Tencent Holdings Limited

Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2022 Fourth Quarter and Annual Results Announcement Webinar. I'm Wendy Huang from Tencent IR team. At this time, all participants are in a listen-only mode. After management's presentation, there will be a question and answer session. For participants who dial in by phone, if you wish to ask a question, please press 5 on your telephone to raise your hand. If you are accessing from the Tencent Meeting or VOO meeting application, please click the Raise Hand button at the bottom left. And please be advised that today's webinar is being recorded. Before we start the presentation, we would like to remind you that it includes four looking statements, which are underlined by a number of risks and uncertainties, 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. 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 group's financial performance held in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IRS section of our website. Now let me introduce the management team on the webinar 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 provide a business review. Chief Financial Officer John Low will conclude with financial discussion before we open the floor for questions. I will now pass it to Pony.

Great. Thank you, Wendy. Good evening, thank you everyone for joining us. During 2022, we increased our business efficiency, sharpened our focus on core activities, and developed new services and revenue lines, positioning us for a sustainable growth model in the future. A few notable achievements. In Weixing, video accounts became a leading shock from video and live streaming platforms in China while many programs achieved strong growth in both DAU and GMB contributing to the real economic development For games, domestically we significantly reduced our minuses time spent while sustaining our market leadership Internationally, we elevated Violent as a top global franchise and published two out of the top three new mobile games of the year. In advertising, we returned to positive revenue growth in the fourth quarter. Through the launch of video accounts in feed ads, enhance the transaction-driven capability of our ad inventories, and improve our machine learning infrastructure. For cloud, our upgrade strategy resulted in initially lower revenue but improved gross profit margin. We assisted that the digital transformation of non-internet industries and public services. During the year, we return increased capital to our shareholders through distribution in-kind, share repurchase and cash dividend. We also make significant progress in our drive to create sustainable social value. For example, we announced our commitment to carbon neutrality by 2030. Our digital charity platform raised donations for over 25,000 projects and engaged more than 100 million users. In support of basic research, we pledged 10 billion RMB over the next 10 years to establish the new Cornerstone Investigator Program. On the governance front, we welcome Professor Zhang to join the Tencent Board last August. Martin will rotate off the board at the upcoming AGM while fully dedicated as our exceptional president. This adjustment will more clearly separate board from execute the responsibilities, increase the proportion of independent directors and increase the proportion of female directors. Now let me go through the headline financial numbers for the quarter. During the first quarter, total revenue was 145 billion RMB up 0.5% year-on-year and 3% quarter-on-quarter. Close profit was 62 billion RMB up 7% year-on-year and broadly flat quarter-on-quarter. Non-IFRS operating profit was 39 billion RMB up 19% year-on-year or down 4% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was 30 billion RMB up 19% year-on-year or down 8% quarter-on-quarter. Now I will hand over to Martin for the strategy review.

