Catherine Chan - IR Pony Ma - Chairman & CEO Martin Lau - President James Mitchell - Senior EVP & CSO John Lo - CFO

Alicia Yap - Citigroup Eddie Leung - Merill Lynch Alan Hellawell - Deutsche Bank Wendy Huang - Macquarie Piyush Mubayi - Goldman Sachs John Choi - Daiwa

Thank you for standing by and welcome to Tencent Holdings Limited 2016 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 the 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 our second quarter interim results conference call. I am 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 underlined by a 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 non-GAAP measures, please refer to our disclosure documents on www.tencent.com/ir. Now, let me introduce the management team on the call tonight. We have our Chairman and CEO, Pony Ma; President, Martin Lau; Chief Strategy Officer, James Mitchell; and Chief Financial Officer, John Lo. Pony will kick off with a short overview, Martin will discuss strategic highlights; James will speak on business review; and John will go through the financials before we take your questions. I'll turn the call over to Pony Ma.

Thank you, Catherine. Good evening, and thank you for joining us. In the second quarter of 2016, we delivered robust growth in established businesses such as mobile, games and social page performance. We had also definite user engagements for our interim businesses such as digital content and online payment. While we continue to invest in early stage activities including retail content, cloud services and internet finance. We are generating margins and profitability on a branded basis. Specifically total revenue was RMB35.7 billion, up 52% year-on-year and 12% quarter-on-quarter. Non-GAAP operating profit was RMB14.7 billion, up 43% year-on-year and 9% quarter-on-quarter. Non-GAAP net profit to shareholders was RMB11.3 billion, up 42% year-on-year and 13% quarter-on-quarter. Moving to our online platforms, total MAU for QQ include 7% year-on-year to 899 million, with 667 million of monthly active user lock in VAS snapped devices. Combined MAU of Weixin and WeChat increased 34% year-on-year to 806 million. For our social network, Qzone, smart devices MAU includes 4% year-on-year to 596 million. In games, we expand our user base and revenue in smartphone games, so our broadened portfolio of casual RPG and payer was as payer titles. We in turn create interest in PC games. In media, we saw healthy growth in new zones for our news and media platforms. Digital content subscription for video and music services also increased. We recently merged our music business with China Music Corporation and these combined companies can help to improve the overall digital music market in China. In mobile utilities, intend market leaderships in mobile facilities by expanding our cooperation model through international handset plans such as Airtel and Samsung. Our mobile browser we got healthy growth in users and page views. For our app store, YingYongBao, we enhanced by providing users with this link ad contents. I'll now invite Martin to discuss strategic highlights.

Thank you, Pony and good evening, good morning to everybody. An important strategic focus area for us is our content businesses. So in this section I'll give you an update on our ecosystem for content businesses. From an industry perspective we believe three major forces are contributing to the evolution of a healthy ecosystem overtime. Firstly, regulators and industry players have been working closely to improve IP protection and anti-piracy enforcement in the past two years. Secondly, mobile internet connectivity and smartphone adoption are making content consumption ubiquitous. Thirdly, revenue models are evolving from advertising-only to hybrid premium models with subscriptions, transactions, as low as advertising. This in turn incentivized content creators and publishers to provide more embedded content to users. For us Tencent's, we act as a driving force for industry change and we also are a major beneficiary of an industry change. We can satisfy the growing appetite of our large user base with diversified quality content. Secondly we serve as a strong distribution to content creators as well as publishers, leveraging our extensive user reach and social graph. Thirdly, we facilitate digital content purchases via Weixin payment and QQ wallet. Fourthly, we recommend content and display ads to users based on our proprietary targeting technology. And fifthly, we own multiple media platforms and that can unlock the existing potential of well-known IT across gains literature, games, video and music platforms. Now in addition through organic business execution, we also persists strategic transactions on a selected basis. In the next two slides I will discuss two transactions that will strengthen our alliance with ecosystem partners. The first one I will like to discuss is the merger between our QQ Music business and China Music Corp., CMC. Kugou and Kuwo under CMC and QQ Music are highly popular online music streaming platforms in China. As part of this transaction, Tencent will have a controlling stake in the merged company and in consolidated financials. We're appointing directors to the board and key executives a Tencent and CMC to join force in managing the platforms and products. The merged company would focus on providing authorized music and superior experience to users helping authors to reach more fans and support record labels to drive new business models. We believe digital music business is a strategically attractive vertical for our content business. According to IFPI record labels reported declining global revenues in the past 15 years due to declining CD sales. But since 2005 global revenues began to recover as the consumers subscribe to streaming services. So the global music business is at a turning point. But particularly in China, music is among the top five internet activities by users but the market is very small from a revenue perspective leading music streaming platforms in gust serving large user base but generating small revenues due to piracy which is not good for artists and creative people. Thus two close cooperation with regulators and like-minded industry players, we believe a merged company will create a more healthy dynamics for the overall industry which will benefit everyone as a whole. Now in addition to the music company, we also made a significant substantial investment in Supercell during the quarter. Supercell is the world's largest standalone mobile games company with a proven track record in developing games that can deliver innovative theme play and long lifecycles. We are extremely excited about Supercell joining our global network of gaming partners. With this transaction we are empowering founders of Supercell to manage the company independently. In China we'll leverage our social graph and platform distribution capabilities to help their games popularize among experienced and core game users. In terms of financing for the transaction, we will co-fund the investment with lenders and consortium investors under our STB structure. This way we can achieve optimal capital efficiency for us and also allow Supercell founders to have the autonomy to drive the company forward. We expect to adopt dividend accounting for our significant stage in Supercell. In terms of strategic benefits, the transaction is highly strategic for Tencent's gaming business. According to news, mobile games now in a percent over 30% of global games revenue and it's also growing rapidly. China is the biggest mobile games market in the world where Supercell has already achieved good results but in our view has got even greater potential with the help of Tencent. As the top two players in the world by revenue, Supercell and Tencent can join force to build an even stronger presence in the market, both are pioneers in real-time play -- business of playing games which is a big hit in China and also gaining popularity globally. We're committed to delivering innovative and best game experience to users worldwide. With that I'll pass to James Mitchell to talk about our business review.

