Tencent Hldgs Unsp/Adr

Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2024 Third Quarter Results Announcement Webinar. I'm 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 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 propelled 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. Now let me introduce the management team on webinar tonight. Our chairman and CEO, Pony Ma, will kick off with a short overview. President Martin Lau and 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. During the third quarter of 2024, we delivered robust revenue growth in our games business, underpinned by consistent performance of evergreen games globally and contribution from new games with evergreen potential. We upgrade our e-commerce strategy around mini shops to create a unified and trustworthy transaction experience spanning the entire WeChat ecosystem. We are increasingly seeing a tangible benefit of deploying AI across our products and operations, including marketing services and cloud. And we'll continue investing in AI technology tools and solutions that assist users and partners. Looking at our financial numbers for the quarter, total revenue was 167 billion RMB up 8% year-on-year and 4% quarter-on-quarter. Growth profit was 89 billion RMB up 16% year-on-year and 3% quarter-on-quarter. Non-IFIs operating profit was 61 billion RMB up 19% quarter on quarter and 5% quarter on quarter a year ago. Turning to our key services, for communication and social networks, combined MAU operation and recheck with year-on-year and quarter-on-quarter to 1.38 billion. Mobile MAU of QQ resumed year-on-year to 562 million. For digital content, we reinforce our leadership in music and long-form video streaming, where Tencent Music and Tencent Video grew substantially year-on-year. For interactive entertainment, we successfully launched DNF Mobile and Delta Force. Both have potential to become evergreen titles. For cloud, we improve our traction in international markets, leveraging our competitive pricing and domain expertise in areas such as games and live streaming. I will now hand over to Martin and James for business review.

Thank you, Pony, and good morning, good evening to everybody. For the third quarter of 2024, our total revenue was up 8% year on year. VAS represented 49% of our total revenue, within which social networks subsegment was 18%, domestic games subsegment was 22%, and international games was 9%. Marketing services was 18% of total revenue, and fintech and business services was 32% of our total revenue. Moving on to gross profit, our overall gross profit growth was 16% year on year in the third quarter, primarily driven by growth in high margin revenue streams from domestic games, video accounts, and wage and search. Improved profitability of our cloud services also contributed to overall gross profit growth. By segment, vast gross profit increased 13% year on year to 48 billion RMB, representing 53% of our total gross profit. Marketing services gross profit increased 18% year on year to 16 billion RMB, contributing 18% of total gross profit. And fintech and business services gross profit increased 19% year on year to 25 billion RMB, contributing 29% of total gross profit. For value-added services, the segment revenue was 83 billion RMB, up 9% year-on-year. Social networks revenue was up 4% year-on-year to 31 billion RMB, driven by increased revenue from music subscriptions, app-based game item sales, and mini games platform service fees, which was offset partially by decreased revenue from music and games-related live streaming services. Music subscription revenue increased 20% year-on-year, primarily driven by 16% year-on-year growth in subscriptions to 119 million. TME enhanced recommendation algorithms and reached content offerings and upgraded audio quality during the period. Long-form video subscription revenue increased 4% year-on-year, Video subscriptions grew 6% year-on-year to 116 million, benefiting from popular animated and drama series. Our exclusive drama series, She and Her Girls, became the highest-rated domestic drama series industry-wide since 2015 per review aggregator site Dolban.com. Our domestic revenue, games revenues grew 14% year on year to 37 billion RMB, reflecting growth from Honor of Kings and Peacekeeper Elite, as well as a record setting performance from Valiant and full quarter contribution of DNF Mobile. International games revenue increased 9% year-on-year or 11% in constant currency terms to 15 billion RMB. The growth was driven by robust performance of PUBG Mobile and Brawl Stars. Revenue growth of international games substantially lacked gross receipt growth as improved retention rates for certain titles led to elongation of their revenue deferral periods. Now, moving on to communications and social network. Within the segment on the key products, mini programs has emerged as an increasingly powerful platform for users to connect with merchants and content providers. Mini programs facilitated over 2 trillion RMB of transaction GMB in the third quarter, benefiting from better coverage and solutions for use cases, including foot ordering, electric vehicle charging, and medical services. On the content side, we enriched our content offering beyond mini games with increasingly popular mini dramas. MiniShops now serves as our platform for indexed and standardized merchandise, where merchants can operate storefronts similar to those in e-commerce marketplaces, while leveraging wage and social interactions, content services, and payment capabilities. For consumers, when enhanced the user interface for order tracking, extended return periods, and provide express return services, For merchants, we lowered entry barriers with simplified onboarding exercises and enabled shoppable SKU-level links across official accounts, mini programs, version search, and video accounts. Recently, we introduced a standalone merchant-facing app for mini shops merchants to facilitate their store operation and management. As Tony mentioned earlier, QQ Mobile Device MAU returned to year-on-year growth in the third quarter of 2024. Over the past few years, the QQ team has comprehensively upgraded the platform's backend infrastructure and added and popularized new functionalities such as Tencent Channels, resulting in this meaningful achievement. So with that, I'll pass on to James.

