Tencent Holdings Limited

Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2023 Fourth Quarter and Annual Results Announcement Webinar. This is Wendy Huang from Tencent IR team. At this time, all participants are in a listen-only mode. After the 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 five on your telephone to raise your hand. If you are accessing from the Tencent meeting or Boo 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 this includes four looking statements, which are underlined 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 group's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors in non-IFRS measures, please refer to our disclosure documents on the IR 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 Lau will conclude with financial discussion before we open the floor for questions. I will now pass it to Pony.

Thank you, Wendy. Good evening. Thank you everyone for joining us. In 2023, we sharpened our strategic focus and achieved substantial progress in our major products, powering our high quality revenue growth model. Notably, video accounts total user time spent more than double as we enrich our short video content ecosystem. Our mini games platform increased growth received by over 50% year on year. Our number of major hit games in China achieving both high DAU and substantial monetization increased from six in 2022 to eight in 2023. And international games achieved double digit revenue growth and rose to 30% of games revenue. Tencent Video and Tencent Music extend their leadership with 170 and 107 million paid subscribers respectively. We come and Tencent Meeting strengthen their enterprise software leadership and increase monetization. And we also achieve significant technology breakthroughs. Our Tencent Huanyuan Foundation model is now among the top tier of large language model in China with a notable strength in advanced logical reasoning. Our upgrade advertising AI model enabled us to deliver better ad targeting and higher revenue. We invest further in sustainable social value initiatives Our digital philanthropy platform helped raise 3.8 billion RMB in public donations during 999 Giving Day campaign in 2023. Our new Cornerstone Investigator program supported 104 scientists contributing to fundamental science research. Looking at our financial numbers for the quarter, total revenue was 155 billion RMB up 7% year-on-year and stable quarter-on-quarter. Gross profit was 78 billion RMB up 35% year-on-year and 1% quarter-on-quarter. Non-IFRS operating profit was 49 billion RMB up 35% year-on-year or down 5% quarter-on-quarter. Non-IFI snap profit attributable to equity holders was 43 billion RMB up 44% year-on-year or down 5% quarter-on-quarter. Now I will hand over to Martin for the strategy review.