Thank you, Martin. In the second quarter of 2016 our total revenue grew 52% year-on-year. VAS represented 73% of our revenue within which online games contributed 48% and social networks 24%. Online advertising was 18% of our revenue. The other segment for the first time reached 10% of our total revenue. Other revenue includes payment related services, cloud services, some e-commerce transaction and other activities. Looking at value-added services, segment revenue was RMB25.7 billion, up 39% year-on-year and up 3% quarter-on-quarter. Social network revenue was RMB8.6 billion, up 57% year-on-year and up 9% quarter-on -quarter. The robust growth was driven by increased revenue from game related item sales and from digital content sales. Our monthly subscription count grew 25% year-on-year to 105 million, although decreased 3% quarter-on-quarter as we restricted parallel distribution of our subscription services at reasonable lower margin distribution channels. Our online game revenue was RMB17.1 billion, up 32% year-on-year and stable quarter-on-quarter. The smartphone games, and player versus player games and new Weixin games, both year-on-year and a sequential revenue growth. The PC games, several existing and new one mid-sized titles contribute to the year-on-year growth for revenue dipped quarter-on-quarter during the weak period in the second quarter. Turning to social networks, for the QQ we added a number of new features and services catering to entertainment driven users thereby improving the overall engagements, specifically we invite chat experiences with new video function. Users can create video gifts at themselves, decorate the gifts with animated stickers and share the gifts with friends. Within school groups we provide third-party online educational content such as rhymes [ph] which helps students and teachers enhance their efficiency and increase their engagement with our platform. Also we launched a UGC live streaming service called NOW that enables users to record videos of interesting events and of their daily life. Users can then distribute this video to a broader audience by starting the NOW app or show the video with selected friends via Qzone. For Weixin, more companies are adopting enterprise accounts which provided built-in infrastructure supporting the staff to manage work process load such as claiming expenses or applying for leave. As the 20 million office workers now use these enterprise accounts. We expanded our municipal services to third cities and we launched these royalty carts within Weixin pay and merchants are going to issue to their customers in lieu with physical royalty membership rewards cards. And Weixin pay experienced rapid growth in users, particularly in people using Weixin pay for everyday commercial transactions. Looking at PC Tencent app and current users for advanced casual games were 7.4 million, down 9% year-on-year and average contract users for MMOG to 1.5 million, up 2% year-on-year. We're doing separate things to engage core users with our PC game platform, for example, in April we released a new game mode for legends in China. User app should be on our sports games, FIFA and NBA 2K benefited from excitement around the UEFA Champions League and the NBA Finals during the quarter. We're using our action on PC D&F [ph] as a test case in developing our IT strategy by releasing Tencent private comics, literature, music and later on, mobile game. And we added a new game that support in combats, Wall of Thunder [ph] is set in World War 2 and enabled games is to fight with tanks and aircraft. Our smartphone game revenue reached RMB9.6 billion, up 114% year-on-year and up 17% quarter-on-quarter. We continue to lead China's IRS top grossing game chart publishing six out of the Top Ten titles. In the second quarter we published three new casual games and four new mid-games. We believe our smartphone game portfolio benefits from publishing a range of game types, specifically our casual games by key role growth in the gaming videos. The rapid success of our new casual titles such as Caravan C3, as well as the ongoing popularity of our existing casual titles such as TV Run Everyday -- share of our overall smartphone game daily attributes account surely this quarter. Our big player versus player games such as Honor of Kings, Cross Fire Mobile, generate both large DAU constant substantial revenue. For example; Honor of Kings has over 30 million daily active users but it's also one of the top revenue games on Android in China. Our role-play games in common with role-play games elsewhere in the industry generally achieved smaller DAU basis to contribute this proportion each revenue, especially on iOS. During the last few months, we released several role-playing games including Zhengtu [ph] Mobile, JX Mobile and drive and proceed. Moving to online advertising, segment revenue was RMB0.5 billion, up 60% year-on-year and up 39% quarter-on-quarter. Brand advertising revenue was RMB2.8 billion, up 41% year-on-year and up 31% quarter-on-quarter. The year-on-year growth was mostly driven by increased traffic and mobile ad impressions, particularly in our news app and our video app. The quarter-on-quarter growth reflects positive seasonality. Our video traffic sustained helped the expansion rate, especially the TV drama series, web videos and sports. For example, the number of unique viewers in China for NBA games, more than doubled year-on-year to over a 100 million. Our Top 5 brand appetizer categories this quarter were online services, freedom beverages, automobiles, online games and personal care. Our performance advertising revenue was RMB3.7 billion, up 80% year-on-year and up 46% quarter-on-quarter. The key driver of the growth is Weixin Moments. Supported by the launch of our self-service advertisement platform in the first quarter we bring many more regional advertisers on board and increased the utilization of city traffic and sideway moments. In addition, in Qzone we launched car sellouts which contributed to new ad impressions and more revenue. I'll now pass to John to read the financials.

