Catherine Chan - Head of Investor Relations and International Public Relations Pony Ma - Core Founder and Chief Executive Officer Martin Lau - President James Mitchell - Chief Strategy Officer and Senior Executive Vice President John Lo - Chief Financial Officer and Senior Vice President

Alicia Yap - Barclays Capital Asia Limited Wendy Huang - Macquarie Cynthia Meng - Jefferies Natalie Wu - CICC Dick Wei - Credit Suisse Erica Poon Werkun - UBS Eddie Leung - Merrill Lynch Alan Hellawell - Deutsche Bank AG Thomas Chong - Citigroup Piyush Mubayi - Goldman Sachs

Ladies and gentlemen, thank you for standing by. And welcome to the Tencent Holdings Limited 2015 Second Quarter and Interim Results Announcement Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan.

Thank you, Operator. Good evening. Welcome to the second quarter 2015 results conference call. I’m Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlying large number of risks and uncertainties, and may not be realized in 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-GAAP 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 the risk factors and our non-GAAP measures, please refer to our disclosure documents downloadable on www.tencent.com/ir. Now, let me introduce the management team on the call tonight. We have our Chairman and CEO, Mr. Pony Ma; President, Mr. Martin Lau; Chief Strategy Officer, Mr. James Mitchell; and Chief Financial Officer, John Lo. Pony will kick off with a short overview. Martin will speak to strategy. James will review our business. And John will go through the financials before we take your questions. I’ll now turn the call over to Pony.

Thank you, Catherine. Good evening. Thank you for joining us. During the second quarter of 2015, we maintained our leadership across our social, games and media platforms. Operationally, we made notable progress across our portfolio of mobile utilities with Mobile Manager Security Service, and Mobile QQ browser, and YingYongBao app store moving into industry leadership positions. Strategically, we achieved rapid growth of our mobile payment solutions and expand subscriber base for our premium literature, music and video services. Financially, we delivered a solid set of results benefitting from the growth of our online advertising. Let me highlight our few numbers for you and details to John’s financial section. Total revenue excluding e-commerce transactions grew 27% year-on-year to RMB23.3 billion, sequentially it rose 5%. Non-GAAP operating profit was RMB10.3 billion, up 34% year-on-year and 10% quarter-on-quarter. Non-GAAP operating margin went up 2 percentage points to 44% for the quarter. Non-GAAP net profit to shareholders was RMB8.0 billion, up 32% year-on-year, and 11% quarter-on-quarter. For our key platforms, total MAU for QQ was RMB843 million, within which smart devices MAU grew 20% year-on-year to RMB627 million. Total MAU for Qzone was RMB659 million, within which smart devices MAU rose 15% year-on-year to RMB574 million. Weixin and WeChat reached combined MAU of RMB600 million, up 37% year-on-year. For online games platform, we retained leadership across PC clients, web, and mobile games in terms of users and revenues. We are adopting our strategies for our mobile games to the changing market conditions, and James will discuss this in the business review section. Now, our media platforms. Our mobile news is the most popular among Internet users in China. Our mobile video service more than doubled its video traffic year-on-year, anchoring our leadership across PC and mobile. For our mobile utilities portfolio, we recently achieved significant milestones in product performance and market share. Martin will share more with you in the strategic highlight section. With that, I will pass to Martin.

Thank you, Pony. And good evening and good morning to everybody. For this quarter’s strategic highlight, I would like to highlight the breakthrough that we have achieved in our mobile utilities. Our mobile utilities include security, browser and app store. And they’re fundamental in providing the infrastructure support to our expanding mobile ecosystem. This portfolio of mobile utility service is very valuable to us, where they technically support each other to deliver seamless product experience to our users, and also cross-channel traffic to our partners in the ecosystem; each one of these apps rank within the top 20 mobile apps in China, in terms of MAU. Onajong, [ph] our mobile manager ensures a secure environment for digital consumption and transactions online. Mobile QQ browser and YingYongBao respectively provide our users quick access to broadening mix of web-based and app-based content and services. Together the trio allowed us to establish constructive relationship with a very large number of industry partners. Benefitting from our overall mobile social franchise, as well as our continuous efforts on product innovation and performance enhancement, we are able to leap from a late entrant to a market leader in each one of these area. Recently, we’re beginning to see the financial benefits materialize through advertising in mobile QQ browser and in-app user spending in YingYongBao app store. I’ll discuss each one of these mobile utilities in turns. Starting with our security service mobile manager, according to QuestMobile, our mobile security app gains market share continuously in terms of monthly active users in the past years and in the most recent month, overtook the incumbent industry leader. How do we achieve this? We provide best-in-class performance across core protection features, such as virus scanning, cleaning and speed boosting. We innovate and differentiate our product offering by investing to enhance our capabilities, especially in payment security, and anti-fraud phone database. This enabled us to earn trust and credibility from users. In addition, to our standalone security app, we are also building a network of partners, including handset manufacturers, long developers, and O2O partners offering them our mobile security solution through software development kit, as well as open API. Our standalone app and security solution together now protects over 60% of interest by our phones and support leading Android app stores in China. We believe a neutral and secure online environment is crucial to the development of our mobile ecosystem in China, and our mobile security service ensure this is the case. Turning to Mobile QQ browser, our standalone app has evolved into a platform that supports HTML5 websites and provides quick access to digital content, such as video and literature to our users. According to QuestMobile data for June [ph] our mobile browser had achieved the number one position by monthly active users. We are gradually monetizing browser traffic through advertising. In addition to our standalone app, we also use our browser kernel to support Tencent browser service, which enables viewing of web-based content within non-browser apps, such as Weixin, Mobile QQ, and many of our partner’s apps. As these apps continue to attract users and serve content via our browsing solution, we saw very heavy volume of page views traffic and monthly active users on Tencent browser service, exceeding any standalone mobile browsers in China. Moving onto YingYongBao app store, our market share by monthly active users doubled in the last twelve months to make YingYongBao the second most popular Android app store in China according to a research. We believe we lead the industry in terms of the total number of apps available and in terms of the speed to bring updates from a majority of top apps to our users. Leveraging our mobile social franchise, when we find our targeted recommendation based on social and interest graphs, and we’re working with partners to deep link in app content. These efforts enhance the overall user experience, the download conversion, as well as their revisits to our app store, thereby enabling us to increase our market share on a consistent basis. On a monetization front, we have implemented revenue-sharing arrangements with game developers and also a test, testing our cost per download advertising. So, with that, I’ll pass to James to talk about our business review.