Thank you, Pooni. Good evening and good morning to everybody. During the course of 2023, we have established a high-quality revenue growth model, which will support our continued economic value creation. This, together with our increased focus on capital allocation discipline, will further enhance shareholder value. Starting with our financial performance, we've seen a healthy increase in revenue since the first quarter of 2023 by increasing high quality revenue streams and reducing low quality ones. Importantly, our gross profit growth has consistently surpassed revenue growth due to the margins of our incremental revenue being significantly higher than the 50% overall gross margins for the entire company. This incremental revenue is generated predominantly from our leading social and payment platforms, which have already been built and have their costs covered. We now consider gross profit growth as a key proxy and frankly, a better proxy than revenue growth for our organic growth given this shift in terms of the revenue mix. We further enhanced our operating profit growth from gross profit growth through operating leverage. First, we streamlined operations and prudently reduced aggressive market expenditures. We perceive these measures as a less recurring strategy. Second and more importantly, we're committed to operational efficiency and discipline resource allocation, which includes thoughtful staff distribution and effective marketing expense management. This approach ensures a focused organization and a lean cost structure moving forward. In the next few slides, I will provide more details on the drivers for our earnings growth going forward. Weixin provides the first set of examples of how we nurture high quality revenue streams. The Weixin platform is delivering consistent growth in both the AU and daily time spent per user. New services within Weixin such as video accounts, mini games, and WayVision Search contribute to greater engagement and overall platform health, while at the same time generating additional revenue at very high margins, given they are offered on top of a relatively stable platform cost base. Going into each one of them, firstly, for video accounts, total user time spent more than doubled in 2023, driven by strong growth in DAU and time spent per user. Video accounts advertising revenue has substantially increased thanks to the increased traffic and improved ad targeting. despite ad load was kept to a much lower levels than industry peers, which then offers a better user experience overall. Secondly, minigames experienced a 50% increase in gross receipts in 2023, benefiting from more DAU and higher revenue per user. The growth in gross receipts drove increase in high margin platform fees for us. Weishen minigames are the clearly industry leader with minigames user retention rate and time spent per user notably higher than in peer services as a result of Weishen's platform stickiness, well-developed ecosystems such as social sharing and notification, and our game technology know-how. Thirdly, Huixin Search now achieved over 100 million DAU, up over 20% year on year. And Huixin Search content QV grew over 30% year on year. Our search revenue grew multiple times year on year in 2023, as we ramp up monetization on this under-monetized asset. In addition, our FinTech service provide a second set of examples of high quality revenue streams. We've spent many years building a solid base for FinTech services in the form of our widely used to payment services. with our straight adherence to regulatory requirements and with careful risk management. In recent months, we completed a comprehensive self-inspection and corresponding ratification process, upgrading our operational compliance capability. We also strengthened our payment ecosystem by improving user security, refining mini program-based transaction tools and enhancing cross-border payment experience. On top of this solid base, we're providing additional products and services in collaboration with licensed financial institutions, which generates high incremental margins as these revenues are recorded on a net fee basis. In wealth management, we generate low take rates, but high margin fee income from a large and growing pool of aggregated customer assets by offering customers high quality products and superb convenience. The products are primarily low risk money market funds and to a lesser extent, fixed income mutual funds. In consumer loans, our partnership with WeBank and other licensed banks facilitate us distributing small size cash flows and installment payment services. We kept the default rate low by applying stringent tech enabled risk management procedures. for both the wealth management and consumer loans. We offer substantially better economics for consumers, partners and ourselves versus standalone FinTech businesses as we reduce customer acquisition costs and credit charges. Now moving on to games, our domestic game business revenue has been soft during 2023, but we expect it to improve from the second quarter of 2024. The reason for slow growth in 2023 was that our two biggest games, Honor of Kings and Peacekeeper Elite, have maintained their leading positions in terms of DAU, but monetization has temporarily stagnated, which caused us to take remedial actions. for Peacekeeper Elite, we identified a need for more creative monetization strategies and have revamped the leadership of its monetization team. We look forward to the game delivering more innovative and engaging experiences that would also help monetization. We're optimistic that our new monetization team can deliver on this front given its sister product, PUBG Mobile's team has already delivered a notable rebound in its monetization internationally. For Honor of Kings, our monetization activities have been overly concentrated within this Chinese New Year period in 2023. We're rolling out a more evenly distributed monetization strategy in the year of 2024, which we'd expect to benefit year-round revenue generation. Looking beyond these two games, several of our recent releases have performed well in terms of DAU and are now converting that DAU success into monetization. The number of major hit games in China increased from six in 22 to eight in 23. We define major hit games as games exceeding average quarterly DAU of 5 million for mobile and 2 million for PC, and at the same time generating over 4 billion RMB annual gross receipts. We view these thresholds as indicative of a major and enduring hit, and games surpassing such DAU and revenue thresholds will contribute to long-term stability and growth of our game portfolio. having a large and expanding portfolio of major hits illustrates our ability in continually developing new major hits and in operating multiple highly popular games at the same time. During the year, our new major titles are, one, Fight of the Golden Spatula. It has transitioned from a niche auto chess game to one of the most popular mobile games in the domestic market, ranking top five by DAU and total time spent. Second, LOL Wild Rift now also ranks among the top five mobile games by total time spent and gross receipts in China. We expect to keep adding major hits to our portfolio in the course of this year. We're looking forward to releasing several major new games, which should also contribute to improving revenue trends through 2024. DNF Mobile is a key title for us, given the success and longevity of DNF PC and given a general scarcity of successful action games on mobile. DNF Mobile has just completed a major closed beta test successfully, and given the positive results, we intend to launch the game in the second quarter of this year. Other high potential games in our portfolio for 2024 include Honor of Fight, Need for Speed Mobile, and One Piece Mobile. In 2023, we also made notable progress in core technologies, especially those involving AI that will serve as our growth multiplier going forward. After deploying leading edge technologies such as the mixture of experts MOE architecture, Our foundation model, Tencent Hunyuan, is now achieving top-tier Chinese language performance among large language models in China and worldwide. The enhanced Hunyuan excels particularly in multi-turn conversations, logical inference, and numerical reasoning, areas which has been challenging for large language models. We've scaled the model up to the trillion parameter mark, leveraging the MOE architecture to enhance performance and reduce inference costs. And we are rapidly improving the model's text-to-picture and text-to-video capabilities. We're increasingly integrating Kunyuan to provide co-pilot services for enterprise SaaS products, including Tencent Meeting and Tencent Docs. And we are also developing new GenAI tools for effective content production internally. More generally, deploying AI technology in our existing businesses have begun to deliver significant revenue benefits. This is most obvious in our advertising business, where our AI-powered ad tech platform is contributing to more accurate ad targeting, higher ad click-through rates, and thus faster advertising revenue growth rates. We're also seeing earlier stage business opportunities from providing AI services to Tencent Cloud customers. Finally, with this high-quality revenue growth model, we have resources to keep investing in our businesses while at the same time returning more capital to our shareholders. Historically, we have continually paid cash dividends to our shareholders and periodically repurchased shares at times when we believed our share price was undervalued, which is particularly true today. with a record high and growing profit and cash flow. We propose to increase our upcoming cash dividend by 42% year on year to 3.4 Hong Kong dollars per share. And we intend to at least double our buyback activity year on year from 49 billion Hong Kong dollars in 2023 to at least a hundred billion Hong Kong dollars in 24. We believe this commitment to return at least 132 billion Hong Kong dollars or 16.9 billion US dollars to shareholders during the year is well supported by our free cash flow, which was 24 billion US dollars for the full year of 23, along with our gross cash position of 57 billion US dollars and our investment portfolio of 126 billion US dollars. Now with that, I will pass to James to talk about business review.