Hello, everyone. For the second quarter of 2016, our total revenue was RMB35.7 billion, up 52% year-on-year or 12% quarter-on-quarter. Gross profit was RMB20.5 billion, up 42% year-on-year or 10% quarter-on-quarter. Share of losses of associates and joint venture was RMB292 million in the quarter; on a non-GAAP basis it was approximately RMB260 million. Income tax expenses was RMB2.8 billion, up 51% year-on-year or 9% quarter-on-quarter. The effective tax rate for the quarter was 20.4%. Net profit attributable to shareholders was RMB10.7 billion, up 47% year-on-year or 17% quarter-on-quarter. After adjustments to non-GAAP, operating profit for the quarter was RMB14.7 billion, up 42% year-on-year or 9% quarter-on-quarter. Net profit attributable to shareholders was RMB11.3 billion, up 42% year-on-year, or 13% quarter-on-quarter. Let's turn to segment gross margin for the quarter. Gross margin for value-added services was 66.7%, broadly stable year-on-year and quarter-on-quarter. Gross margin for online advertising was 45.3%, down 6.6 percentage points year-on-year or partly stable quarter-on-quarter. The year-on-year dip was mainly due to higher content costs. Moving on to operating expenses; selling and marketing expenses was RMB2.4 billion, up 48% year-on-year or up 16% quarter-on-quarter. The year-on-year increase was mainly driven by higher marketing spending on products and platforms. The sequential increase was mainly due to suitable increase in advertising and promotional activities in the second quarter, as well as marketing spend due to business expansion. G&A expense was RMB5.3 billion, up 32% year-on-year, or 21% quarter-on-quarter within which R&D expense was RMB2.7 billion, up 33% year-on-year, or 18% quarter-on-quarter. The year-on-year and sequential increase were primarily due to higher research and development expenses and staff costs. As a percentage of quarterly revenue, selling and marketing expense was 7% and G&A was 15%. R&D represented 8% of quarterly revenue. Share-based compensation was approximately 2%. Looking at margin ratios for the second quarter, gross margin was 57.3%, was down 4.3 percentage points year-on-year and partly stable quarter-on-quarter. The year-on-year decrease was mainly due to the increase in proportion of other segment revenue with lower margins. Non-GAAP operating margin was 41.2%, down 2.8 percentage point year-on-year and stable quarter-on-quarter. The year-on-year decrease reflected lower gross margin which was partially offset by lower G&A expenses as the proportion of total revenues. Non-GAAP net margin was 32.2%, down 2.3 percentage points year-on-year and partly stable quarter-on-quarter. For the second quarter, total CapEx was RMB1.5 billion, down 47% year-on-year and 63% quarter-on-quarter. Operating CapEx was RMB1 billion, up 30% year-on-year and down 23% quarter-on-quarter. As a percentage of revenue, it was at 3%. Non-operating CapEx was RMB466 million, down 77% year-on-year or 83% quarter-on-quarter. The significant year-on-year and sequential decrease was mainly due to no addition of new [ph] during the period. Free cash flow was RMB9.7 billion, up 80% year-on-year and down 30% quarter-on-quarter. The year-on-year increase reflected a higher cash generated from operations. The sequential decline was primarily due to PC game cash flow seasonality. Our net cash position at quarter end was RMB24 billion, up 11% year-on-year or down 12% quarter-on-quarter. This sequential decrease was mainly due to a new dividend payout. Thank you. So now open the floor for questions.