Thank you, Martin. In the second quarter of 2015, our total revenue grew 19% year-on-year, excluding e-commerce transactions, total revenue increased 27% year-on-year, VAS representing 79% of our revenue within which online games contributed 56% and social networks 23%. Online advertising represented 17% of total revenue, up 7 percentage points year-on-year. For our value-added services, segment revenue was RMB18.4 billion, up 17% year-on-year, and down 1% quarter-on-quarter. Social networks revenue was RMB5.4 million, up 18% year-on-year, and up 3% quarter-on-quarter. Premium subscription packages and item-based content drove the year-on-year revenue growth, while subscriptions from mobile privileges and for premium literature, music, and video services led to sequential revenue increase. Online games revenue was RMB13 billion, up 17% year-on-year, and down 3% quarter-on-quarter. Revenue grew year-on-year due to higher monetization of core PC gamers and the contributions from new smartphone games. Adverse seasonality for PC games in the second quarter resulted in the sequential revenue decline. Looking at social networks, our Mobile QQ, we enabled direct streaming of music books, comets, and videos to keeping user engagements and promote digital content purchases. We integrated access to over 200,000 interest strides in Mobile QQ to facilitate the discovery of popular chat topics, such as celebrity, sports, and movies. For Mobile Qzone, we introduced a smartphone storyline and new photo editing features that boosted photo sharing activity. Average daily photo uploads increased 70% year-on-year in June. The Weixin broader use of digital red envelopes in everyday social interactions and corporate marketing events led to a dramatic increase in payment transaction volume year-on-year. We’re encouraging content producers to enhance the quality of their content to sharing our advertising revenue with them and to incentive schemes, such as enabling users to send cash rewards to create especially interesting content. We’ve connected users in 47 cities to local health, transport, utilities and municipal services, as part of our Internet Plus strategy. Looking at PC client games, total average concurrent users increased year-on-year. Although the mix shift from massively multiplayer online games to advanced casual games continued. Within advanced casual games, League of Legends grew users and increased monetization through new skins and gifts packs. We’re enhancing our sports games, FIFA Online 3 and NBA2K online by timing them more closely into high-profile sports events such as the new NBA season, where we held exclusive China online distribution rights. We’re investing time and energy into eSports activities, which we believe enhance community activity around our games and so contribute to games longevity. We organized some of the most watched eSports events in China. The massively multiplayer online games, we saw lower average concurrent users and higher spending per user year-on-year. In early July, we began largely scale beta testing of Moonlight Blade, a new self-developed martial arts RPS. Initial user feedback is positive. And we’re internally testing several high profile new titles including Monster Hunter Online. The smartphone games, we generated revenue of RMB4.5 billion in the second quarter, up 11% year-on-year on a gross-to-gross basis and up 1% quarter on quarter. We remain the largest platform for smartphone games in China, operating the top titles in the playing card, shooting, running and fighter plane genres. We’re implementing several strategies to extend our leadership and to benefit from the increase in user capacity to spend money on mid-core mobile games, specifically over the coming months you’ll see us exporting some of our most popular PC game IPs on to mobile. We’re also bringing some of our PC game best practices in the areas of testing, marketing and operations to mobile, so it’s to encourage user engagement, enhance user spending and extend games lifecycle. We’re developing new internal marketing resources to promote games more broadly. In the Red Sea, that are well-developed and intensively competitive, such as battle card and role playing games, we’re focusing our key marketing resources more tightly on our most promising titles to cut through the industry clutter. And we’re developing high-quality games in blue ocean genres, such as action, role-playing and tower defense to cultivate new user behaviors, as we’ve already done with our WeFire shooting game. Moving to online advertising, segment revenue was RMB4.1 billion, up 97% year-on-year and up 50% quarter-on-quarter. Mobile contributed over 60% of our total advertising revenue. Our brand advertising revenue was RMB2 billion, up 47% year-on-year and up 45% quarter-on-quarter. Year-on-year revenue growth flowed from increased video traffic and higher sell-through of mobile ad inventory for both portal and video. Quarter-on-quarter revenue growth positive – benefited from positive seasonality. Our performance advertising revenue was RMB2.1 billion, up over 100% year-on-year and up 54% quarter-on-quarter. Revenue jumped year-on-year due to new ad inventories, especially in Qzone and Weixin official accounts and due to higher cost per click. Sequentially, increased ad impressions and positive seasonality drove the performance advertising revenue growth. So brand advertising, we believe we again outgrew the overall market. Based on internal tracking, over the past 12 months, we have gained substantial market share in three of our top five advertiser categories: personal care, online services, and consumer electronics. And we have sustained our market share in food and beverage and automobiles. Our video platform, traffic increased substantially and revenue more than doubled year-on-year. Our mobile video views more than doubled year-on-year and mobile now contributes most to our video ad revenue. During the second-half of 2015, we’re adding more exclusive contents including Voice of China Season 4 and NBA coverage. For our mobile news service, average daily page views and the number of advertisers, both increased substantially, plus that our mobile news ad revenue more than doubled year-on-year and exceeded our PC portal ad revenue. For social performance advertising, we have integrated Weixin official account ads into GuangDianTong engines, simplifying the advertiser experience and increasing liquidity. The advertiser base or number of advertisers on Qzone tripled year-on-year, supporting higher cost per click on overall revenue. Advertising on Weixin official accounts benefited from more traffic and more ad impressions. Advertising on Weixin Moments offers significant potential, especially among brand advertisers. They’re currently adding new categories of brand advertisers to the mix, including luxury products and financial services. We ran over 60 advertisements on Weixin Moments in the second quarter. In the second-half of the year, we’ll continue to refi our ad formats, our ad approval processes, and our ad targeting within Weixin Moments. And with that I’ll pass over to John to talk through the financials.