Thank you, Martin. Moving to domestic games, our flagship Evergreen Games achieved healthy gross receipts growth as a result of proactive adjustments that we made earlier this year. Honor of Kings grew its gross receipts year on year in the third quarter, benefiting from a Chinese Valentine themed event in collaboration with the Tencent Comics IP Fox Spirit Matchmaker, as well as a top tier martial arts themed outfit. Peacekeeper Elite continued its recent rebound and grew gross receipts at a double-digit percentage rate year-on-year in the third quarter, driven by items tied into the Neon Genesis Evangelion anime and an upgradable outfit inspired by Chinese ink painting. Among our other evergreen games, eight-year-old game Naruto Mobile achieved a historical high of over 10 million quarterly average DAU. Naruto Mobile grew gross receipts robustly year on year, reflecting higher paying user penetration for season passes. Valorant captured share in the reviving PC game market and was our largest PC game by gross receipts and revenue in the third quarter. For the first time, a Chinese team, namely Edward Gaming, won the global championships in the Valorant Champions Tournament, attracting new players and boosting sales of esports-themed items, driving quarterly average DAU and gross receipts to record high levels. We launched a pair of new games that are also demonstrating evergreen potential. DNF Mobile ranked second by gross receipts among all mobile games in the third quarter. While the fourth quarter will be a consolidation period for DNF Mobile, we will release a major content update for Chinese New Year intended to further enhance user engagement and monetization. Delta Force, developed internally by Timmy Studio, represents the first time we have created a first-person action game for simultaneous release on mobile and PC, as well as for domestic and international markets. We launched Delta Force in China in September, and the game is achieving good average user daily time spent and player retention rates with several million DAUs. We'll add a content-centric campaign mode and launch Delta Force in international markets in the coming months. Among our international games, PUBG Mobile grew gross receipts by a double digit percentage year on year to a record high level in the third quarter. Egyptian themed outfits became one of the most popular costumes in the game and Lamborghini branded car costumes monetized well too. Brawl Stars continues to rank among the top three mobile games by DAU across the industry and international markets. Gross receipts grew several times year-on-year, driven by the limited-time Megaboxes event and an IP collaboration with SpongeBob SquarePants. For Valorant, gross receipts increased over 30% year-on-year in the third quarter, benefiting from the launch of a console version and esports-themed weapon items. We extended Valorant to PlayStation and Xbox in early August in North America, Europe, Japan, and Brazil, expanding the game's user base. Turning to our next revenue segment, which we've renamed from online advertising to marketing services to better represent the breadth of our promotional and marketing solutions. Our marketing services revenue grew 17% year on year. Strength in games and e-commerce categories outweighed weakness in real estate and food and beverage. The Paris Olympics somewhat cushioned industry-wide weakness in brand ad revenue during the third quarter, but this positive factor will be absent in the fourth quarter. We leveraged our foundation model, Tencent Hunyuan, to facilitate tagging and categorization of content and ad materials. And we upgraded our machine learning platform to deliver more accurate ad targeting. By property, video accounts marketing services revenue increased over 60% year on year. As we systematically strengthen transaction capabilities in Weixin, advertisers increasingly utilize our marketing tools to boost their exposure and drive sales conversion. Mini programs marketing services revenue grew robustly year on year as our mini games and mini dramas provided high value rewarded video ad inventory and generated incremental closed loop demand. And for WayShin Search, we utilize large language model capabilities to facilitate understanding of complex queries and content, enhancing the relevance of search results. Commercial queries increased and click through rate improved and our search revenue more than doubled year on year. Looking at FinTech and business services, segment revenue was 53 billion RMB, up 2% year-on-year. FinTech services revenue in aggregate remained largely stable year-on-year, with a decrease in payment revenue offset by an increase in wealth management services revenue. The number of commercial payment transactions continued to increase at a hefty rate, but average value per transaction declined. For wealth management, both the number of users and aggregated customer assets increased year on year. Turning to business services, revenue grew year on year in the third quarter, benefiting from higher cloud services revenue and increased technology service fees generated from rising e-commerce transaction volumes. Business services gross profit rose significantly year on year due to the increased contribution from higher margin revenue streams, as well as improved efficiency. Our cloud revenue from GPUs, primarily used for AI, grew swiftly year on year and now represents a teens percentage of our infrastructure as a services revenue. We released Tencent Hunyuan Turbo, which utilizes a heterogeneous mixture of experts architecture, doubling our training and inference efficiency and halving inference cost versus its predecessor Hunyuan Pro. Super Clue ranked Hunyuan Turbo first for general capabilities among domestic peers. Last week, we made the Hunyuan large model and the Hunyuan 3D generation model available on an open source basis. Our international cloud revenue increased significantly year on year. We leveraged domain expertise in areas such as games and live streaming and competitive pricing to win international customers. And with that, I'll pass to John for the financial review.