Thank you. Operator, we shall take the question please.

And we'll now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Alicia Yap from Citigroup. Please ask your question.

Hi, good evening management, thanks for taking my questions. Congrats on the good results. I have two questions; my first question is related to the advertising. So can you share with us some colors on the latest self-service tools that enable the regional advertiser to buy those traffic in the lower tier cities? So what type of region or advertisers specifically that are you attracted to these apps? And then looking forward into medium term, how should we think about the revenue contribution splits from moments between the LMC advertisers for broad, branding exposure versus the opportunity coming from the sales of regional advertiser group? And also related to apps, for the -- can you give us some colors on the tractions for these new app format colors on the Qzone. Can -- will these actually help to simulate high social app by Qzone in the coming months?

So, thank you for the -- congratulations on the question Alicia. In terms of the advertising on Weixin moments, since specifically the self-service advertising; I think we outlined some of the tools we introduced three months ago. And those had somewhat beneficial effect, the number of self-service advertisers increased over 400% quarter-on-quarter and in results within Weixin moments becoming like a start revenue generating inventory, specific categories were most interested in the self-service product in targeting some of the non-fast tier cities included, for example, the real estate category which makes sense given that you're developing an apartment building and you may not want to advertise it Beijing. So we saw a good broadening of our advertiser mix by category as well as expansion in absolute numbers on our Weixin Moments. In terms of the long-term split of advertising revenue on Weixin Moments between self-service since Fortune 500 advertisers. I think that for performance advertising as a whole, the mix will have an excuse rewards as self-service advertisers which is what we've seen elsewhere in the world – thanks for Google for that matter. Now, within our performance advertising inventory which includes not only Weixin Moments, but also Weixin official accounts, YingYongBao, third-party app network and so forth, there is a generalization the Weixin Moments could be particular attracted to the bigger projects, more brand-conscious Fortune 500 advertisers. It's possible that Weixin Moments will always be heavily influenced or heavily used by those I think large fortune 500 advertisers -- but none of that are obviously very gratified with the progress that our self-service tools that have achieved with attraction in smaller cities in supporting Weixin Moments and another piece with the diversification revenue. In terms of the introduction carousel ads on Qzone, as we'd expect, we're continually seeking to introduce new technologies, new ad formats within Qzone and within our other performance advertising products. So that's an ongoing effort and while Weixin Moments, the single digits inventory opportunity where there are performance ad portfolio, there are many discrete inventory that are attracted for their own reasons as well to different types of advertisers.

I see, great, thank you. My second question is related to the digital music business. So is that fair to assume that with you consolidating on China Music Corp, compared with the online video platform, new suite and online literature contents, less comparative compared to online video and for the content shelf life, is that also fair to assume that the music and literature content will have longer shelf life and less pressure to always acquire the latest content compared to the video, hence, these two slightly better economic self-return? Any comments or view on the bigger pictures on these digital content landscape would be appreciated. Thank you.