Thank you, James. Hello, everyone. For the second quarter of 2015, our total revenue was RMB23.4 billion, up 19% year-on-year, or 5% quarter-on-quarter. Gross profit was RMB14.4 billion, up 19% year-on-year, or 7% quarter-on-quarter. Operating profit was RMB10 billion, up 28% year-on-year, or 7% quarter-on-quarter. Income tax expense was RMB1.8 billion, up 10% year-on-year, or 9% quarter-on-quarter. The effective tax rate for the quarter was 20%. Net profit attributable to shareholders was RMB7.3 billion, up 25% year-on-year, or 6% quarter-on-quarter. In the second quarter, we included non-GAAP adjustments for material associates in the definition of our non-GAAP measures. We believe this will reflect a more accurate picture of our core businesses and renders us more easily comparable with peers. Non-GAAP operating profit for the quarter was RMB10.3 billion, up 34% year-on-year, or 10% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB8 billion, up 32% year-on-year, or a 11% quarter-on-quarter. Non-GAAP diluted EPS was RMB0.849 for the quarter. Turning onto segment gross margin. Gross margin for value-added services was 66%, one-time 1 percentage point year-on-year on a gross to gross basis, and up 1 percentage point quarter-on-quarter. The year-to-year dip was primarily due to increased revenue sharing costs from a larger mix of third-party smartphone games and increased channel costs. The sequential change reflected a mix shift towards higher margin first-party games in the second quarter. Gross margin for online advertising was 52%, up 7 percentage points year-on-year, or 13 percentage points quarter-on-quarter. The higher gross margin resulted from rapid advertising revenue growth, partially offset by higher sharing and content cost. Moving to operating expenses. Selling and marketing expense was RMB1.6 billion, down 19% year-on-year, or up 21% quarter-on-quarter. The year-on-year decrease mainly reflected reduced subsidies relating to taxi booking services, while the sequential jump was the result of increased advertising spend to promote key products and mobile payment solutions. G&A expense was RMB4 billion, up 16% year-on-year, or 9% quarter-on-quarter, of which R&D expense was RMB2.1 billion, up 10% year-on-year, or 2% quarter-on-quarter. G&A expense increased mainly due to end-user review and higher R&D expenses. As a percentage of quarterly revenue, selling and marketing expense was 7% and G&A 17%. R&D represented 9% of quarterly revenue. Share-based compensation was approximately 3% of quarterly revenue. As at quarter end, we had 28,072 employees, up 12% year-on-year and broadly stable quarter-on-quarter. Looking at margin ratios for the second quarter, gross margin was 61.6%. It increased 2.1 percentage points year-on-year on a gross to gross basis and increased 1.6 percentage points quarter-on-quarter. The year-on-year increase primarily reflected a mix shift away from low margin revenues following the divestment of our e-commerce business. The sequential increase mainly reflected higher online advertising gross margin, as well as mix shift to higher margin gains within our gain portfolio. Non-GAAP operating margin was 44%, it was up 6.4 percentage points year-on-year on a gross to gross basis and up 2 percentage points quarter-on-quarter. Higher operating margins year-on-year benefited from higher gross margins and reduced selling and marketing expenses as a proportion of total revenues. The sequential uptick mainly derived from higher gross margins. Non-GAAP net margin was 34.5%, it was up 4.8 percentage points year-on-year on a gross to gross basis and up 1.9 percentage points quarter-on-quarter. The higher net margin year-on-year was mainly due to higher operating margin, partly offset by recognized share of loss associates a proportion of total revenues. The sequential increase in net margin was due to a higher operating margin. For the second quarter, total CapEx was RMB2.8 billion, up 210% year-on-year, and 113% quarter-on-quarter. Operating CapEx was RMB801 million, up 38% year-on-year, and 22% quarter-on-quarter. The increase in operating CapEx is primarily for the purchase of network equipment and replacement of office computers. Non-operating CapEx was RMB2 billion, up 507% year-on-year, and 202% quarter-on-quarter. Non-operating CapEx in the second quarter mainly relates our land use rights for Penn, [ph] construction of the new office building to support business growth. Free cash flow was RMB5.4 billion, down 14% year-on-year, and 35% quarter-on-quarter. Free cash flow decreased on higher capital expenditure pay during the quarter for the land use rights mentioned above. Our net cash position at quarter-end was RMB21.7 billion, down 4% year-on-year, and 14% quarter-on-quarter. Year-on-year declining net cash was mainly due to dividend payments of approximately RMB2.8 billion of about US$450 million in the second quarter. Fair market value of our listed associates and the available-for-sale financial assets rose to approximately RMB90 billion at the quarter end. This concludes our presentation. Thank you.