Thank you, James. For the third quarter of 2024, total revenue was 167.2 billion RMB, up 8% year-on-year. Gross profit was 88.8 billion RMB, up 16% year-on-year. Operating profit was 53.3 billion RMB, up 20% year-on-year. Interest income was 4 billion RMB, up 14% year-on-year, driven by growth in cash reserves. Finance costs were 3.5 billion RMB, up 27% year-on-year due to exchange loss this quarter compared to gains in the same period last year. Share profit of Associates and JV was 6 billion RMB compared to 2.1 billion RMB in the same period last year. On a non-IFRS basis, share of profit was 8.5 billion RMB up from 4.8 billion RMB last year due to strong financial performances from several associates as a result of company-specific factors including new content release and improved operating efficiencies. Income tax expense declined by 19% year-on-year to 8.9 billion RMB, primarily due to higher withholding tax provision in the same quarter last year. Domestic corporate income tax in the third quarter of 2024 increased year-on-year. On non-IA virus financial figures. Operating profit was 61.3 billion RMB, up 19% year-on-year. Net profit attributable to equity holders was 59.8 billion RMB, up 33% year-on-year. The difference in year-on-year growth rates between operating profit and net profit was due to higher non-IRV share of profit from Ashok Jais and JV, which increased to 8.5 billion RMB this quarter from 4.8 billion RMB same for the last year, as well as lower income tax due to previously mentioned high base impact. Diluted EPS was 6.34% of RMB, up 36% year-on-year, outpacing non-IA virus net profit growth due to reduced share count from share buybacks. For the first quarter of 2024, our weighted average number of shares for calculating diluted EPS decreased by 2.5% year-on-year. Moving on to gross margins. Overall gross margin was 53% up 4.0% year-on-year. By segment, value-added services, gross margin was 57% up 2.0% year-on-year due to a higher mix of higher margin gain revenue, margin improvement in music and non-form video businesses, as well as low mix of low margin live streaming revenue. Marketing services gross margin increased to 53%, up 1 percentage points year-on-year, primarily driven by growth in high-margin video accounts and wage and church revenues. FinTech and business services gross margin increased to 48%, up 7 percentage points year-on-year. This was driven by enhanced cost efficiency in our crowd businesses, revenue growth from wealth management services and e-commerce technology service fees, and improved monetization of WeCom and other business services. On third quarter operating expenses, selling and marketing expenses were 9.4 billion RMB, up 19% year-on-year due to increased promotional efforts to support new games in domestic and international markets. Selling and marketing expenses represented 6% of revenues compared to 5% in the same quarter last year. R&D expenses were 17.9 billion RMB, up 9% year-on-year, driven by our investment in strategy areas, including AI. DNA expenses excluding R&D were 11.2 billion RMB, a 14% year-on-year due to higher staff force, including costs associated with performance-based reward at certain overseas subsidiaries. At quarter end, we had approximately 109,000 employees up about 3% year-on-year and also up 3% quarter-on-quarter as the third quarter is the annual college recruitment season. When I revised, operating margin was 37%, up 3.0% year-on-year, largely in line with gross margin expansion. To conclude, I will highlight some key cash flow and balance sheet metrics. Operating capex was 14.7 billion RMB, up 122% year-on-year, driven by investment in GPU servers. Non-operating CapEx was 2.4 billion RMB, up 74% year-on-year, driven by CIP. As a result, total CapEx was 17.1 billion RMB, up 114% year-on-year. Free cash flow was 58.5 billion RMB of 14% year-on-year, primarily due to higher gross receipts from games. On a queue-on-queue basis, free cash flow increased by 45% driven by higher games receipts and timing difference in the settlement of certain accounts payables. That cash position was 95.5 billion RMB of 33% quarter-on-quarter, primarily driven by free cash flow generation, partially offset by cash used for our shared purchases. Thank you.

Thank you, John. We should now open the floor for questions. Our first question comes from Kenneth Wong from UBS.

Hi, good evening, management. Thank you for taking my question. I have two questions. First is on mobile games. This year, we have a few major hits in China gaming market. In mobile, we have our hugely successful Dungeon and Fighter. In PC, Blacksmith Wukong, which we have an equity stake, has been a big hit. in mini games, White Owl Survival, which started as our top mini program, mini games, and now being a top 10 grossing in China after turning into an app-based game. So in light of that, can management share with us some implications and insights for the industry and how would these events or major hits games actually shape our game strategy going forward? And my second question is on e-commerce. Notice that we upgrade into our vision mini stops to enhance our e-commerce offering. Can management share more with us this initiative, including this positioning versus before, and how should we think about its potential? It is fair to say that we shouldn't think about this temp from a live streaming e-commerce, but actually the whole e-commerce space as a much higher temp. And how should we think about its role versus the mini program, which GMB has heated $2 trillion last quarter. Thank you.

Hi, Kenneth. I'll take the question on games. So it is true to say and gratifying to say that in recent months, the success of Certain games made in China worldwide has become increasingly evident, whether that's a black myth Wukong or a whiteout survival or the ongoing strength of a PUBG mobile. And I think that is a structural trend facilitated by the fact that Chinese studios are operating in a large area. Home market that adopts new trends such as virtual item business models such as mobile platform relatively quickly. Also, they benefit from a very substantial engineering workforce. That means they can allocate substantial headcount to games, both developing and commercial. operating games. And then the workforces are very willing to embrace new tools. This year, Unreal Engine 5, which powers Black Myth Wukong, has been a particularly notable example of the benefit of utilizing these new technologies. So what does that mean for Tencent's strategy? We believe that whether internationally or domestically, the scarce resource in the industry is really evergreen games. And on the one hand, the ability to release new games that becomes hits is increasingly challenging. On the other hand, for games that are hits, then with the right investment and care, the opportunity to render them evergreen is more attractive than it's ever been before. And, you know, how do we turn that observation into a strategy? You know, the strategy is to really, you know, play to different studios' strengths. You know, within Tencent, we have a number of very capable, proven studios. Many of them are particularly good at player versus player games. gameplay-based games, and they continue to double down on their strengths. Outside Tencent, there are studios that are particularly good at content-based, story-driven games, such as Black Myth Wukong. There are studios that are particularly good at strategy games, such as Whiteout Survival. And for those studios, we seek to invest in them, which we've done with both to deepen and increase our investments and relationship with them, sometimes to publish their games. And so we believe that that strategy is the right strategy, leveraging both in-house studios and investments and partnerships with external studios for each studio to focus on what it does best.