Well, it's fair to say the video business is a lock-leader for us right now and the industry structure -- it's actually sort of very unhealthy for everyone. So I think by default, all other digital content industry is actually in a better shape than the video industry. But the philosophy that would take in content business is a bit like what we have taken in the gaming business, which is we try to create a model in which every party benefits from a healthier industry condition, so that a one-handed user actually benefit from better content. At the same time, our partners, the records company or with the creative artists, they will benefit from having a multitude of different business models. I think we need to strike the right balance among all different parties and as you can see in the way we create the music business. Right now the streaming business by enlarge is free for all users, but at the same time we have been able to create packages including subscription, including transaction-based albums and as well as advertising. Actually so you can create enough business model for the other industry partners to benefit. I think that's how we look at the content business and we hope that we can create the right model for everybody to benefit.

Okay, great. Thank you so much.

Next question, please.

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

Good evening. Thank you for taking my questions. Could you share your thoughts with those on the trend of user-generated video? What could be the impact on the social media​? Any of things on how Weixin can deal with this development; and then second, just a couple of housekeeping questions. I'm wondering if you could share some color with those on the impact from the launch of over lodge [ph] on your gaming portfolio. And how about the game app of different types of games? Thank you.

In terms of user-generated video, I think it's actually growing very nicely within our platform and especially sort of new on the mobile platform. It's better to say that a significant amount of official account media-related content is actually sort of new from user-generated video. So it has actually sort of new transmit from -- in the past where you have to go to a video site to actually view these user-generated video -- now there are a lot of different official accounts which you create contents and you're putting their video on their push messages and that actually sort of now will be pushed to users on the official account system and it will be shared widely within the moment of different people. With that, it's actually a very significant amount of traffic within our ecosystem and we feel that it's good for user engagement right now we really are not generating much revenue, but it's guaranteed for user engagement and so far, I will say the quality of the content is not absolute professional, or even semi-professional level yet, but we are striving to see some good content creators. Over time, what we hope to see is while the entire video content ecosystem will still be dominated by professional-made content, the user-generated company will become more and more professional and over time, it will continue to add to our traffic, it will continue to add to our engagement and hopefully some time it would start contributing to our advertising revenue.

In terms of Overwatch and the impact on RPG game business and the industry as a whole, and it varies to some extent by geography. I mean you can see -- if you look at Korea clips to other Korean internet cafe behavior or you look at the results from Korean game companies that Overwatch clearly grew the marketing career, but also to some extent it cannibalized other titles in the market. And for us, Korea is a largely percentage about game revenue. If you look at, for example, team engagement data for the U.S. and Europe, then it's evident that while Overwatch gets very popular, it actually has not had a noticeable impact on the major online games in the Western world such as Counter Strike or even Team Fortress 2 – that's probably most superficially similar to Overwatch. I think its right to believe that Overwatch has grown the market in the Western world. And then in China, Overwatch so far had a very dramatic negative impact on the incumbent titles. I think that there is a couple of sort of bigger picture silver linings to be aware of. The more important one is I think the success of our Overwatch and also the success of other recent PC games like No Man's Sky shows that there is still quite a high pent-up demand for new games including new IP among PC gamers, both in the west and in Korea and also in China. And then secondly and more narrowly, Overwatch's success is actually good for their developer Blizzard and were actually the second biggest shareholder in the activation of Blizzard. James, do you want to...

In relation to the app for games, MMOG ranges from 310 to 415. So ACG ranges from 85 to 350, and for starter games -- we prefer as one game, it range between RMB150 to RMB165 per quarter.

Thank you very much.

Yes. Next question, please.

Your next question comes from Alan Hellawell from Deutsche Bank. Please ask your question.

Excuse me. Thank you very much. James mentioned other revenue bodes to roughly 10% of consolidated revenue. And I believe that in your prepared remarks, we described a majority of the year-on-year decline in growth margin to the growth areas such as -- [Technical Difficulty].

Yes, well, in terms of other revenue, we actually sort of do naturally apply the mix. What we describe is -- it consists of our cloud business and revenue from our payment business but both of the businesses we have are at relatively early stage of development. And on the cloud business, it's still very low margin and sometimes sort of negative margin business. In terms of our payment business, I think the goal is actually sort of new provided infrastructure service for our entire ecosystem and as a result, we're not aiming to make much money from that business. And we're glad that sort of -- as a whole, this series of revenue are not sort of making losses for us as we grow but I think these are more like infrastructure businesses that we'll be investing for the long run.

Thank you.

Thank you. Next question, please.

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

Thank you. My first question is regarding your penalties. I know there is still cash in the balance sheet actually record new high, its RMB125 billion again. So how should we actually interpret this into the G&E growth on your payment platform? Also, how have you seen your payment transactions momentum change since there is payment quality change either by industry or by itself since March 1. My second question is in missions that your social event has actually declined sequentially due to the pressure on the parallel distribution. Can you provide more color on that one? Thank you.