Thank you, Operator. We shall open the floor for questions, please.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Alicia Yap from Barclays. Please ask your questions.

Hi, good morning. Can you hear me? So, good evening, everyone. Thanks for taking my questions. I have the first questions that can you elaborate a bit more details on your plans and strategy. How to potentially increase the payment fees revenue that you could generate via your partners, that integrated into the Weixin and Mobile QQ? And related to that, can you share with us currently what are the rankings of the payment transaction volume that come through the retail payment currently. For example, after the gaming payment, red packet, friends circle transfer, what are some of the higher frequency transactions that you could monetize, and your plans for increasing the fee-based income in the future?

Yes. In terms of payment, I think, the strategy for us is really should increase the number of users that use our payment solutions. Thereby increasing the attractiveness of the payment solutions to merchants, and thereby increasing the number of transactions that I should go through our payment system. At this point in time, we actually do not really look at the revenue as much, right. I think broadly speaking, our payment business is actually at breakeven, from a fee generation versus sort of banking charge perspective. And then sort of we do spend a quite a bit of money actually in terms of subsidies, in order to drive the adoption of the payment solution among users and among merchants. So that the most import thing for us is really to increase the usage. We believe this is actually important for our overall value, not in the sense of generating revenue, but more importantly we can increase the efficiency of our advertising business in the future. Right now, when you actually have merchants and service providers who actually can get the users to respond to an ad and pay for the services sort of in a very seamless way then sort of the advertising rates would go up. In addition to that, payment also generates a very good entry point for our online finance applications going forward. And also provides us a lot of data, which we believe the consumption pattern of users and that would also help our targeted performance, advertising performance. So, I think, that’s where we stand on the strategic plan for our payment solutions. In terms of the key categories of payments right, so you have sort of the first red-packet, [ph] the person-to-person. And then from their point, we have a number of virtual items, let’s say, sort of mobile charger, people who pay for games and Tencent, as well as the partners virtual services. In addition to their web, a whole range of O2O services, as well as e-commerce services, which certainly will follow that in terms of ranking.

I see. My second question is – thank you, Martin. My second question is on mobile games. So excluding your strength in the YingYongBao app store seems like attractions on Mobile QQ and retail game center has experienced some slowdown. Is that mainly due to the fact durations of the mobile gamers, which is more an industry issue, or is it just because during second quarter for Tencent, there was a lack of big hit titles released in the retail game center. How should we think about the growth outlook for the overall mobile games revenue in the coming quarters? Thank you.

So, Alicia, perhaps I’ll speak to address that question. We believe there’s ample room for revenue growth for the mobile game industry in China. So, today, there’s more than twice as many people playing mobile games as PC games each day, both for the industry as a whole and for Tencent specifically within the industry. Recently, there has been some examples, including a very popular game from NetEase, including our own shooting game of titles that can both monetize throughout at the levels and enjoy relatively long use lives. So we believe that the China mobile game industry is becoming more like the U.S., European, Japanese, or Korean mobile game industries, where not only do you have very casual games with long life and more mid-core games in short life, but also you have hit mid-core games that can really define, redefined as genres and generate substantial revenue over extended periods of time. In recent months, we have been following the evolution of the industry with great interest. We have seen some challenges, but we also think therein lie opportunities. And that’s really behind the strategic shift that I outlined earlier, that’s within the Red Sea categories we’re focusing on more resources on fewer titles that we believe can participate in genres, but also potentially redefine the genres, and then the blue ocean categories were focused on developing new game experiences that currently don’t exist in China, training people supply mobile games in a way that they haven’t before. And we’ll see what happens going forward. But if you look at the app store rankings, today, for example, you can see that some of our new titles, for example, King of Fighters or Legend of Mir 2, it fits squarely within that criteria of being mid-core games with a great user experience, where we’re cautiously optimistic that ensure a healthy longevity.

