of the 20 new technologies such as AMD servers, such as RT Block architecture so that we can make our solutions cost competitive. And I would say finally, Tencent has got a lot of SaaS solutions on the communications and productivity side, 20, which are market leading. And in the future, when we can actually connect our cloud service with these SaaS Solutions. I think that's the time when we can really leverage our competitive advantage and overcome a lot of these challenges. I hope that answers your question. Thank you. Our next question comes from Han Joon Kim from Macquarie. Please ask your question. Great. Thank you very much management for your time today. I do have first one is just touching upon I think We've probably not had too much engagement with them, I think, since 2016. So should we just view this as something in isolation 20. Or kind of should we see that there's more room for collaboration with other ecosystems out there in China? And How do we think kind of the shifting dynamics in that kind of scenario where on one hand, I guess we have to kind of make sure we protect our 20 user experience and the integrity of the experience within WeChat, while also kind of thinking about how we remain open platform in collaboration with other ecosystems out there. And then the second question I want to touch upon is in regards to your investment To Rakuten. Mikitaison did host a call and I think he kind of elaborate that he would want to work with you guys a little bit more deeply And even in areas, I think, like games. So I mean, and for you guys, is it more of a passive role if they want something like games? Are you happy to kind of give it to them? Or is that kind of more strategically minded initiative where we kind of see the ability to export some of our key kind of resources and services to other geographies. Thank you. So In terms of the first question, without going into a lot of details, I would say our general Principle is that we are open in nature. We have an open platform which encourage 20 organic cooperation with other platforms. But at the same time as a platform Manager. We actually need to look after the user experience as well as protect our users' privacy with a lot of focus, right. So there's a dual responsibility there and our responsibility for the users is actually much 20. And in a lot of cases, prevent spending, especially encourage spending of our users. And if we actually sort of see violation 20, not only to third parties, but also to our investee companies and sometimes our own services. If you see our own services actually spamming users in unscrupulous way, we actually sort of put in penalties too. And finally, I think the relationship with any large company has to be mutually constructive. So I think these are sort of the principles that we adhere to when we look at these relationships on the industry end. Now in terms of our investment in the international market, right now, I would say I would refer you to on the particular case of Rakuten, you referred to the press release as well as what Mickey said. I think this is a company which is a local champion in 10. It's very innovative and it also has a very strong franchise in the area of e commerce and Fintech and emerging 20 in the telecom space and we are very Honored to be able to work with them and without that by working with them we can actually sort of help to Download some of the know how that we have. We can help them with their capital. At the same time, they are very Competent Company who can operate very independently and we felt we can actually Help them to operate even more competitively in the local markets as well as internationally. And in terms of thinking about Working with international partners, I think the approach is very similar. We look for very competent management teams and passionate entrepreneurs. We look for companies which has Very strong presence within the local market where they have good support by the government. They have good report with the consumers in the market. And what we do is that we provide our resources basically know how as well as some capital 20. And maybe in some cases some access to the Chinese market. And by and large, the companies with some help from us And by engaging in these kind of partnerships, we felt that it helped us to get access to exciting markets, exciting teams, exciting products around the world. Thank you. The next question comes from Gary Yu from Morgan Stanley. Please ask your question. Hi. Thank you for the opportunity to ask questions. I have two questions from my side. The first one is on FinTech. Correct me if I'm wrong. I think majority of Tencent credit business is being conducted under the WeBank subsidiary. Just wanted to check the new kind of fintech regulation on forming financial holding company. How does it affect the way Tencent conduct a credit business in the future, if at all? And how does it affect our revenue financially? And the second question is related to Vino accounts. Just a follow-up question This unique feature from content and also diverting traffic between kind of private domain and public domain. Given these unique features compared to other short form video platform, do we expect the future kind of monetization opportunity will also be a lot more different compared to what we've seen out there in other platforms in the form of advertising, e commerce, live streaming. Are we expecting more kind of different form of monetization opportunities going forward? And if that's the case, what kind of timing Are we looking at in terms of monetization? Thank you. Yes. On WeBank, it's an affiliate 20. The vast, vast, vast majority of our loan business is actually conducted through WeBank and WeBank is a licensed license. And Well, there's a lot of nuances in your question, right? So maybe I'll just try to answer it in full. There is a question of what is the impact of financial holding company right now? And I would say financial holding company as a concept is an important put forth by the regulators in managing the risk within the financial system and we have been paying very close 20 attention to the relevant development. And we would be completely compliant if it's But from our understanding, the financial co holding company in itself is neutral