So Kenneth, on your second question, In terms of Weixin Mini Shops, as we introduced in our prepared remarks, the purpose of the Weixin Mini Shop is actually to create and develop a unified and trustworthy e-commerce platform within Weixin. And this platform features standardized and indexed merchandises And these products would become atomic data structure within Weishen to represent product information. And at the same time, the merchants are going to be verified and subject to quality monitoring. So what does it mean? With this upgrade, what we believe is that the shopping experience for consumers would improve as there is a better quality assurance on the products. And they also enjoy better shopping experience such as order tracking, express return, because now we know what kind of products have they bought and from which merchants that they have bought. And for the merchants, they would actually enjoy better transaction support, as we discussed, and more importantly, and most importantly, access to new traffic and customers. this overall mini shop experience will be incorporated into the Weixin ecosystem. And as a result, it would actually enjoy new traffic streams, such as it will have magnified access to our communication and social traffic, such as chat, group chat, and moments, as well as our media properties, such as official accounts, mini programs, search, video accounts, and overtime recommendation engine. So the whole idea is that when we know what products are being sold by what merchants, then we are more comfortable in providing access to traffic to our consumers in the Weixin ecosystem. And that actually would create the flying view on attraction for merchants. In terms of the potential, we are actually very excited about the long-term potential of this e-commerce ecosystem. And the reference point, as you said, is like mini programs, right? So within mini programs, there are already a lot of transactions happening. When we mentioned about 2 trillion transaction, a lot of it is actually on services. So they are not really on physical merchandise. But even if you look at the physical merchandise, there is actually a pretty significant GMB already that merchants are selling to their customers. But if you look at how these merchants are generating these transactions, transactions, right? They are primarily selling these products to customers, which they have already known, right? So, you know, when merchants have got their physical shops, they would actually ask their customers to purchase through WeChat Pay. And with that, they would activate sometimes a mini program. And from their point onward, if the customers actually want to revisit the store, they can actually go back to the mini program and generate a transaction. But within these transactions, we actually don't know what's happening, what kinds of products are being sold. And the merchants actually do not really have new ways of getting access to new customers. But if they feature the product within the Waysion mini shops, then they can actually get access to all the traffic that I mentioned within communication and social and within our media properties, including video accounts. So that's why we felt it's actually a better experience for merchants than the mini program infrastructure. And another case in point I would point out is that if you look at video accounts, before video accounts was introduced, as a standardized product format within Weixin, what happened is there was already a lot of non-standardized short video being shared within the ecosystem of Weixin. But once video accounts was introduced and once the video format was actually standardized with Weixin, with a good traffic support, then the video accounts traffic actually grew very significantly. And that's why we felt if we can actually provide a standardized, well-protected, trustworthy transaction environment within Weixin, then we can actually have a good potential of building our transaction volume.

Thank you, Martin and James. And congrats on a strong quarter.

Thank you, Kenneth. Next question will be from Citibank's Alicia Yeap.

Thank you, Wendy. Hi, good evening, management. Thanks for taking my questions. Two questions. First is that related to Waysing search. You mentioned commercial queries and click-through rate year over year. Can management share some colors on which industry advertisers started to utilize more of the commercial keyword to drive the traffic lead? And other than the so-and-so feature within the Waysing app, Is there any other entry point the advertiser can leverage on the search query? And also, will your yuanbao, the GenAI chat box, will that eventually embed with the commercial sponsor answer as well? Second question is related to international games. When you comment on elongating the deferred periods, is that only refer to certain big flagship titles that you have? Can you remind us the range of the deferred period for your international games? And also judging from your comments about the decent growth receipt growth. It seems that international games revenue could see a more stable and more sustainable growth into next year or maybe the years after. Thank you.

Thank you for the questions, Alicia. So on Weixin Search, then some of the larger advertisers buying search keywords include advertisers in financial services, Internet services, games, automobiles, local services, more recently, luxury goods. In terms of other than the so-and-so feature within Weixin, are there other entry points? Then yes, we have multiple entry points and we'll cultivate more, whether that's within video accounts, mini programs, elsewhere. And some of those entry points are more in the nature of search boxes. Some are more response triggers in response to actions that the users have undertaken. And, you know, for example, Martin was talking about the standardization of SKUs that mini shops provide. And one of the sort of opportunities going forward is that as we have standardized cards on each product, then a consumer transaction, a consumer interaction can trigger transactions. a feed of, you know, commerce relevant information displaying, you know, those cards one after the other in response to, you know, consumer intent. And, you know, that feed would then also be powered effectively by a search technology. In terms of whether Yuanbao will embed commercial platforms, Search results, the answer is no. For the current time, we're focused on making Yuanbao be as appealing and attractive to users as it can be. And we're not focused on premature monetization. So that's on Weixin's search. Moving to the international games, was the elongation for certain big flagship titles? Yes. What is the deferral period for international games? We've disclosed in the past that the deferral periods for domestic games are typically six to nine months. And for international games, the deferral periods are either similar or longer, and in some cases, substantially longer. And then in terms of the outlook for international games revenue growth, we are indeed constructive on the outlook. given the business trends we're seeing from the existing games, given the deferred revenue backlog that has built up in the last few quarters from those existing games, and then given the potential upside from new game releases. Thank you.

Thank you. Thank you, Alicia. We will take the next question from Goldman Sachs, Rona Kwong.

thank you thank you uh pony martin james john and wendy uh i have two questions kicking off with a macro kind of related question with the shift in more pro-growth domestic policies in september And while we also see a more complex geopolitical environment ahead, just how are we positioning our business and strategies in face of domestic, which is policy opportunities, while the international environment is still evolving? And specifically on consumption, I just want to expand on how are we seeing any latest trends on marketing services, payment indicators, with the recent singles day. And you mentioned a decline in average order value per transaction for payment. So any thoughts on potential inflection points in terms of the ticket size trends that is important for consumption trends?

