TCEHY Stock | Tencent Holdings Ltd Q4 2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Tencent Holdings Limited 2020 fourth quarter and annual results announcement conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question today, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. I'd 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 quarter and annual results conference call. I'm Wendy Huang from Tencent IR team. Before we start a presentation, we would like to remind you that it includes forward-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 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 Chief Financial Officer John Lowe will conclude with financial discussion before we open the floor for questions. I will now turn the call over to Pony.

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 the focus on user experience, we pursue continuous innovation to enhance our platforms. We invest in incremental innovation to enrich existing product experiences, and we also invest 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. In communication and social, for example, we started with mobile chat and added social networking, official accounts, payments, and mini programs over the years. At the present time, we are incubating video accounts as a new innovation. In the area of games, we created new and exciting titles internally and through partnerships, as well as continuously upgrade our game tech. In SaaS, we identified this emerging opportunity in China when we announced our strategic upgrade to the industrial internet in 2018. Over the past year, we achieved breakout growth in productivity and communications software. In health tech, we are utilizing our AI, mini programs, and communication tools to solve industry pain points. In ecosystem, we support innovative companies via capital investment and business partnerships to better serve users and enterprises. For the rest of the 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 WeChat video accounts, which represents our recent innovation in the communications and social space. Visualization of content for easy consumption is a key global trend. We saw a significant increase in uploads and sharing of short videos with innovation moments and chats, hence video accounts was created as a separate ID-based short-form content creation platform within WeChat. Video accounts enable video uploads and sharing, as well as live streaming to the public audience. Through aggregating content providers' digital assets within WeChat, such as official accounts and mini programs, video accounts help reinforce their branding and facilitate user engagement and transactions. In addition, the unique strengths of video accounts lie in linking public domain to private domain, which provides an unparalleled channel for businesses to acquire and manage their own customers. Video accounts is attracting an increasing number of high-quality content providers who generate both informative, 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 of 2020, we launched several new and exciting titles and made breakthroughs in new technology applications such as gaming AI and cloud gaming. For new games, we released Valorant on PC for the international markets, as well as Moonlight Blade Mobile and Call of Duty Mobile in China. Each game offers unique experience by innovating in character abilities, environmental design, gameplays, and controls, thereby achieving best-in-class performance. Valorant, a team-based tactical shooter which Riot Games spent over six years to develop, was the most successful new PC game internationally. In China, Moonlight Blade Mobile was the best performing new MMORPG for the year and was supported by our proprietary game engine honed through 10 years of dedicated development. Call of Duty Mobile, the highest DAU game launched in 2020 in China, is a high-quality complement to the franchise's console and PC versions. For existing titles, we continuously innovate in game tech to refresh user experience. For example, Honor of Kings is an early adopter of next-generation rendering and high dynamic range imaging technologies in China, which enhances the visual effects and makes animation more realistic, detailed, and natural. Honor of Kings was the top-growing mobile game in China for the fourth consecutive year and worldwide for the second consecutive year. We also tested the game AI Wukong in Honor of Kings, which attracted over 50 million player participants within four days of trial. Wukong is the first AI agent able to play a full MOBA 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 first mover to launch platforms and games, providing high-quality in-game experience across different devices. Among which, Start platform is cooperating with leading TV manufacturers to offer MMO games on smart TV. The Start platform offers more than 100 mobile games including Honor 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 WeCom, Tencent Meeting, and Tencent Docs. We strengthened interoperability between WeCom and WeChat, allowing an