In terms of payment business, I would say the number of transactions, as well as transaction volume has continued to grow pretty healthily. And whether the amount of cash in the escrow account as you pointed out -- part of it is actually sort of a reflection of the fact that sort of user activities have been growing; the other one is really sort of as part of the policy that we put in place in the two quarters ago when we were sort of incurring a lot of losses when people sort of transferred money from one account to another, we actually sort of put in a charging mechanism so that we can recover part of the costs in relation to the money transfer. A byproduct of that measure is that people have more incentive to -- or less incentive to sort of move money immediately out of the account once they have received the money. And as we continue to increase the number of payment scenarios that they can use -- they can use online, they can use offline, they can use it for a whole series of different payment scenarios; and sort of -- I think the consumers are happier to just park the money within the account. So that will -- that contributes to part of the increase.

In terms of subscriptions -- I apologize, you may have misheard me a little bit but I didn't say the subscription revenue is down quarter-on-quarter, I've said the subscription counts or accounts were down quarter-on-quarter. And the reason for that is, in the past we've been able to have consumers of other company's products, strictly belongs to other companies on a membership rewards scheme, to use their membership rewards to purchase some of our privilege payments such as QQ membership. And we actually sort of reduced some of that sort of low revenue, low margin distribution channel during the second quarter which in turn reduce the subscription accounts for the privileged memberships. The subscription accounts for the digital content services such as premium -- user from premium video showed healthy quarter-on-quarter growth. And then the overall subscription revenue increased quarter-on-quarter because the accounts we were sort of reducing were low revenue accounts versus the digital content accounts which is growing a residue high ARPU accounts.

Okay. Thanks for the clarification.

Next question, please.

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

Good evening. This is Ming Xi [ph] on behalf of Erica. So I have two questions. The first is regarding your subscription business, can you share with us latest number of subscribers and also the awful trend? [Technical Difficulty].

Excuse me, I think your line is cracking. We can't hear your question. Excuse me, I think your line is cracking. I think we can take our next question and we'll come back to your second question. Okay?

Okay, I apologize. I didn't get the first question either beyond the subscription accounts, which we disclosed in the MD&A was $115 million and awful trend for the subscriptions. We don't disclose the ARPU. I mentioned in the previous answer that for our digital content provinces, there often is slightly higher ARPU. You will see if you go to our site that our music ARPU is -- our music pricing is normally RMB15 and our video prices is normally RMB20. I'm sorry, what was the second question?

Okay, sure. My second question is on the monetization advertising. So we know this from [indiscernible] research reported that the readership -- every readership per article of public health is declining. So could you -- can management show us the latest public account activity and also the weaker time spend trend and what's the implication for the retail monetization? And lastly, the progress in your targeting [ph]? Thanks.

Well, I think sort of your -- there is actually a number of different ways to look at the traffic, and at the same time sort of -- the leadership actually -- sort of new distribution is somewhat changing and what I mean by that -- I think in terms of your question, what we see as sort of the [Technical Difficulty].

It was 40% year-on-year compared to last year it was probably over 100% year-on-year. So I was wondering like -- any sort of trend or budget shift trend that you have seen in the recent quarters about the willingness of spending budget shift to the traditional online video format or did you see the advertisers maybe shifting somebody to some short video format? And in terms of our strategy, our content spending; any update on that will be helpful. Thank you.

In terms of our video advertising revenue growth, I think that both, for the industry as a whole and for Tencent video, there has been a deceleration in growth and I think that's for a couple of fairly structural reasons. One is the large base effects and naturally percentage growth rates in center as the base gets bigger. And the second is the growth of our subscription video. So if you take the video revenue growth, then the growth rate for advertising plus subscription revenue together is actually twice as fast the growth rate for our advertising revenue alone. And to some extent the two are very complimentary to each other but to some extent if the biggest invest in U.S. content, some percentage of it is going behind these subscription wall then that may have an impact on the growth rates of the advertising funded wall. But I think we're okay with that because it's a business, historically we'd be very comfortable with consumers paying us directly the content they want. And as a generalization, the subscription-funded video content market is more tightly concentrated than the advertising-funded video content market. In terms of advertiser behavior, as I mentioned we saw good growth in video advertising this quarter as we've done in one or two years ago, but this quarter, we also saw very good growth in our news advertising and innovation of moments advertising. So it seems if the advertisers -- why they continue to favor video particularly for reach; and they are also increasing the allocating to news apps, new apps and [indiscernible] as well as to performance advertising within the Weixin Moments format. With regards to video content spend, the industry continues to be extremely competitive and more competitive this year than last year; and that's especially true of our specific verticals such as the Top Tier S-Class domestic drama serials and also the sports category. So the video business -- the entire industry remains a loss-making business because of the rapid escalation of video content cost. But I would say that when we and the industry think about video content costs, than in the advertising growth -- the advertising revenue we can generate off the content, its one component, but these subscription revenue we can generate off the content is another increasingly important component as well. So it would be wrong to compare the video ad revenue growth rates which have slowed down for the industry versus the video content costs alone because you should actually think about the video subscription revenue opportunity as well.