Thank you. In terms of your first question, we do get encouraged by the recent trend your policy by the Chinese government to provide stimulus to the economy. And we felt this policy direction is very constructive. It's very timely and the resolution is actually very strong. So that's why we are constructive on the longer term economic outlook. We believe that the economic growth would eventually re-accelerate, although the timing may be uncertain. And especially, it would take some time for the measures to be implemented and additional time for the measures to take effect. So how do we position ourselves? I would say we would continue to do the right things, right? If you look at what we have been doing doing in the past few years. We have gone through a cycle of regulatory scrutiny, and that was domestic primarily. But then I think that principle can also be applied globally, which is we continue to do things that make us very compliant to all rules and regulations, not just to the word, but also to the spirit. And in a lot of cases, when we understand what are the intentions of the regulators, we are able to be proactive in making changes to our products and in conducting communication so that we will be not only just sort of passively compliant, but also actively compliant to rules and regulations around the world. We continue to improve our products and create user value. I think that's actually very important for us. And in order to do that, we focus on the products and services that are meaningful. And instead of spreading ourselves very thinly across many different products, we want to make sure that we focus ourselves on the right products and continue to create value for the users as well as for our customers and for our partners. And at the same time, I think in just conducting ourselves internally, we continue to enforce and build a culture of excellence and also a culture of focusing on cost efficiency so that we are strong on our own self-discipline and prevent ourselves from spending too much and getting into a lack of focus. So I think when we do these right things, no matter whether there's good times and bad times in macroeconomic conditions and whether there will be some fluctuations in terms of regulatory attention, we can actually continue to grow our business and develop business in a consistent way. Now, in terms of just looking at the macro economic environment right now, what we have seen is that There is an uptake in October after the policy got announced in terms of transaction value. And that's actually against a backdrop of a gradual decrease of year-on-year growth rate through each month in the third quarter. So if you look at the trend, it was like month on month, the year-on-year growth rate has been declining through the third quarter until we hit October and there's an uptick. So I think that's the latest trend. trend that we see. We believe going forward, the economic recovery would take some time. But over the long run, we do believe it would definitely be re-accelerating because we felt there is a very strong resolution by the government to revive the economy. And at the same time, there's actually positive structural factors in the economy. including a very strong work ethics among workers in China, including a very deep engineering talent pool, including entrepreneurship among companies of all sizes, small, medium, and large companies. And also there's a vast and comprehensive supply chain in China, just to name a few. And that's why we felt over the longer run, we are optimistic about the economic revival in the macroeconomic environment.

Thank you. We will take the next question from Bank of America, Miranda. Miranda, your line is open.

Thank you. Good evening, management. Thanks for taking my question. So first question, I want to follow up on the recent e-commerce business. So management has explained the rationale and the benefits of the mini shops and is optimistic about the e-commerce business over the long term. If we zoom in into the near term, wondering what will be the next steps and timeline for the WeSing eCommerce business in the upcoming quarters, can management share about your focus areas or priorities and the strategy to ramp the business in the near term? Especially against the backdrop and environment where it seems that the overall short video and live streaming eCommerce market is slowing down, and traditional e-commerce market still has intense competition. So against all these like near-term environment and how will the within e-commerce grow the scale and gain share in a market. And my second question, can I check with the management if there will be any color about the recent open up and cooperation with Taobao? um what kind of benefits are we seeing and and how should we think about the you know any potential future uh collaborations thank you so this short answer um on the mini shop is that we will continue to improve

the basic infrastructure, which is building this standardized and indexed and quality assured transaction environment within Weixian. And there's actually a lot of functionalities that we need to build. And there's the infrastructure bit, there's actually the customer service and consumer experience needs to be improved. And there's also a lot of merchant tools that we need to provide to merchants. And once all this is done, then we'll provide linkage of this infrastructure to the various traffic stores, right? If you look at the communication and social side and all the media properties, we need to build a lot of these features and functionalities and product So I think that's essentially the focus. And what's the short-term target? I think the answer is that we don't manage that from a short-term perspective. We felt if we can actually build all these products and features and utilities, then the growth would actually follow.

On the second question, so it's very early days, but we have seen good adoption of Weishinpei within Taobao in October. And that's beneficial for us. because that increases overall e-commerce TPV and therefore revenue. And it's good news for Taobao because we believe that those customers who are using Weixian Pay within Taobao are disproportionately customers who are new to Taobao and who are therefore particularly desirable customers. So we think that this is something that will take a long period of time to fully play out. But we're very happy with the initial steps and success. And we also believe that. As it becomes easier for Weixin Pay users to transact within Taobao, then over time, it would also become more desirable for Taobao to advertise within Weixin. Thank you.

Thanks, Manikin. Thank you. We will take the next question from JP Morgan, Alex Yang.

Hey, thank you guys for taking my question. My first question is about the newly launched game Delta Force. Based on the iOS ranking, the game's monetization seem to be a little bit behind the curve despite of high user time span and retention rates. Is the current situation more of a monetization timing strategy thing or is it a monetization design thing? And then the second question is regarding the payment revenue decline in this quarter. China retail spend actually grew by low single digit in third quarter, but your payment revenue declined on a year-over-year basis. So the question is, is Tencent payment overly exposed to certain weak consumption categories? Thank you.