Good evening and good morning to everybody and thank you Tony for the kind words earlier. I look forward to sustaining and indeed enhancing my dedication as Tencent's president in the years ahead. With that, I will share some of our perspectives on our strategy for the future which we believe is actually very exciting. In the year of 2022, we aligned our businesses with the new industry paradigm while continuing to invest and pursue value creation opportunities in strategic areas. Today, I'm pleased to tell you that our consistent efforts have yielded encouraging results and we have successfully repositioned ourselves for sustainable and high quality growth. Let's take a look at our financial performance, which has started to improve since mid-2022. Particularly for the fourth quarter, our revenue stabilized on a year-on-year basis following the decline in the last two quarters. We achieved year-on-year improvements in gross margins across all business segments. Non-IFRS operating profits and net profits both increased 19% year-on-year compared to low base in the same period last year. The improved financial results reflect our proactive initiatives coupled with an improved macro environment. First, we executed efficiency initiatives to improve margins and promote earnings quality. These included reducing costs and sharpening business focus. Second, we made significant progress in developing new high quality and high potential revenue streams, such as video accounts in feed ads and international games. Third, for the macro environment, we're encouraged to see positive signals related to post-COVID recovery and regulatory normalization. looking forward we're confident of our future growth potential underpinned by multiple drivers first we see expanding opportunities in advertising fintech services and games along with continued recovery in macro environment second we're still in the early stage of monetizing video accounts we have and we're nurturing additional revenue streams such as live streamed e-commerce Third, we'll continue to focus on operational efficiency and remain disciplined in resource allocation. Fourth, we have been leveraging our longstanding expertise in developing and applying AI technologies as a growth multiplier. The recent industry breakthroughs in foundation models and consequently in generative AI applications present exciting opportunities for us. In the next few slides, I will discuss more about some of these drivers. Let's start with advertising. While it's still early days for macro recovery in China, I'm pleased that our ad revenue returned to double-digit growth in the fourth quarter, albeit comparing to an easy base period last year. We registered positive growth in the fourth quarter even if we take out the new contribution from video accounts and feed ads. To enforce reinforce our growth potential as macro environment improves in 2023. We have been expanding our inventories as well as improving our capabilities to enhance conversion for advertisers. For new ad inventories, we see strong market demand for video accounts in feed ads. We're making very good progress in ramping up revenue on the back of rapid user engagement growth and high advertisers demand. Additionally, we're increasing ad load of wishing official accounts and enhancing access to quality inventories in mobile ad network. To drive conversion for advertisers, we have been upgrading our transactional capabilities via innovative ad formats, CRM tools for merchants, and shopping tools for users. The portion of wage and ad revenue generated from click-to-purchase and click-to-message ads has been increasing and exceeded one third in the fourth quarter. This possible trend demonstrates that advertisers increasingly recognize our differentiated capabilities in driving transactions, positioning us well for consumption recovery. In addition, we have been investing in our new machine learning infrastructure, but rolled out a new ad targeting engine, enabling us to enhance conversion rates and help improve ROI for advertisers. especially for long-tail advertisers. Furthermore, the new infrastructure allows us to achieve greater processing efficiency by increasing training speed and lowering per unit training costs. Turning to fintech services, despite the temporary COVID impact during the fourth quarter, we expect our commercial payment business will benefit from consumption recovery in China. This is evidenced by the strong rebound in our total payment volume growth since the beginning of 2023. On the top of macro recovery, our commercial payment business have been structurally benefiting from synergies with many programs. As a leading transaction platform in China with several trillion RMB of GMB in 2022, MiniPrograms enables online plus offline solutions for merchants to reduce transaction friction and drive repeated sales. As a result, the proportion of commercial payment volume contributed by MiniPrograms has been increasing over time and has reached high teens percentage level. In terms of new business development, were well positioned to capture further opportunities in the fintech sector as the regulatory environment in China normalizes. For wealth management, we're expanding our user base through investor education, better services, and a broadening product line. For consumer loans and online insurance services, we're exploring new opportunities through close cooperation with licensed financial institutions under a new regulatory framework. For games, we are now gearing up for global expansion. In domestic market, we navigated through industry challenges during 2022 and are now well positioned for reigniting growth. Our key franchises have demonstrated resilience and longevity. For example, in January, 2023, Honor of Kings had its best ever Chinese New Year period in terms of gross receipts, thanks to very successful launch of new content, top quality outfit, as well as targeted offerings for players. In addition, Dungeon & Fighter delivered its strongest fourth quarter performance over the past three years, leveraging the success of game mechanics evolution to attract returning users. Furthermore, we're benefiting from normalization of Banhao approval, which enables us to strengthen our game releases for 2023 and beyond. Under the new industry norm, we're sharpening our focus on launching new games. In addition to titles in high potential genres such as Undone, we'll bring to the market new games combining popular IPs with our expertise in genres such as shooter and all chess. Meanwhile, we'll publish leading international franchises such as Valorant and Lost Ark. In international markets, we have made strong progress in reinforcing our growth potential over the medium and long term. Our international games revenue for the fourth quarter increased to two billion US dollars, representing one third of our games revenue. We have expanded our top franchise portfolio as Valorant goes from strength to strength with record users and revenue, and as Miniclip acquired top casual game franchise, Subway Servers. Our emerging studios have achieved initial success in their new title launches, including V Rising by Stunlock and Darktide by FactShark. For the next few years, we're building a strong pipeline to tap into multiple opportunities in the international markets. Notably, we're expanding our original IPs into new platforms, markets, and genres, such as Valorant on mobile and One of Kings in international markets. We're also supporting our emerging studios to launch bigger titles with greater longevity, as well as bringing more highly acclaimed PC and console IPs to mobile devices. Turning to video accounts, which is a key strategic growth driver. Video accounts continue to experience strong user engagement growth. In the fourth quarter, its total time spent reached 1.2 times that of moments. the number of videos with over 100,000 likes more than doubled year-on-year. We're now building on our user engagement in short-form videos to expand into live streaming services. Over the past year, we achieved rapid growth in live streaming services as we enriched our content and drove traffic for creators. In addition, we're gaining user mindshare in live events. For example, over 190 million viewers watched the 2023 CCTV Spring Festival Gala via live streaming on video accounts. To keep up with the growing demand for merchants to conduct transactions, we're enhancing our e-commerce capabilities. One of these improvements is the launch of Video Accounts Shop, which offers seamless shopping experience to users. We are broadening monetization opportunities in video accounts, capitalizing on the rapid expansion in short-form videos and live streaming. While live streaming tipping revenue experienced strong growth in 2022, in-feeds ad revenue are ramping up rapidly and exceeded 1 billion RMB in the fourth quarter. Furthermore, we're building infrastructure for live streaming e-commerce to promote GMB growth. Since the January of 2023, we have started charging commissions to develop a new revenue stream. To conclude the strategy section, I would like to share with you our perspective on artificial intelligence, specifically the implications of foundation models for Tencent. Most important takeaway is that we expect AI to be a growth multiplier for us going forward. We have a longstanding experience in developing and adopting AI technologies, which has already benefited many of our businesses, such as advertising, games, short-form videos, and cloud computing. Recent industry breakthroughs in foundation models and consequently in generative AI applications are very beneficial to us, as our core social and gaming businesses are user-to-user oriented and involve very premium content, which are hard to be disrupted by AI technology. can stand the benefit of being enhanced. On the other hand, foundation models facilitate our introduction of user to machine services such as digital assistant and search, which can become new growth areas for us. As for strategies, we have been developing our foundation model and plan to gradually roll out these models at the back end while introducing front end use cases across our full product range. We are leveraging AI technologies to enhance our product innovation, monetization, and operational efficiency. We believe that we have strengths across the entire AI value chain because first, we have a broad range of use cases for AI via applications with deep user engagement, including Weixin, our leading game titles, our office productivity software, and our entertainment services. Second, with our long-term investment in machine learning, we have strong teams and deep expertise in technologies such as natural language processing and computer vision. Third, the breadth and depth of data accumulated in our businesses offer a strong foundation for our model training process. And fourth, Tencent Cloud is one of the leading cloud providers in China. The scale and sophistication of our infrastructure can support the growing demand for computing power from not only our in-house products, but also our clients' applications. Building on these competitive capabilities, we are rapidly advancing our proprietary foundation model, Hunyuan, which has strong capabilities in Chinese language processing. And with that, I'll pass to James to talk about the business review.