Thank you, James, for the comment.

Thank you. Next question, please.

Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.

Thank you for the opportunity. Given the disclosed flattish ARPU for mobile games, what is driving the surge in the paying user number which seems to be around 125% year-on-year? Also, are these trends sustainable at this higher clip? And I had a question on Supercell's revenues in China; could you give us a sense of what percentage of revenues for Supercell are coming from China? Thank you.

So in terms of the -- you're correct to identify that the revenue growth has been driven less by ARPU and more by the increase in paying users which we think is quite healthy phenomenon and differentiates us from many of the big mobile game companies in the West. In terms of what's behind that shift, I think there is couple of factors. One is, as you know, we successfully released the number of role-playing games on mobile which intend to achieve the quite-high conversion ratios as well as ARPU. And in the second, if you look at some of our big player versus player games like Cross Fire or like Honor of Kings, then those sort of achieve the Holy Grail in terms of attracting big user base since we mentioned in the opening remarks. But also overtime, we're used to increasingly willing to purchase items within the games in order to be more competitive. So that's on the paying user trend. In terms of Supercell's position in China, interestingly, some of Supercell's games in Clash of Clans for example, they are already very popular in China. And Clash of Clans has many millions of daily active users, it's probably one of the -- or second one of the highest DAU games in the China market but Supercell has not restored key customized monetization for the China market. For example, it hasn't introduced products that are sort of a China-friendly price point necessarily. And so Supercell in China has been very popular, has not monetized that popularity in the past.

And if I can add a question on Supercell, what is the rationale for the creation of the consortium in contrast, for example, to the full ownership of Supercell?

The main reason achievable, one is really sort of the structure of our partnership is actually that -- we empower the founders of Supercell to continue to run the company on a very independent, as well as entrepreneurial basis, which we believe really sort of achieve results on the success of the company. And this structure actually sort of -- is more consistent with this sort of over watching principle. And second one is really sort of new because we're doing this, we want to sort of preserve our capital efficiency and by establishing SPU [ph] and taking on non-course debt, and also inviting certain equity consortium partners; who actually sort of -- can put in last money, but at the same time sort of have a significant relationship with Supercell.

Thank you, Martin. Thank you, James.

Thank you very much. Operator, in the interest of time, we shall take the last few questions, please.

Your last question is coming from…

Last three, please.

I'm sorry. Your next question comes from the line of John Choi from Daiwa Capital Markets. Please ask your question.

Thanks and congratulation on great set of results. I have a couple of questions here on your second half mobile game pipeline. I was wondering if management could share what -- that you're still seeing opportunities given that since your launch years Tencent has done a really good job of starting into different type genres. I was wondering what other opportunities are you seeing there. And secondly, on the Supercell investment, apart from the consortium, I was wondering about you guys mentioned about the strategic cooperation opportunities. I was wondering if management could elaborate more on -- I'm pretty sure, James did highlight that Supercell didn't really monetize that efficiently in China yet but can you give us more color there and also any opportunities overseas with Supercell? Thank you.

In terms of the mobile game pipeline for the second half of the year, as you would expect we would be enthusiastic, but historically we had sort of spent all of time talking about the pipeline because we were out to demonstrate three results and demonstrate through promises. We will continue to release mobile role-playing games, particularly role-playing games that are associated with existing PC or comic book intellectual property. We'll continue to look for opportunities to expand in player versus player games, and we'll continue to also look for opportunities to release a board game type experiences that amass a large number of users if we succeed, even if they don't immediately generate revenue because again, we're really focused on the mobile game portfolio and that help can be measured by a revenue, it could be measured by engagement, it could be measured by reach and we'd like to deliver all three revenue, reach and engagement. We're also intrigued -- I mean, as some of you may be aware, there has been a successful mobile game in some parts of the world called Pokémon Go, that utilizes location-based services technology, and we've been intrigued for some time by the opportunities around injecting LBS into smartphone games and whether the China audience is as receptive as that as other audiences have been, it remains to be seen.