Great. So on Delta Force, Delta Force is a PvP multiplayer game. And historically and currently, when we release PvP multiplayer games, we do tend to sort of front load the user engagement, the user additions, and then progressively monetize over time. That said, the monetization on Delta Force is actually good. much better than for some of our existing large-scale PvP multiplayer games when they launched. And the reason you don't see it in the data that you mentioned is because Delta Force is our first big game simultaneously launched on mobile and PC. And four games that are simultaneously launched on mobile and PC, we can see from our investee companies, and we can see now with Delta Force that while the... Majority of the users are on mobile. The large majority of the revenue is generated on PC, which doesn't show up in the data sources you're looking at. But rest assured, Delta Force is actually monetizing quite well. And we're very happy with it, both from a usage perspective, but also from a monetization perspective.

In terms of our... payment revenue and the comparison to the China retail spend, I would say, I think the implied question is like, is there any issue without payment franchise? And I think the way we look at it is actually we are quite comfortable without payment franchise. And the discrepancy is actually due to Two points in our view. One is, you know, we, throughout this year, we have been eliminating lower quality and in particular, sometimes loss making transaction volume. And that actually has an impact on our overall payment volume. And the second thing is actually, when we look at our payment coverage, it doesn't represent all the retail purchases in China. It's actually gravitated towards smaller ticket everyday items. And as a result, we're much more focused on the number of transactions rather than the transaction volume or the revenue when we assess our payment franchise. And when we look at that number, the number of transactions, it actually grew around 10% year on year, which gives us comfort that our payment franchise is actually still very strong.

Thank you. We will move to the next question from HSBC, Charlene Liu.

Thanks, Wendy, and thank you, management team, for the opportunity. The first question I wanted to ask is about sort of outlook on earnings growth because we have seen close to two years of really strong margin expansion come through. Does Tencent have a more normalized earnings growth rate that the company targets in the medium term? Alternatively, is there a certain ratio that Tencent seems to achieve between top line and earnings growth? Say, for example, no GP growth at 1.5 times of top line, et cetera. Secondly, do we have an updated budget for 2025 share buyback? Is it fair to assume that Tencent would do at least the absolute amount that Tencent did in 2024? And housing management thinking about shareholder return more generally, is buyback still the preferred form versus disposal of investments, investees and dividend? Thank you.

I think the quick answer is we don't have a target for buyback. we can't share the target for earnings growth, right? But overall, the direction is that we are gonna see some revenue growth, even under a pretty challenging macro economic environment. And so that's something we have achieved. And we hope we can actually continue. And among the revenue drivers, there are some drivers which are high quality. And as a result, hopefully, we can actually see some additional leverage from revenue growth to gross profit growth. And then we hope we can actually achieve some operating leverage when we get from gross profit to operating profit. So that's sort of the model that we strive to achieve. But of course, given how dynamic the situation is, how complicated the business is, there will be sort of quarter to quarter fluctuations in all these factors. But the general direction is as such. Now, in terms of the 2025 share buyback, we would share our view basically for 2025 at our year-end earnings announcement. So we're not in a position to share it at this point in time. When we look at 2024, we said the target was actually $100 billion. So far, we have already done slightly more than $90 billion, and we believe we'd actually exceed the $100 billion target this year. And when we look at next year, the underlying factor is that we do want to... shareholder value with our shareholders. And we are in a good position to return cash to our shareholders because our business is actually generating significant cash flow. And at the same time, we have a very large investment portfolio, which is essentially at least self-funded. It would not be drawing any capital from our operating cash flow. And at times, it may actually sort of provide additional return if we want to distribute stock or if we do big divestments. And at the same time, if you look at CapEx, right, you will believe we have a and progressive CapEx plan, especially given that the development of a cloud business and the event AI, but at the same time is measured compared to a lot of the US companies. So with these three factors in play, then we believe we'll be generating significant free cash flow next year that we can engage in dividend and share buyback.

Thank you very much. Thank you. We will take the next question from Daiwa Zhongchui.

OK. Thank you very much for taking my question. And congratulations on a strong set of results. I have a question on AI. I think management mentioned that GPU-powered services accounts for teams for your IAS business. But can you kind of elaborate a bit more how do we see the AI-related revenue contribution for the business service going forward? And my second question is, could we have more color about your management strategy for monetizing by employing your Hunyuan element for different business lines and how we are able to see it? Thank you.

Okay, well, in terms of the tangible benefits of AI that we that we've mentioned. I think that the most significant one right now is actually around content recommendation and ad targeting. Because the AI engine in those two use cases are generating a significant amount of additional user time. And at the same time, It's generating a higher incremental targeting rate, response rate for our ads. And both of them actually have direct benefits to the business and direct benefit to ad revenue. And both of the video accounts and our performance at revenue are actually at scale. So if you add a certain percentage to that kind of number, it's significant. The ICE revenue is now in the teens generated by AI. But having said that, we think the amount of AI revenue is actually less than US cloud companies. And the main reason is because, number one, China doesn't really have a very big enterprise market. And if you look at the US, a lot of enterprises are actually sort of fiddling with AI and they... in testing out how AI can do for their business that they're actually buying a lot of compute, which is not happening in China yet. There's a very big SaaS ecosystem in the US, which everybody is actually trying to add AI to their functionality and thus charge their customers more. And that SaaS ecosystem ecosystem is not really that vibrant in China. And thirdly, there are also fewer AI startups in China, which are actually buying a lot of compute. So as a result, the AI revenue in China on the cloud side is somewhat at scale for us, but I think it will not be exploding like in the U.S., And in terms of how AI would continue to propagate through our different products and services right now, I think, you know, I talk about that immediate scalable benefit is actually on the content recommendation and outside. At the same time, it's actually a productivity tool that everybody is using on a frequent basis. For example, our co-pilot is being used by our engineers across the board on a very frequent basis and it's actually generating efficiency gain for our business. And, you know, different businesses, all our products are actually testing our huan yuan and trying to incorporate AI into either the production process, right, so that they would gain efficiency or in the user experience use case so that it can actually make their decisions. user experience better. So I would say right now we are seeing more and more adoption among all our different products and services. It would take probably a few more quarters for us to see some real use cases at scale. And at that time, we'll actually provide an update to all of you.