increasing number of retailers, service providers, and teachers to connect to over 400 million users. This also boosted WeCom's customer base to 5.5 million enterprises. We are upholding an open strategy and introduced multiple cooperation models to rapidly grow partnerships with OA application vendors in order to better sign up enterprise clients together. Besides, by leveraging synergies with Tencent Cloud sales force, WeCom successfully increased penetration in the K-12 education market. In view of growing needs for virtual meetings, we launched Tencent Meeting in 2020, which accumulated over 100 million users and has become the most used standalone app for cloud conferencing in China. During the year, we launched the enterprise version for key accounts and enhanced meeting capabilities, delivering superior experience for enterprise customers. We developed new solutions, rooms and connector, in order to expand Tencent Meeting's compatibility with clients' existing devices, saving costs for them and facilitating adoption for us. Our signature productivity solution, Tencent Docs, is the first mover in China to provide online solutions that efficiently generate tables based on collaborative data entry. During the year, we continued to add new features such as AI support and 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 million monthly active users in 2020, more than quadrupling year-on-year. Next, on health tech, our product matrix includes Tencent Health, Tencent Medipedia, and Health Code, 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-19 related services such as appointment for testing and vaccination. Total active users exceeded 400 million. We also included the medical insurance e-certificate, an 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 and 200,000 pharmacies across over 200 cities. Our electronic health card serves as a health information management tool for users and their families, and now is available online in more than 2,000 hospitals. Tencent Medipedia, a reliable medical information source, extended the number of medical terms to over 120,000, leading in China. We utilized AI technology to enhance medical experts' efficiency in reviewing content. We enriched content formats from text and picture to short video and live streaming. Tencent Medipedia content is distributed via self-owned and third-party platforms, attracting over 7 billion page views and video views in the year of 2020. Health Code is an easy entry point for users to get their e-pass automatically based on health information they filled in. During the pandemic, Health Code facilitated people's efficient movement in and out of public areas nationwide. Within a year, Health Code served a billion users with over 65 billion total visits, becoming the most used e-pass 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 investees, which ultimately together better serve users and enterprises. In consumer internet, we identify investments which capture emerging opportunities arising from technological advancements and user behavior changes. User value and product experiences are top priorities for us. Our key investment areas include content, games, fintech services, e-commerce, O2O, and education. In industrial internet, we seek to build close relationships with value chain players to support the evolution of various industries. Leveraging our technology strength, we assist digital upgrade in sectors such as education, healthcare, transportation, and retail. In that process, our communication and social services can also connect users with more services in a convenient and efficient manner. Our investment principles are to invest in high-quality management teams and best-in-class companies which have deep industry know-how and core competence in their respective fields. We aim to support the investees' innovation while enabling them to grow and operate independently. Through investments, we do not only nurture the growth of startups 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, be it developers, people, and bandwidth, on driving innovation within our core businesses. This two-prong strategy has been pivotal in driving 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 fourth quarter of 2020, our total revenue grew 26% year on year. VAS 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 67 billion RMB for the fourth quarter, up 28% year on year and down 4% quarter on quarter. Social network revenue was 28 billion RMB, 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 million subscriptions. Our video subscriptions increased 17% year on year to 123 million subscriptions. We strengthened our market leadership through self-commissioned animated series, deepening cooperation with channel partners, and an expansive OTT user base. Our music subscriptions grew 40% year on year to 56 million subscriptions, benefiting from improved user retention in our paywall strategy. Our online games revenue increased 29% year on year to 39 billion RMB, 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 37 billion