Next question, please.

Thank you. Your next question comes from the line of Wendy Huang from Macquarie. Please ask your questions.

Thank you, and congratulations on the solid results and also the breakthrough you made onto a different mobile product. My first question is about mobile game. So are you seeing any new technology, such as MTNN-05 [ph] to actually revolutionize the mobile game industry in the near future, and also to bring the monetization opportunity for Tencent? And second, your margin recorded a very high level in the past three years. So is this kind of high margin sustainable for the rest of the year? Thank you.

Okay. So on the game question now, I’ll answer that. I think, at this point in time, we look at for the native apps as sort of the best technology for mobile games. I think sort of, a lot of industry participants and we ourselves are actually sort of testing out HTML5 as a platform for games, and try to see sort of whether there are more casual games that could actually fit into that category. If sort of this technology becomes an important technology for games, I think we are very, very well-positioned in that segment. In fact, we wish there is a big market for that segment, because as we went through it in our strategic highlight, we have a very strong browser app right now on a standalone basis which is leading in terms of the market. And at the same time, we actually sort of have even bigger traffic on our HTML5 Tencent browsing servers in terms of page views, in terms of active users, right. So if there are games which actually fit into this technology platform, which we believe there will be, but whether how big it is, it’s a question mark. It becomes very big, right, then we will be a major beneficiary of that technology shift.

Just on the margin outlook, first, as you know, we generally don’t comment on margin outlook going forward. So my answer to the question will be consciously vague. Second, in terms of specific cost items, our cost of revenue, it is experiencing some weight, I mean, it will experience some weight going forward from items such as exclusive content payments, for example, for NBA rights and also to the support for our online payment businesses where we have to incur the interbank handling fees. Thirdly, I would say that that by global standards our margins are fairly comparable to those of global peers. And it’s important to bear in mind that our margins are not – they don’t bear the cost of margin destructive O2O experience, as O2O activities, because we have adopted a strategy where generally speaking those O2O activities and the financing around them takes place at our partner company level, rather than in consolidate Tencent level.

Thank you.

Next question, please.

Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your questions.

Eddie, can you hear us? Perhaps, we’ll take the next question.

Yes, next one please, operator.

Thank you. Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your questions.

Hi, everyone. Thank you for giving me the opportunity. I have two questions. First one is on the advertising. Currently, Tencent doesn’t participate in the revenue sharing mobile GuangDianTong. Is this the revenue share to advertisers in the quarter, the cost of goods sold like? And does Tencent have any near-term or a mid-term plan of participating in doing so? I have a second question on online travel. We noticed that you submitted a – going private proposal to eLong recently. Just wonder if management can share some of your overarching strategy behind online travel and how does that fit into Tencent’s overall O2O footprint. And given that Baidu and Alibaba are both quite aggressive in O2O, if you can talk about your O2O strategy as well, that will be great. Thank you.

Actually, for the GuangDianTong official con, we share revenue with the content providers and sharing would be included under comps.

Right, in terms of online travel right now, we look at it as an important – well, as an attractive vertical, right, but – it’s not the biggest contribution or in terms of frequency of payment, but it’s an attractive business in itself, right? So we have some participation in the sector. As you can see we have invested in a number of different companies including eDong, including 17u. Now, a number of these companies actually coincidentally also sort of have investments from Ctrip. So, I think, overall we look at sort of eLong as an attractive business going forward, because, as I said, it does have a pretty good exposure to the hotel segment. And we view that in the public as we know, right, it has to make continuous investments and so that’s why their share price are very suppressed. If we can actually take a private, we can actually invest in the company and really make it a more viable business. And overtime, we may actually sort of list in the Asia market in the future. But that’s undecided at this point in time. Overall, we feel that our various investments in the travel segment as well as our partnership with Ctrip at the different levels give us pretty good exposure to a good vertical business. In terms of our O2O initiative, right now, we do focus a lot on the high frequency O2O services. So, we have a number of different investments including investment in Didi, Kuaidi and including our investment in Dianping, including our investment in Ele.me, and a number of other investments too. As James talked about, right now, we feel that these O2O services – on one hand, we requires some traffic right now, but on the other hand requires actually a lot of offline exposure and the ability to manage a very large sales force in particular. So, these are not the kind of expertise that we as a technology company and user experience company sort of it’s very good at managing. So what we had decided on a strategic basis is really sort of working with a number of BATS-breed [ph] partners and help them to sort of generate the online exposure, while they actually focus on building out on their offline expertise. And at the same time, as James said, this not only give us exposure to the best team in the industry, with a lot of focus; it also allows us to leverage our capital in a more efficient basis, because we don’t necessarily need to spend all the money right now, that this company making a loss in the process of building up market leadership. As you know, all these companies are actually generating a pretty heavy subsidies and losses at this point in time.