in nature. It does involve organizational change, but it doesn't really impact the businesses. What impacted real FinTech businesses are really the regulations In the past few months, right, there have been a number of regulations that have been put in place. But I have to say because of the way that we conduct our FinTech business and the loan business, 20, which is I would say there are a few principles that we have continuously emphasized 20. In terms of our approach to FinTech Businesses and I would like to reiterate them once again. Number 1 is We operate in strict compliance with rules and regulations and that's both in form as well as in substance. We are very prudent in our risk management. We have been have always been optimizing for quality and Risk Management rather than pursuing scale. And we focus on products and services that 20 as opposed to disruption. So with that in mind, and especially in the compliance point as well as 20. The focus on risk management and the fact that we have been very self restrained in terms of pursuing scale of our loan business. So when you look at some of the key regulations that have been put in place And I hope this actually sort of shows that for our FinTech business we have been prudent all along the way. 20. And as a result, we are actually sort of less affected by all these regulations. In a way, right, we actually sort of embrace these regulations that will be completely compliant, whatever regulations that will become in 20. Because we felt that with new regulations, with these more healthy regulations, at the end of the day, the entire industry will be healthier and it will be sustainable for longer term growth. And then in terms of just the video accounts, right, I would say Monetization is probably sort of too far a question for us to answer at this point in time. We have always seen When we get users, when we get user engagement, over time there is going to be monetization. But Number 1, at this point in time, we are very focused on building the ecosystem of content providers as well as the viewership. And we prioritize the user experience over any monetization. And number 2, even when 20. The practice of Tencent has always been much more self restrained in terms of monetization. It will only come on a gradual basis. So I think that's the answer upon your question. Your next question comes from Eddie Leung from Bank of America. Please go ahead. Good evening. Thank you for taking my questions. It is a pretty straightforward question, But perhaps quite important. Just wonder, given the reason in antitrust regulation, What are some of the things that Tencent can do to stay competitive in the industry while still able to address the percent of the regulators. And then just a further question on the Weixin ecosystem. Any target or strategic goal for Weixin's transaction ecosystem in 2021. For example, any more new initiatives are to facilitate the commercialization of your merchants and service providers. Thank you. Okay. Well, in terms of the first question, right, I would say There are more and more focus on Government Regulations. And I think this is something which to be honest, it's actually quite natural. I think in the past we actually have talked about this view and this is we want to reiterate it, which is As companies become large and as Internet services become more and more a part of people's life, Then companies need to be much more responsible both to the users, to the government, to society and socially, right. This is Just something that needs to be done and to some extent It signifies the importance of the industry that we operate. And in order to Navigate this, Reni. I think it's a boring answer. This is basically sort of doing a lot of the things that we have been doing, But with a very strong focus on communication with the government and compliance. So if you look at the operating principles of Tencent, we have always emphasized that we would be fully compliant with rules and 20. Now I think it's important for us to understand even more about what the government is concerned about, what the with a futuristic approach. So you anticipate what is needed and try to be sort of even more compliant in the businesses in anticipation of any rules and regulations change. We want to focus on user value and innovation. I think this is essentially what That answers your question. The ultimate competitiveness actually come from you providing more and more user value and you Come up with exciting and innovative products that deliver more user value, not only to the users, but also to industry partners right now. And when that's done, then I think it also complies with what the government, what the society, what the users perspective. We are very self restrained in terms of monetization and our business practices. And I think a lot of people comment that, oh, there's one way that you can actually turbocharge your revenue. I think we sometimes get criticism on being too Much in self control, but that's something that we'll continue to do and we think it's going to be beneficial for us in the current environment. We embrace open platform and we provide our open platform to a lot of industry partners and help them to grow. We embrace competition, right, but in a fair way. We embrace fair competition even within our own company, right, because we think that Fair competition actually makes the teams better and when the teams are better they provide good products and innovation that create a lot of user value. And finally, we engage in partnerships while respecting our partners' independence and this has 20, our principal in our investments, in our business partnerships and we'll continue with that. So with all these existing practices and we continue to Put through our efforts in exercising them. I think over time, we would be able to comply with the rules and regulations and also Present ourselves as a healthy force in the industry and also fulfill the expectation of the society as a whole. So the second question is about Weixin GMV. The Weixin GMV, I don't think we have any target right now. Weixin GMV has been increasing and I think the reason is Because of the fact that more and more merchants as well as service providers Look at online as important and the importance was