RMB, 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 Moonlight Blade Mobile. For PC client games, revenue decreased 1% year on year to 10 billion RMB, as softness of Dungeon and Fighter offset growth in League of Legends and Valorant. Focusing on WeChat, Martin has already discussed our video account strategy and product, but I will touch briefly on live streaming and video accounts, which facilitate 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, we launched the Startups feature, allowing users to share their current emotions and thoughts with pictures or videos and connect with like-minded friends. Animated emojis enabled users to express themselves more vividly online. Moving to QQ, we focused on enhancing interactive experiences 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 daily user engagement. For game communities, we launched joint promotions and celebrity esports competitions for games such as Honor of Kings and Call of Duty 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 new hero skins and user interface. We upgraded the game's rendering technology to enhance visual effects with minimal performance overhead. For shooting games, Call of Duty Mobile attracts hardcore players with its fast-paced and competitive FPS experience. For role-playing games, Aurora Studio extended the Moonlight Blade IP from PC to mobile, and the mobile game ranked as the top-grossing massively multiplayer role-playing game on iOS during the cold water. By the end of 2020, we've distributed over a million Switch consoles in China. Pony mentioned the healthy gameplay system, which helps parents manage younger users' in-game play time and spending. During the fourth quarter, players aged under 18 accounted for 6% of game gross receipts, and players aged under 16 for 3.2%. Internationally, our game revenue rose 43% year on year from 9.8 billion RMB. The League of Legends World Championship finals attracted over 45 million concurrent users, a record-high viewership for esports. League of Legends mobile version, Wild Rift, has further expanded the League of Legends franchise user base. PUBG Mobile ranked as the most popular smartphone game by monthly active users for the second consecutive year, and its flagship tournament was the most viewed esports competition among all mobile games. We're increasingly thinking to create games with global appeal by collaborating with renowned console and anime IPs. We can bring our new mobile games to wider global attention, and we're investing in PC and console studios that are leaders in emerging players that can in future nurture fan bases worldwide. Moving to online advertising, our advertising revenue was 25 billion RMB in the fourth quarter, up 22% year on year and 15% quarter on quarter. We experienced increased demand from the education sector, e-commerce platforms, and fast-moving consumer goods advertisers. Auto-related ad revenue benefited from a domestic car sales recovery and from consolidation of Bitauto. Our social and others advertising revenue was 20 billion RMB, up 25% year on year and 15% quarter on quarter, driven primarily by Moments and our mobile ad network. Moments revenue maintained growth as we enable performance-oriented advertisers to link their ads with their mini programs, boosting their transactions and sales conversions. By offering customized in-app advertising solutions, our mobile ad network has attracted more ad spend, especially from external game companies and internet services. In-game ad revenue on our mobile ad network more than doubled year on year. Our media advertising revenue for the quarter was 4 billion RMB, up 8% 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 38 billion RMB in the fourth quarter, up 29% year on year and 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 services, and groceries. Payment commercial take rates were generally stable. For our wealth management business, aggregated customer assets grew robustly year on year, and looking forward, we'll focus on investor education and helping users to identify quality products selected by our independent research team. Within business services, we expanded our customer base in key verticals and increased our platform as a service revenue robustly, contributing to a faster year-on-year revenue growth rate in the fourth quarter compared to the third quarter. We also deployed more on-premises projects during the period. In infrastructure as a service, we developed our StarLake SA-3 server architecture powered by the latest generation AMD EPYC processors. This new architecture provides better AI, security, storage, and network capabilities with lower energy consumption, enhancing Tencent Cloud services cost efficiency. In software as a service, Tencent Meeting enterprise version penetrated key accounts in the energy, healthcare, and education sectors. Our conference room solutions, Tencent Meeting Rooms and Connector, facilitate high-quality real-time communication and are compatible with customers' existing audiovisual equipment. And with that, I pass to John.