In terms of collaboration with Supercell, I would say that the immediate right and now and sort of obvious synergy is actually around China where Supercell -- we believe that we have already achieved some sort of potential quite high in terms of attracting more users, as well as getting better with non-session. But I think sort of -- even bigger picture is really the fact that both, Supercell amass leaders within the mobile gaming industry which we believe is actually still at a relatively early stage of development. There is going to be a lot of innovation that is yet to come and by having the two sets of minds together, we hope to facilitate ideas, exchange and create great user experience, create operational processes so that we can deliver a better experience and create and capture a bigger share of the overall market going forward. In particular, I think we have lot of knowledge about emerging markets and how the users behave, whereas Supercell has got a lot of knowledge about the developed markets and by exchanging ideas we can help each other do better.

Thank you. Next please?

The next question comes from the line of Li Jan [ph] from Securities. Please ask your question.

Hi, good evening guys. Just sort of going back to the other service, revenues, line of payments, and on cloud; can you just kind of talk about how much -- what are the kind of revenue drivers, especially on the -- both payments and cloud. There are lot -- were there any one-time revenue impact at this quarter that we felt whether that is promotional activities on either fronts? Should we expect those kind of year-over-year jumps for the following couple of quarters? And are you actually monetizing SME enterprises on payments now as well. So any color on that would be great. Thanks.

As I said earlier, for payment and cloud service, we are running it more like infrastructure. So there is -- for our overall ecosystem, I think sort of revenue online are there -- there is not sort of one-time revenue per say. But at the same time I would sort of try to deemphasize this to the extent that from a profit contribution perspective, both of them are more like infrastructure services and the best deal relatively or in terms of development, so it may fluctuate from time to time. But I would say that on the cloud business, we are growing our business and revenue on a truly consistent basis and actually we invest more into this business in order to expedite the growth.

Got it.

All right. Last question.

Your last question comes from the line of Chi Tsang from HSBC. Please ask your question.

Hi, thanks for taking my question. This is Eugene [ph] calling on behalf of Chi. Actually I've got a question regarding the online advertising margin. The margin actually came quite a bit like five or six percentage points and Martin mentioned it's mainly because of content cost. But actually like content cost expanded to advertising revenue came down a bit from last year. So just wondering if -- can management give some color on the margin difference between performance-based ad and revenue ad because it's like red wall. It's always was performance based platform and it has margin as high as 70%, so shall we expect like the margin improvement -- like -- because of the increasing contribution from performance based ad. Or so like on the other revenue side, the business can -- like we are -- pictures and the Tencent pictures that are releasing the pipeline for this year and next year, now you've got quite a few films and TV journals coming out. So shall we -- are we going to book that revenue in the other revenue side -- other revenue line and how shall we expect when we are going to contribute a meaningful revenue?

Again, in terms of the online advertising content cost, I'm not quite sure why you said that, it's an option roll year-over-year?

Because I think you disclosed the content and the cost -- in your expense by nature. And I divided by online advertising revenue and actually it's like 76% this year and compared to 88% last year, like in the second quarter last year. So I'm not quite sure like…

I mean I think we can -- I'm not quite sure which number you are using because we opt for content cost, we only disclose while including a lot of divesting in just like licensing cost for games; you saw aggregated into one line.

Okay.

So it is because of the content cost in the margin actually we increased. The second question -- actually, it increased a little bit of the contribution from movies but it's quite small at this point in time, so negligible.

Okay. So when do you -- just like quite a few like Tencent Pictures released like seven movies this year and it's going to be like expecting ten next year. So kind of like when it's going to be contribute or you're going to…

We have sort of a certain percentage or the revenue. So I don't think it will be very significant from a revenue perspective and since we are still in the process of getting inducted into this industry, I don't think certainly it will be a major profit generator either. So I think its mute -- for now it's probably better to be sort of being a positive model.

Okay, thank you.

Okay, thank you very much, operator. And thank you everybody for joining the call tonight. We are closing the call now. If you wish to check our press release and other financial information, please visit our Company website at www.tencent.com/ir. A replay of this webcast will also be available soon. Thank you and see you next quarter.

That does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2016 second quarter and interim results announcement conference call. You may all disconnect now.