Thank you. Your next question comes from the line of Natalie Wu from CICC. Please ask the questions.

Hi, good evening, management. And, thank you for taking my questions.

Can you up a little bit, please?

Okay. Can you hear me?

Thank you, yes.

Okay. I have two questions actually. The first is congratulations on the strong performance in your online advertising business. But can you elaborate a little bit more about your advertising revenue. You mentioned that RMB2 billion was generated from brand ads. I’m just wondering how much this contributed from online video. Also for performance based ad, what is the mobile revenue contribution? And the second question is actually on your deferred revenue. If we look at your deferred revenue in current liability line, there is actually RMB1 billion decline from last quarter’s level. So, just wondering, can you share with us what is the major cause for this sequential change? I would have pleasure that, if you could just breakdown this effect from mainly game and advertising business. Thank you.

But, why don’t I handle the advertising question and John will look after the deferred revenue question. So, we can follow-up with the detailed analysis offline. But given that the rapid growth in our video business, video would be the largest portion now, the largest contributor to our brand display, which I think was your first advertising question. And then, for your second advertising question, on the performance advertising, mobile would be the very large majority at this point, it’s primarily on mobile business, or essentially a mobile business.

In respect of deferred revenue, actually this quarter, it’s high about 6.3%. There are two reasons for that, because the number one is in terms of the business cooperation agreement Jingdong, every quarter there will be a natural decrease of more than RMB200 million. And secondly, you can see that this quarter is a lower season for online games, which in 2014, it was the same case,and that target decreased by about 3% quarter-on-quarter. Yes. Next question.

Thank you. The next question comes from the line of Dick Wei from Credit Suisse. Please ask your questions.

Good evening. Thanks for taking my questions. I have two questions. First questions is on the premium content subscriptions. I wonder if you can give some update on how Tencent is progressing across different videos and also some of the music within content subscription, and wonder, is that number is also included in the fee-based as much as subscription line as well?

Sure. So, yes, it’s included inside our fee-based VAS. I think that the big picture here is that the Chinese consumer behavior is changing and that’s very positive for everyone in this business, and including hospitals to our competitors. If you look at the U.S. today, then the top 10 highest revenue apps in Apple app store in the U.S, seven of them are games, but then three of them are HBO, now Spotify and Pandora. So in developed markets does a very well-established trend now toward people, spending substantial time and money on – for premium digital content, especially on the smart devices. We’re just starting to see that happen in China. If you look at some of our end products, recently we’ve run a promotion for a Korean signer called Big Bang, and that’s generated millions of digital album sales in the last few weeks. We just put online the universal movie Fast & Furious 7, that will generate millions of transactions in a few days. So it seems like there is a great deal of demands now emerging among consumers to pay for premium content. We’re tapping into that with our literature – digital literature business, which is a very clear industry leader, we’re tapping into that with our digital music business, which is in a very clear industry leader, digital video business, which is added millions of subscribers here to-date. But I don’t want to give media impression that this is all Tencent alone. I mean, we feel that both we and our competitors is together enjoying a buoyant and increasingly substantial market for consumers paying for premium digital content.

Great. Thanks for the color, James. Then the next question is on internet finance. I think company has started some of the small lending program, maybe WeBank in May/June timeframe. I wonder, how is that progressing along, and any kind of a color you can share with us? Thank you.

Yes. WeBank launched a product called Weilong [ph] which is a consumer alone on a very convenient basis. So we have actually launched it on the basis of whitelist. So we go to the list of users within Mobile QQ at this point in time. And basically sort of leveraging on our credit model, indentify a certain number of users and then sort of we can offer them sort of new entry point to these credit product and see what the responses. I think, at this point in time, it’s still on trial. We have put in a small number of users into this program. So far I think the result is encouraging, I would say, both in terms of for the people that, we have shown the entry point the adoption of these loans, as well as when we look at the credit model, right, so far with limited data, of course, but we feel pretty good about the credit model that we have at this point in time. Obviously, sort of in the next few months, we’ll gradually roll it out to a larger number of users within Mobile QQ. Over time, we’ll also sort of launch this product on Weixin as well. So by that time, we will be able to give you much more color on how this product is faring; but so far, I think, so good.

Okay. Thank you. Next question, please.

Thank you. Your next question comes from the line of Erica Werkun from UBS. Please ask your questions.

Thank you. My first question is on Moments advertising. I think, James mentioned that you ran about 60 advertisements in second quarter. Can you share just how significant was the revenue contribution for second and if we kind of look at that run rate on a 12-month basis, how significant can Moments advertising be? And my second question is on selling expenses. That amount was down 19% year-on-year and one of the reasons cited was WeChat marketing. Were you being more selective in your global expansion of WeChat? Thank you.

So, on the first question about advertising inside Weixin Moments, I’d say, it was a contributor to our performance advertising business in the second quarter, but given it’s still at very early, a substantially smaller contributor than advertising on Mobile Qzone or advertising on Weixin official accounts as comparison points. Over the long term, we think that it has the potential to be one of the largest products within our mobile performance advertising portfolio, because it enjoys enormous traffic. It enjoys relatively affluent users who are disproportionately appealing to advertisers. And therefore, we believe it can tap into not only the kind of hardcore performance advertisers such as e-commerce companies and app developers, but also the brand performance advertisers. And we’re already seeing that with very good response from luxury goods advertisers or automobile advertisers to participate in Weixin Moments. So it’s a long path ahead, but we’re very optimistic about the destination for Weixin Moments advertising.