Thank you, James. Hello everyone. For the fourth quarter of 2020, total revenue was 133.7 billion RMB, an increase of 26% year on year or 7% quarter on quarter. Gross profit was 58.9 billion RMB, up 28% year on year or 4% quarter on quarter. Net other gains was 32.9 billion RMB, this mainly comprised non-IFRS adjusting items representing increased valuations of certain investments impacted in social media, e-commerce, and online game verticals, as well as net gains on the disposal of certain investees. Operating profit was 63.7 billion RMB, up 123% year on year or 45% quarter on quarter. Net finance costs were 2.3 billion RMB, down 19% year on year or up 16% quarter on quarter. The year-on-year decrease reflected lower interest expense as a result of reduced average cost of funds. The quarter-on-quarter increase was primarily driven by foreign exchange losses. Share of profit of associates and joint ventures was 1.6 billion RMB, compared to share of losses for the fourth quarter of 2019. The year-on-year difference mainly reflected non-IFRS adjustment items of certain associates and improved performance of certain e-commerce and online games associates. On a non-IFRS basis, share of profit was 2.7 billion RMB for the quarter versus 1.3 billion RMB a year ago. Income tax expense was 3.7 billion RMB, and the effective tax rate was 5.9% for the quarter. IFRS profit attributable to equity holders was 59.3 billion RMB, up 175% year on year or 54% quarter on quarter. For the full year of 2020, total revenue was 482.1 billion RMB, up 28%. Gross profit was 221.5 billion RMB, up 32%. Operating profit was 184.2 billion RMB, up 55%. IFRS net profit attributable to equity holders was 159.8 billion RMB, up 71%, and the effective tax rate for the year was 11.1%. Now I'll share with you our non-IFRS financial figures. For the fourth quarter, operating profit was 38.1 billion RMB, up 26% year on year, flat quarter on quarter. Net profit attributable to equity holders was 33.2 billion RMB, up 30% year on year or 3% quarter on quarter. For the full year of 2020, operating profit was 149.4 billion RMB, up 30%. Net profit attributable to equity holders was 122.7 billion RMB, up 30%. Moving on to segment gross margins. Gross margin for value-added services was 51.5%, up 1.4 percentage points year on year, down 1.1 percentage points quarter on quarter. On a year-on-year basis, we continue to benefit from revenue growth of higher-margin self-developed smartphone games. Sequentially, the margin decrease was primarily driven by revenue mix shift from high-margin PC client games to lower-margin digital content services. Gross margin for online advertising was 53.3%, down 0.6 percentage points year on year, up 2.4 percentage points quarter on quarter. The year-on-year decrease was due to higher revenue contributions from the mobile ad network business, which carries lower margins. Sequentially, the margin increase reflected lower related content cost due to delays of sports events. 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, VAS gross margin increased 1.1 percentage points to 54.1%. Online advertising gross margin increased 2.4 percentage points to 51.4%. Gross margin for fintech and business services increased 1.1 percentage points to 28.3%. On operating expenses, selling and marketing expenses were 10 billion RMB, up 49% year on year or 12% quarter on quarter. As a percentage of revenues, selling and marketing expenses represented 7.5% for the quarter. Both the quarter-on-quarter and year-on-year increases reflect increased marketing spend on online games, business services, and digital content services, including those associated with the consolidation impact of Bitauto. G&A expenses were 19.8 billion RMB, up 24% year on year and 15% quarter on quarter, mainly reflected greater R&D and staff costs. Within G&A, R&D expenses were 11.2 billion RMB, up 26% year on year or 13% quarter on quarter. G&A and R&D represented 14.8% and 8.4% of revenues respectively. As of quarter end, we had approximately 86,000 employees, up 37% year on year or 11% quarter on quarter. For the full year of 2020, selling and marketing expense was 33.8 billion RMB, up 58% and represented 7% of revenues. The increase primarily reflected greater marketing spend for online games and recent consolidations, as well as marketing spend to support long-term strategic initiatives including short-form video, cloud-based healthcare solutions, online education, and remote work. R&D expense was 39 billion RMB, up 28% and represented 8.1% of revenues. G&A expenses excluding R&D was 28.6 billion RMB, up 24% and represented 5.9% of revenues. For the fourth quarter of 2020, gross margin was 44%, largely stable year on year, down 1.2 percentage points quarter on quarter. The sequential decrease reflected lower gross margin compared to the previous quarter. IFRS operating margin was 28.5%, largely stable year on year, down 1.9 percentage points quarter on quarter. Non-IFRS net margin was 25.8%, largely stable year on year and 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 remaining broadly stable. Let's move on to earnings per share and annual dividend. For 2020, on an IFRS basis, basic EPS was 16.844 RMB and diluted EPS was 16.523 RMB. Non-IFRS basic EPS was 12.934 RMB and diluted EPS was 12.689 RMB. Subject to the approval of the shareholders at the AGM to be held on 28 May 2021, we are proposing an annual dividend of 1.6 Hong Kong dollars per share payable to shareholders on 7 June 2021. This represents an increase of 33.3% from last year. Finally, total capex was 9.7 billion RMB, down 33% year on year or up 11% quarter on quarter. Operating capex increased by 13% year on year to 8 billion RMB as we continue to ramp up investment in servers and network equipment to augment our business growth. Operating capex decreased 83% year on year to 1.6 billion RMB, mainly due to a high base in the fourth quarter of 2019 for office land purchase. Free cash flow was 27.7 billion RMB, down 11% year on year or down 2% quarter on quarter. Net cash position was at 11.1 billion RMB, which increased sequentially due to free cash flow generation and foreign exchange effects, partially offset by the net cash outflow for M&A activities. Fair value of our shareholdings in listed investees and executing subsidiaries was approximately 1.2 trillion RMB or 185 billion US dollars at the end of the year. Thank you. We'll 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.