especially heightened during 20. In the past, they look at online as an additional channel. Now they look at online as in 20. The second one is more and more companies and 20. E commerce players and service players now value private domain more and more. In the past, when they look at Online, they said it's an additional channel, it's okay for them to host their users on the public domain. And over time, when they feel that online is an indispensable part of their future, Then they want to engage with their users like the way that they engage with their users in their shops. So the private domain is becoming more and more important and Many programs actually allow them to engage with their users in a private domain. And now We have also added a lot of tools for them to engage with these users. That's the third reason. Yes, we have had official accounts. We have had Weixin payment, but now we are adding a mini shop. We are adding video accounts. We are adding live streaming. And a lot of these tools are actually helping them to manage their customers online on the private domain better and better. And with all these factors and with also a continuous education process and the establishment of role models within the industries, The ecosystem of menu programs is quite getting more and more vibrant and we're very happy to see that. Operator, we will take 2 more questions. Thank you. Certainly. Your next question comes from Choi from Daiwa Capital Markets. Please go ahead. Thank you for taking my question. I have Two questions. First of all, I think on the online games international part, imagine you mentioned that you guys will continue to So would this be another strategy for both the domestic and international market? And just quickly a follow-up also on that is in terms of the investment, it seems that you guys are stepping up more on the PC and console studios. So Could you kind of share your thoughts whether we're going to be more serious in these 2 genres going forward? And a quick follow-up is on your online advertising. Given that some verticals such as online execution has been seeing some challenges, what are the trends that you're seeing despite all the changes in the industry? Thank you. So on the game question, yes, We absolutely seek to work with intellectual property to create games that we think can resonate both internationally studios that are active on console MPC, but we've also been very active investing in studios that focus on mobile. In reality, our mental framework is not that we want to invest in a certain number of console studios, a certain number of PC studios, a We want to invest in the best or the future best studios within each genre of 20 games. And sometimes the genre of games is particularly well developed in China, in which case the best Japan or the United States where the best studios are often console centric. And quite often for the 20. The best studios are in Europe, where they'll typically be PC centric. Our view is that over time, it's becoming easier to cross platforms. And so we're much less interested in whether our studio has Mobile or console or PC expertise. I'm much more interested in whether it has simulation expertise or card game expertise or role paying expertise that can move across different hardware platforms over time. So that's on the game front. And then On the advertising side, I mean, I think anytime you look at the advertising market, the short term is always It's a very murky because it's sensitive to GDP growth, which is unknown at the moment as it always is. It's sensitive to regulatory changes. Right now, we have some uncertainty globally around the impact of Apple's IDFA changes. So, there in China, that will be mitigated by 20. And advertising will tend to grow over time. And I think what you can see very clearly from 2020 20. More traffic, more tools, more resources, less monetization than the industry in aggregate. So in good times, 2019 and in bad times like 2020, we tended to outgrow the overall advertising industry and over the long term, we think advertising is Thank you. Your last question comes from William Packer from Exane BNP Paribas. Please go ahead. Hi, management. Many thanks for taking my questions and congrats on the strong numbers. Last quarter on this call, you gave Some helpful initial perspectives of the draft announcement regarding antitrust and platform rules. Could you provide an updated view now that we've had a bit more information? So that would be helpful. And is it still right to think that your video games and digital Entertainment businesses are not likely to be a focus. And then as a follow-up, in terms of acquisitions, both stakes and larger deals, Should we expect the pace of your investing to change as new systems of oversight are established? Thank you. So perhaps I'll start with the second question. For better or worse, the pace of our investing activity has been Relatively unusually intense during the past 6 months. And that's not because of regulation. That's just because in those spaces, specifically enterprise software as a service in China. So as you know, historically, the very vast 20. Over 95%, 99% of our investments, minority investments rather than mergers or outright acquisitions and that will remain Going forward and for that very vast majority, then a different antitrust regime will not, we believe, the impact, the Desirability of us investing in and supporting startups and helping them to grow into bigger, better companies over time. So we remain active investors, but internationally as well, especially in China. Yes. In terms of the last question, I would say because the gaming and the entertainment business It's by nature much more competitive and there are many more players in the market and it's Essentially, so they're free for all competition, right? So it's less relevant for the antitrust Regulations. And in terms of what we should be doing, I think I would refer you back Thank you. Thank you, operator. We are closing the call. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.tencent.com. A replay of this webcast will also be available soon. Thank you and see you next quarter. Thank you. Ladies and gentlemen, That does conclude our conference for today. Thank you for participating. You may all disconnect.