In respect of the selling and marketing expenses drop year-on-year, it was mainly due to the significant reduction in subsidies for taxi-hailing apps, Didi Dache, as well as little bit of the reduction in the WeChat overseas marketing expenses.

Okay. Thank you very much. Next question, please.

Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your questions.

I apologize, bad connections. Two questions, the first one is about mobile games. I’m wondering if James could talk a little bit about you guys feel on the future of overseas mobile games in China. It seems like we have been seeing too many successful overseas games in China. And traditionally, we all know Tencent has an advantage in licensing overseas games in China. So just wondering what’s your thought on that? And then, secondly, perhaps something more long-term, could you guys give us any updates on the so called social commerce within your ecosystem? We have heard certain any-dot-hold [ph] data points that the growth has been pretty good. So, just wondering, if you’ve any more color on this business? Thanks.

Yes, so, with regard to the success or lack thereof of overseas mobile games inside the China mobile game market. I think that’s a fair observation. If you look at Southeast Asia or India, then the correlation between the top mobile games in those markets and the top mobile games in the U.S. and Europe, it’s about 75%. If you look at China, the correlation is about 20%. So for a number of reasons, including local taste, localization, publishing and so forth, so far the Chinese mobile game market has evolved relatively independently from the rest of the world with a couple of high profile exceptions such as Clash of Clans. Our belief is that over time, as the Chinese mobile game audience becomes more sophisticated and as foreign games better localize to suit Chinese tastes, then there will be an increase in the success of overseas games in China, and we’ll certainly try to position ourselves for that trend. So we have partnered with and made investments in some of the biggest and best mobile game companies in Korea, and we’ll be having relationship with CJ Games, for example, in Europe, with Miniclip in the U.S., with Blue in Japan and so forth. And we have a number of international games, both from third parties and from our partners, which were looking forward to releasing in China. But as of today, the Chinese mobile game market is still in a 75% of local game market. And that hasn’t hurt us so far. I mean, I’d emphasize that most all of our biggest and most successful mobile games historically have been mobile games developed by our in-house studios, such as [indiscernible]

Yes, in terms of social commerce, right, I think, at this point in time, it’s still at a very primitive stage of growth. We do see, sort of, quite a bit of action that’s happening within our social network. And we do see sort of one of our investee comes in like Koudai has seen pretty good traction in terms of their growth. But I feel that, overall, we’re still in a trial mode in terms of how can we really capitalize more growth of the social commerce. I think, there are certain elements that’s needed, one is, actually payment, the other one is advertising. For example, other ways of, therefore, people to discover about these shops, these sellers, also the supply chain of good products is actually important right. So, I think, at this point in time, it’s more like a grassroot effort. But over time, as we continue to build up our own payment system as advertising continued to grow within our ecosystem and then we provide different ways to capitalize the discovery of these products, and as more and more good sellers actually start to use this channel, I think, there could be more growth. But we need to, sort of, we’ll keep trying. And I think, if you look across the ocean, right, Facebook has been trying quite a bit in terms of figuring out what would be a good way to capitalize commerce on their platform, as well. So, I think, we’re in the experiment and learning modes in terms of doing this, and we’re also building a lot of the infrastructure element to support this.

Okay. Thank you. And, operator, in the interest of time, we’ll take the last three questions, please.

Thank you. Your next question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your questions.

Okay. Thank you very much. Forgive me, if you mentioned this already. But what is the current numbers of official accounts on Weixin, and how many do we now have on Mobile QQ? And also curious as to what the timeline might be for launching official accounts for these ads on Mobile QQ? My second question relates to the appreciable sequential improvement in the advertising gross margin in the second quarter. I assume it’s largely the interplay of fee margins, which are very high, but also content spend on video, which is consequent to the phase [ph] of margins. The question is, is content spend growth likely to continue to stay significantly relative to overall ad revenue growth, given the current marketing conditions? Thank you.

Well, in terms of official accounts, right, I would say, sort of, we have continued to see a healthy growth in terms of the total number of official accounts on WeChat, on Weixin, as well as, sort of, the number of active official accounts and the number of page views, and the number of articles that sort of, these official accounts sellout. So, all in all, sort of, the trend has been, sort of, quite nice. In terms of ballpark figures, we have, sort of, more than 10 million official accounts registered, and on active basis a couple of million active. So in terms of Mobile QQ, we are creating a whole infrastructure for supporting official accounts too, and that will be launched in the next couple of months. And we expect that could also sort of generate additional traffic on our official accounts.