Thank you. Your first question comes from Robin She from Bernstein. Please go ahead.

Thank you for the opportunity to ask a question. Could I ask two 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 have any quantitative targets for, for example, time spent or users by the end of 2021? Second question: if I look at the deferred revenue balance, it seems to imply that cash game billings showed quite a meaningful deceleration in Q4 despite the launch of Call of Duty. I just wanted to get your thoughts on why that was, if anything happened, and your expected expectations for growth in the first half of 2021. And if you had any color on the launches like DNF or League of Legends, what your expectations are. Thank you.

Okay, I'll take the first question earlier in terms of video accounts. I think you have actually hit on the important points, which is you need to have a double flying wheel. You need to have more content, and as such, you actually 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 mutually reinforcing. Now in terms of how do we actually keep on increasing the amount of content, the key thing is we already have a very good set of content creators. These are content creators, part of them are actually new creators, and they are converted from our official accounts. In the past, they have been writing articles, and now they convert themselves into content creators on the video side. There are new creators as well who come in, and at the same time, we have seen existing content creators on other platforms also join us. The main reason that they actually join us is because of the distinction that our platform provides, which is essentially the ability for them to build their private domain viewership. In other platforms, when you have content, you subject yourself to the algorithm recommendation, and after that, you basically lose your viewership, and then the next content you have to build up again. But in our platform, we actually have a very strong set of tools and connections so that you can convert the public domain traffic into private domain. 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 assets such as official accounts, live streaming, and mini programs. 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's a 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, we would continue to improve the algorithm recommendation, which is very important. And at the same time, as you can see, we're actually providing pretty unique content on our platform right now. These are content not just for entertainment purposes, 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 us to attract the users. And finally, when we actually provide content, we not only use the algorithmic recommendation, we also have social signals which actually help the viewer to see a different kind of world. And with all these together, we felt we can on one end increase the supply, on the other end we can increase the consumption, and they will self-reinforce themselves over time. I can say the video accounts in terms of both users as well as the user time have been...

Increasing pretty healthy, but we're not in a position to talk about specific numbers yet. Robin, thank you for the second question as well around game billing. So you're correct to observe that both the game billings and the game revenue declined quarter on quarter in the fourth quarter. There are three 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 as people returned to offices in the second half of last year. So that tended to boost the billings in the first half of last year, and then because we convert our billings into reported revenue with a time lag, that promoted through into lower recorded revenue in the fourth quarter of last year. So that's just a sort of natural unwind of the work from home period benefit, at least in China. We haven't seen that yet internationally. The second point is that for us, the fourth quarter is historically a low season for game billings. Now, you didn't see that every year in our history, usually due to one-time events. For example, if you look at the fourth quarter of 2019, you didn't see the normal seasonal decline in billings, in part because we consolidated Supercell, which added many billions of deferred revenue. But for this period, we didn't have any sort of unusual benefits, and so the usual seasonality became more apparent. And third, the seasonality was more pronounced than in a normal year this year because of the late Chinese New Year. For some of our biggest games in China, we begin running our Chinese New Year activities around 30 days before the holiday itself. For the 2019-2020 period, that meant the activities commenced in late December, and so we had the deferred revenue on our balance sheet as of December 31st. For 2020 going into 2021, the activities commenced in January, so they only came onto our balance sheet in the first quarter. You also asked about the outlook for the first half. As you know, we don't provide guidance, but I think that if you look back at the first half of 2020, the work from home conditions resulted in higher game revenue than would otherwise have been the case and lower revenue for some of our other activities, in particular payments and fintech. So all else equal, if this year we're backing a work from home mode, which we seem to be, then I think it would be natural to expect those two trends to temporarily reverse. But that's very much a short-term phenomenon. For people who are focused on the next quarter, if you're focused on the next several years, I think the more important takeaway is that the work from home period really expanded the audience for games and expanded the social acceptability of spending money within games, which positions the game industry alongside several other industries, such as online education and healthcare, for sustained multi-year growth once we've worked through the slightly tougher comparisons in the first half of this year. So I hope that answers both parts of your question.