Thank you. We will take the next question from Thomas Chong from Jefferies.

Hi, good evening. Thanks, management, for taking my questions. My first question is back to the gaming business. I think recently, if we look into Southeast Asia, as well as the domestic market, or even globally, we're actually seeing shooting games experience strong growth. And we also see Peacekeeper Elite is also experiencing a very good growth momentum. So I'm just wondering on a gamer preference perspective, are we actually seeing gamers increasingly shifting to shooting games? And for domestic market, given the market is very big already, should we expect there might be cannibalization among different games in our portfolio? And my second question is, is relating to our FinTech business. We have talked about wealth management is experiencing positive growth. I just want to get some color with regard to our strategies in wealth management versus lending. Given that, I think other FinTech companies are also talking about macro hot wins on the credit business. Should we expect our strategy is focused on wealth management going forward? And lastly, It's more about our investors. Any thoughts about unlocking the values of our investors or our free cash flow is already strong enough in returning value to shareholders? Thank you.

Hi, Thomas. So on your first question around first-person shooter, first-person action games, we absolutely see that younger users in China disproportionately favor first-person action games versus older users. And there are certain first-person action games such as Valorant and now Delta Force that are proving particularly appealing to that sort of 18 to 25-year-old age cohort. And we think that's a structural trend. And if you look at western game markets then you know first person action is you know the sort of the super dominant genre it's equivalent to you know drama series being the super dominant form of tv programming that you know within drama series you have costume drama series you have you know romance you have police procedural and each of them is as big or bigger than many standalone genres of TV programming, such as documentaries. And so in the same way with video games, first person action is the dominant genre in the West. And it is the dominant genre now with younger players in China. And over time, it will become the dominant genre for the China market as a whole, which is good for us because we're disproportionately successful in first person action games. Now, as to whether new first person action games like Delta Force are cannibalizing existing games, then the answer is no. And I think that, you know, that is because just as with drama series, you know, you wouldn't expect a historical costume drama series to cannibalize, you know, a modern day suspense drama series or a police procedural drama series because there's so much difference between between them in terms of user tastes. So with the first-person action games, there are differences within the genre that are too big for any single game to transcend. So one important and technical difference is long time to kill games versus short time to kill games. Another important technical difference is hero-based games versus class-based games. Another one is tactical games versus chaotic games. Another one, which is more obvious, is realistic graphics versus cartoony graphics. And so, you know, while we have a multitude of successful first person action games within Tencent in China, including Peacekeeper Elite, Innovator, Delta Force, Crossfire, Call of Duty Mobile, Arena Breakout, you know, they actually each occupy a unique role. you know, niche along those axes that I just outlined. And that is why, you know, when we launch new first-person action games, you know, we don't see the cannibalization that one might expect to see, just as if we launch a new costume drama series on Tencent Video, it doesn't cannibalize a police procedural or a modern-day contemporary drama series the way that one might expect it to.

In terms of the payments and the wealth management service in landing, I would say the wealth management strength in the recent quarters, are actually mostly driven by money market funds. And to some extent, this is counter-cyclical, right? When people spend, then they actually save less. And when people don't spend, they actually save more. So that's sort of counter-cyclical to some extent. But overall, right, there is a cyclical part, but there's also... structural part, which is over time, we actually want to gradually convert more and more people into buying not just money market funds, but also longer term equity based funds and ETFs. So we are in the process of building those products and providing the conversion mechanism for people who have equity, who have money market funds with us to adopt additional investment products within our wealth management service. Now with respect to lending, it's true that we are getting more cautious recently in terms of lending in order to control the credit exposure. I think overall our credit exposure is still very well manageable and very conservative. Because we have always taken a conservative approach and we selectively pick the better credit to lend to. And we have been all along the way controlling the scale of our lending pretty proactively. But given the macroeconomic cycle right now, we are more cautious. When the macroeconomic conditions improve, then we can actually be a little bit more aggressive in expanding our lending again. So it's kind of dynamic according to where the economic conditions are.

And in terms of divestments, we do actively divest from our portfolio. We have been particularly actively divesting in the last couple of months as various markets have rallied aggressively. On rare situations, you can sort of track that through filings that we have to make. But most of the divestments that we conduct don't require filings. And the purpose of the divestments is to recycle capital, whether that be for new investments or for funding share buybacks, or simply for increasing our ammunition for activity in the future, which you can see in the shape of the net cash position having progressively improved through this year, despite the buybacks and dividends that we've done.

Thank you. We will take the next question from CICC Baiyang.

Thank you, management, for taking my question. My question is about the game business. The IEG has made some internal adjustment. Could management share more details and the reason about this adjustment? And how do these adjustments related to the overall trends in the gaming market and Tencent's current business situation?