With regard to advertising gross margin, so you are correct that the increase reflect to the combination of positive seasonality and the mix shift toward the performance advertising which tends to be higher gross margin all else equal. With regard to content costs, our experience historically is that, when we buy excellent content exclusively such as The Voice of China program or the Game of Thrones series. Then that consent combined with our platform strengths, combined with our distribution through Weixin and so forth, can deliver a job search to our video traffic, to our video advertising and more laterally also to our video subscription revenue. So, given those very positive experiences, we continue to reinvest right aggressively in video content. And I know we’ve mentioned numerous times that our video advertising revenue more than doubling year-on-year. And you should assume that as our revenue growth, our content will grow, not exactly at the same rate. But at a relatively rapid rate as well, because we find that buying the best content delivers the biggest and most successful results for us.

Thank you.

Next question, please. Next question, please.

Your next question comes from the line of Thomas Chong from Citigroup. Please, ask the questions.

Hi, thanks for taking my questions. I’ve two questions. The first question is about the macro headwinds. Can management comment about how it impacts the brand advertising business? And my second question is about the M&A strategy. What other verticals would Tencent be interested to invest in the future? Thanks.

Well, in terms of macro headwind, I think we don’t really feel that much. I think you had identified among our entire business probably the only thing that’s exposed to it is actually our branded advertising which actually sort of is relatively small compared to our total revenue. And at the same time, within the brand advertising, a big part of it is actually video advertising, which is on secular or structural growth mode. So, I think the macro headwind is not felt that much attention at this point in time. In terms of M&A, I think, as we said, right, we in the past, we focus on acquiring stakes in companies that would enhance our overall ecosystem and at the same time these are management who have proven track record and have similar culture with us. So, I think these are the criteria for our investment. And with the rollout of Internet Plus strategy, with Internet actually approaching different verticals within the economy, I think there are actually more opportunities for us to find ourselves being at the crossroad with our partner. And if our technology, if our ecosystem, if our user base is actually helpful to help companies to make use of Internet to capture opportunities. I think we will be happy to do that. So, I think that’s sort of in broad general terms what we are looking for.

Thanks.

Yes. Thank you. The last question, please.

Thank you. Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please your questions.

Thank you. Could you talk about the net revenues that you earned in mobile games in the quarter? As well as the new genres of games that you’ll be launching in the coming month, how soon can we see that price improve? That’s the first question. And second, on WeBank and the strategy, would you remain focused on micro loans or should we expect WeBank to evolve into a platform potentially supporting all but the top-five banks. Thank you.

Piyush, on the first question we can go into net revenue versus gross revenue offline, because it’s a fairly technical discussion. I think with regards to new genres of games, it’s a combination of a new approach of putting more resources behind key titles within the sort of existing Red Sea genres, and then developing and publishing what we hope would be big transformative games in Blue Ocean genres, where we have not yet formed in China, but which we hope to form. And you should expect that to be a kind of gradual, but continual process. If you look in recent weeks, we’ve already released two mobile games a bit of more sort of Red Sea in nature, that seems to be successful, one being, The King of Fighters and other one being Legend of Mir that are based on proven IP. And one trend has become very apparent in the first-half of this year, whether you look at NetEase’s, Fantasy Westward Journey name in China, or the Fallout Shelter game in the U.S., the PC gamers who in the past treated mobile games the way that someone who reads novel as my treated comic book adoption and now taking mobile games much more seriously and a much more willing to play mobile games that are tied into PC games. So we have already released couple of titles that linked – on mobile that are linked to PC, and we have several more in the pipeline. And then going forward, we’ll seek to attack both of these, Red Sea and Blue Ocean categories progressively.

Yes. I would just sort of just add one more point to James discussion about sort of our strategy. I think, if you look at sort of PC platform, we actually sort of have spent many years in terms of developing the best traffic perhaps for bringing traffic into games. I think, sort of, with the same exercise, it needs to be done for our mobile platforms. And sort of, if you look at the first inning of that effort was really sort of creating these game centers. But I think that’s just sort of the first part of the story right now. We arguably has a much bigger franchise on mobile internet than we had on PC internet. And as a result, they’re actually sort of a lot of venues to which we can actually generate traffic for our games. I think some of the things that James talked about, for example, sort of cross-promoting our content with the games, so video platform can be sort of bear – brought to bear, for example, sort of, we can actually sort of leverage music to offering traffic to music games. So there are a lot of our existing platforms, which had not really participated in our game initiative yet. So it will take time for us to build that, but over time, they will be built. In terms of our internet finance and WeBank initiative, I think, WeBank as we [indiscernible] WeBank wants to be a provider of products that actually sort of can bring value to consumers, as well as to its partner banks. So WeBank is not, sort of, just a bank, but really, sort of, an open platform for banks to access users, and provide better services to users. So, I think, Weilong is one of these products, but sort of we’ll continue to develop good products along these lines. But, sort of, for example, right, making loans to state-owned enterprises, or large corporate, not sort of really something that’s along the line. So we probably sort of reframe from doing that for some time.

Yes. Thank you very much for joining the call, and thank you, operator. We’re winding up the call now. If you wish to check our press release and all the financial information, please visit our corporate website at www.tencent.com/ir. We’ll post the replay of this webcast on the site shortly. Thank you, and see you next quarter.

Thank you. That does conclude our conference for today. Thank you for participating Tencent Holdings Limited 2015 second quarter and interim results announcement conference call. You may all disconnect now.