Thank you. Your next question comes from Alicia Yap from Citigroup. Please ask a question.

Hi, thank you. Good evening management, thanks for taking my questions. Congrats on the solid set of results. I have two questions. First question is, as we see increasing overlap of internet service among all these internet companies in China, in addition to user, which is the core asset for most of these companies, the proprietary content and also the content IP actually seems to be the key differentiated asset. So actually Tencent does 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, very quickly on the Tencent Cloud, I'm just curious to see what are some of the key challenges that the Tencent Cloud is facing when trying to penetrate to the different enterprises. Is that related to the lack of IT talent at this 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 these enterprises to further adopt the cloud service? Thank you.

Alicia, perhaps I'll answer the first question. 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. Over the past decade, we've been investing aggressively in swimming upstream to get closer to the content. 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 studio-centric game business. You can see that in music, where we increasingly have upstream label coverage in China as well as stakes in global leaders such as Universal Music and Warner Music. You can see that regularly in literature. So that's a trend that we really embrace, and we think that we will validate the strategy we've been embarked on for the past decade. One interesting thought experiment: if you look at the world of traditional video linear entertainment, while there are many excellent companies competing in this space, one company, Disney, has pretty consistently enjoyed outsized success both with its organically developed IPs such as Frozen, also with acquired IPs such as Cars or Star Wars. There are many reasons, but I think one key reason is that Disney has an unparalleled ability to not only provide the linear video entertainment but also to provide an interactive experience in the form of its theme parks that really deepens the engagement between the users and the IP, because they're actually interacting as opposed to just passively consuming. 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 are universally available, very cheaply and expensively available to users. But what we see is increasingly that the games serve the same role as a theme park would in terms of deepening the engagement between the user and the IP and heightening the user's appetite to consume the IP in other linear formats. So if you look, for example, at our intellectual property, Soul Land, that's a China Literature novel, it's also been developed into a comic book, into an animated TV series, into a live action TV series, and into a card-based mobile game, all of which are successful and each of which feeds the general interest in the IP and drives it to a higher level than would otherwise be the case.

Thank you. Our next question comes from Han Joon Kim from Macquarie. Please ask a question.

Great, thank you very much management for your time today. I do have two questions. First one is just touching upon the relationship with Alibaba on top of deals that the media has talked about. Please correct me if I'm wrong, I think we've probably not had too much engagement with them since 2016. So should we just view this as something in isolation, or is there more room for collaboration with other ecosystems out there in China? And how do we think about the shifting dynamics in that kind of scenario where on one hand we have to make sure we protect our user experience and the integrity of the experience within WeChat, while also thinking about how we remain an open platform and in collaboration with other ecosystems out there? And then the second question I want to touch upon is in regards to your investment into Rakuten. Mickey had a call and I think he elaborated that he would want to work with you guys a little bit more deeply, even in areas like games. For you guys, is it more of a passive role? If they want something like games, you're happy to give it to them, or is that a more strategically minded initiative where we see the ability to export some of our key resources and services to other geographies? Thank you.