Well, if I'm correct in looking at what you're referring to, there's some recent media coverage on the adjustments. And then frankly, the adjustments were basically adjustments that we have already made by some time ago. So these are adjustments that were made to the Honored Kings team, which happened last year, late last year, and the adjustments that we have made to the Peacekeeper Elite team, which happened earlier this year. And we have actually talked about these adjustments quite a few times on our earnings call. And when you look at the adjustments, they have been actually quite productive in the sense that both Ernest King and in particular, Peacekeeper Elite had actually registered good growth in this year. And the logic is really around you know, our overall strategy on evergreen titles, right? You know, so there is, you know, yeah, I think, you know, I believe that games have life cycles, and sometimes if the games are not performing well, then there's nothing you can do about it. We do not believe that's the case. We believe that no one game has reached a certain scale and has become eligible for becoming an evergreen title, and especially when a game has a very large user base. then it's not about the game itself. It's about the team and the ideas behind the development and the ideas behind the operations and community management. So that's why we made changes when games are not performing well. And when we see a team that has run out of ideas, then we have to make some adjustments in order to restore the creativity, restore the activity, restore the innovation to the games. And when those adjustments are done, then the games get back to its aggregate status and get back into a growth mode. And so I think that's essentially what it is. And in terms of sort of going forward, we continue to be focused on sustaining and growing our evergreen titles, as well as creating new games that has potential to become evergreen titles. And that means we will have to be much more focused on creating The games that we create, instead of creating many games, we create fewer games. And at the same time, we have to put behind each game a very strong positioning, very strong genre, very strong... gameplay and a large production force and a high production value so that we can exceed the expectation of the gamers and become category leading in the gaming market in order for us to really give the games a potential to become evergreen title. And I think Delta Force is actually a good demonstration of that focus. And we'll have more of such high potential evergreen titles coming to the market in the future.

Thank you.

Thank you. We will take the last question from Nomura Shijialong.

Good evening. Thanks, management, for taking my question. And congratulations on a very solid quarter. So I have two questions. The first question is about the advertising business. Tencent Advertising, Tencent Ad Business has performed much better than industry peers this year. Video account has been a driver for your overall ad business among other drivers. So just wondering how should we think of the outlook for your ad business? If we take a look of the two bigger short video peers of your video account, Both of them generate a very big chunk of that revenue from e-commerce brands and merchants. So just wondering if it is fair to say e-commerce sector will also be instrumental to fully unleash the potential of your video account ads. My second question regards the collaboration between WeChat and Taobao. What were the factors that have led to the collaboration? Are we going to see more collaborations of this kind between Tencent and other internet platforms, such as granting access to your WeChat contents for external search engine. Thank you.

Thank you for the question. I'll take the advertising one. So in terms of the drivers for 2025, the overall macro environment would obviously be an important accelerator or decelerator or neutral force for the aggregate advertising market. And that in turn will be a function, a primarity of consumer confidence and consumer spending behavior. Now, within that overall environment, our relative performance will be a function of, first of all, our advertising technology. and our ability to utilize GPUs, utilize neural networks to continue boosting click-through rates from the current very low levels to higher levels that mechanically translates into more revenue. And then secondly, our deployment of specific inventories, in particular, video accounts, in particular, WayShin Search, And, you know, with video accounts, we did moderately increase the ad load during the course of the third quarter, which contributed to the 60 percent plus year on year growth that we we've disclosed. But the advertising load is still dramatically lower than those of peers in the low single digit range. Going forward, we believe that we can continue to outgrow the industry as we take the ad load higher without needing the e-commerce initiative to contribute. Once the ad load reaches, let's say, two-thirds of where our peers are currently at, which with our peers in the mid-teens would be around 10% ad load versus the 3% or 4% we're at today, then I think it is fair to infer that being able to really tap into closed loop e-commerce advertising will be increasingly important. But as we look at our growth runway, you know, that situation is still, you know, years away. And so, you know, we believe we'll continue to outgrow the overall ad market for a number of years based on ad tech enhancements, based on improving ad load in video account, based on growth of weight and search. And then in order to sustain that market share gain beyond that point, it will be increasingly beneficial if we have cracked the code on closed loop e-commerce activity with the mini stores that Martin talked about earlier.

In terms of the cooperation with Taobao, And I think the obvious thing is that it's actually beneficial to the users because it's more convenient for them to click. And there's actually benefit to us because we can actually have... bigger exposure of use case of our payment service. And it's also beneficial to our partner Taobao, which can allow them to convert their new users with high conversion rate and get more new users. But the Less obvious is actually how much work that actually had gone into making that happen. Because the key thing is actually there's a lot of designs and agreement that we need to do in order to make sure that the user experience is actually well protected. So that, for example, there's not going to be a lot of spamming of our users. When you have merchants who can share all kinds of different products, and if there's incentive to create a lot of spamming, then that's a problem. So we actually need to design for that and also get our counterparty to agree to policing that. And for example, on compliance, we actually need to make sure that all the merchants are actually gone through a proper onboarding process in order to be compliant. And that's something which require work from our side and our counterparty in order to make it to work. And I think in the past, all these very complicated designs are very difficult to execute. But with the new environment, with a more collaborative and open environment of the different platforms, these hard work has been done. And as such, we can actually have these collaborations. So when we look at other collaborations, I think we'll be very open-minded. But the bottom line is that it has to make sense and be very good and safe for our users and for our content partners in order for these collaborations to be done.

Thank you. We are now ending the call. Thank you all for joining our results webinar. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.kenzen.com. The replay of this webinar will also be available soon. Thank you and see you next quarter.