Thank you. The next question comes from Gary Yu from Morgan Stanley. Please ask a 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 our Tencent credit business is being conducted under the WeBank subsidiary. Just want to check, the new kind of fintech regulation on forming financial holding company, how does it affect the way Tencent conducts credit business in the future, if at all, and how does it affect our revenue financially? And the second question is related to video accounts. Just a follow-up question on the unique feature from content and also diverting traffic between private domain and public domain. Given these unique features compared to other short-form video platforms, do we expect the future 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 different forms 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.

Your next question comes from Eddie Long from Bank of America. Please go ahead.

Good evening, thank you for taking my questions. It is a pretty straightforward question, but perhaps not quite important. Given the development 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 concern of the regulators? And then just a follow-up question on the WeChat ecosystem, any target or strategic goal for raising a transaction ecosystem in 2021? For example, any more new initiatives to facilitate the commercialization of your merchants and service providers? Thank you.

Operator, we will take two more questions. Thank you.

Certainly. Your next question comes from Choi from Daiwa Capital Market. Please go ahead.

Thank you for taking my question. I have two questions. First of all, on the online games international part, management mentioned that you guys will continue to collaborate with renowned console and gaming anime IPs going forward. So would this be another strategy for both the domestic and international market? And just quickly a follow-up on that: in terms of the investment, it seems that you guys are stepping up more on the PC and console studios. Could you share your thoughts on whether we're going to be more serious in these two genres going forward? And a quick follow-up is on your online advertising. Given that some verticals such as online education have been seeing some challenges, what are the trends that you're seeing despite all the changes in the industry? Thank you.

On the game question, yes, we absolutely seek to work with intellectual property to create games that we think can resonate both internationally as well as in China. And yes, we have been very active investing in studios that are active on console and PC, 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 certain number of mobile studios. It is that we want to invest in the best or the future best studios within each genre of games. Sometimes that genre of games is particularly well developed in China, in which case the best studio will often, not always, be mobile centric. Sometimes that studio might be in Japan or the United States, where the best studios are often console centric. Quite often for the sort of smaller, deeper genres, the best studios are in Europe, where they'll typically be PC centric. But 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 and much more interested in whether it has simulation expertise or card game expertise or role-playing expertise that can move across different hardware platforms over time. So that's on the game front. And then on the advertising front, I think anytime you look at the advertising market, the short term is always murky because it's sensitive to GDP growth, which is unknown at the moment as it always is. It's sensitive to regulatory changes, and right now we have some uncertainty globally around the impact of Apple's IDFA changes, although in China that would be mitigated by the fact that Apple's only a teens percentage of mobile traffic. It's also sensitive to changes within specific advertiser industries. For example, in China, it's possible there'll be rules around advertising by the education industry, which could have some negative impact on the advertising industry as a whole. So I think at any point in time in the next few months, advertising always looks cloudy and confusing. But over the longer term, advertising is a function of GDP growth, and if you're an optimist and you believe that economies tend to grow over time, which we do, then advertising will tend to grow over time. I think what you can see very clearly from 2020 is that whatever the advertising industry growth rate, for a number of reasons we tend to outgrow the industry because we have more activity, more traffic, more tools, more resources, less monetization than the industry aggregates. So in good times like 2019 and in bad times like 2020, we've tended to outgrow the overall advertising industry, and over the long term, we think advertising is a growth industry in and of itself.

Thank you. Your last question comes from William Packer from Xin BM Parabola. 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 on the draft announcement regarding anti-trust and platform rules. Could you provide an updated view now that we've had a bit more information? 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.

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 six months. That's not because of regulation; that's just because COVID has provided a glimpse of the future, particularly for industries like games, education, healthcare, and especially enterprise software as a service. We've really utilized that glimpse into the future to step up our support for independent companies in those spaces, particularly enterprise software as a service in China. As you know, historically the very vast majority, over 95%, 99% of our investments are minority investments rather than mergers or outright acquisitions, and that will remain true going forward. For that very vast majority, a different anti-trust regime will not, we believe, 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 both internationally as well as especially in China.

Thank you. Thank you operator. We are closing the call now. 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. The 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.