Jane Yip - IR Pony Ma - Chairman & CEO Martin Lau - President James Mitchell - CSO John Lo - CFO

Alan Hellawell - Deutsche Bank Alicia Yap - Citigroup Eddie Leung - Merrill Lynch Alex Yao - JPMorgan John Choi - Daiwa Richard Kramer - Arete Research Grace Chen - Morgan Stanley Chi Tsang - HSBC Thomas Chong - Bank of China International Natalie Wu - CICC

Thank you for standing by and welcome to the Tencent Holdings Limited 2017 First Quarter 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. Jane Yip from Tencent. Please go ahead, Ms. Yip.

Thank you. Good evening. Welcome to our first quarter 2017 results conference call. I'm Jane Yip 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 the future for various reasons. Information about general market condition 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 Risk Factors and non-GAAP measures, please refer to our disclosure documents on tencent.com/ir. 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 do our value added services. James will speak on online advertising and John will discuss the financials before we take your questions. I will now turn the call over to Pony.

Thank you, Jane. Good evening everyone, thank you for joining us. In the first quarter of 2017, we delivered a strong set of operational financial results of course in payments, digital content and advertising. Let me run through the key financial numbers for you. Total revenue was RMB49.6 billion up 55% year-on-year and 13% quarter-on-quarter. Non-GAAP operating profit was RMB18.5 billion, up 37% year-on-year and 24% quarter-on-quarter. Non-GAAP net profit to shareholders was RMB14.2 billion, up 42% year-on-year and 15% quarter-on-quarter. John will provide more details in the financial section. Operationally, our key platforms continue to grow robustly combined MAU of Weixin and WeChat increased 23% year-on-year to RMB938 million. Total MAU for QQ was 861 million within which the overall smart devices MAU for QQ was 678 million down 0.4% year-on-year while daily active users of mobile QQ who were aged 21 or below increased by double-digits year-on-year indicating QQ continues to be very popular among young users. For our social networks, Qzone smart devices MAU was 605 million. In games dependent penetration in multiple genres and organized several new sports tournaments in the first quarter to increase communities, we expanded our revenue market share in both PC and smartphone games. For our media platforms, we brief our review news literature and music services are each the largest in China measured by usage. In mobile utilities, we solidified our lead by monthly active users for mobile security, mobile browser, and android app store. Martin and James will discuss further in business review.

Thank you, Pony, and good morning and good evening to everybody. In the first quarter of 2017, our total revenue grew 55% year-on-year as Pony has talked about. Our VAS represented 71% of total revenue of which online games contributed 46% and social networks 25%. Online advertising was 14% of total revenue. Other segment accounted for 15% of revenue of which payment related services and cloud services contributed to both year-on-year and quarter-on-quarter revenue growth and they both grew triple digits year-on-year. Let's then take a look at value added services, the segment revenue was RMB35.1 billion in the first quarter, up 41% year-on-year and 20% quarter-on-quarter. Social networks revenue was RMB12.3 billion, up 56% year-on-year and 15% quarter-on-quarter. Digital content revenue drove year-on-year and quarter-on-quarter growth. Total subscriptions increased by 10% year-over-year to RMB119 million driven by video and music subscriptions and partially offset by decreases in subscription counts as we shipped users from QQ VIP to super VIP which offers more privileges. As a result the blended ARPU for subscription products actually increased. Online games revenue was RMB22.8 billion, up 34% year-on-year and 24% quarter-on-quarter. In PC games due to strong performance of expansion pack and Chinese New Year promotions this year, the year-on-year revenue growth accelerated from the last quarter. The sequential growth benefited from positive seasonality. In Smartphone games key titles continues to perform robustly and contributed to both year-on-year and quarter-on-quarter growth. The successful launch of new games such as Dragon Nest mobile also contributed significantly to sequential growth. Turning to social networks Weixin is increasingly playing an important role in the commercial world. For Weixin Mini Programs we launched more developer friendly features to generate more organic traffic to Mini Programs. For example, in April, we introduced a new scanable code which can be found offline or inside official accounts to lead traffic to Mini Programs. We also allowed service providers to embed links in official accounts to access Mini Programs and we enabled users to discover Mini Programs from nearby merchants using the look around future. In March we introduced Weixin index which allows users and merchants to analyze the popularity of keywords within official accounts and net search. For our other major social copy QQ it is increasingly focused on serving younger internet users to enhance its appeal to this audience we upgraded the viewing feature of QQs content newsfeed to recommend personalize content to young QQ users based on their interest graphs and applying big data analysis. We also expanded our QQ smart campus service to support the administration of college student affairs to select a school student communication. Make pay in tuition fees more straightforward and host job listings. Almost 900 tertiary institutions have signed up to QQ smart campus. Now a bit more on our gaming businesses looking at PC Client games the revenue was up 24% year-on-year and quarter-on-quarter benefiting from activities such as a well received expansion pack for DNF and popular Chinese New Year promotions for League of Legends. Active user accounts generally declined year-on-year as players continued to shift time from PC to mobile and from in games other game related activities such as forums, game video streaming and offline used sports events but this quarter we saw a seasonal improvement in active user accounts for games with new content such as DNF. The ratio of paying user to total users increase in particular for sports and action games. For example in fee-for-online three we added several famous soccer players which stimulated more in-game purchases. While we view the strong performance of PC games in the first quarter as a pleasant surprise rather than a new trend and expect performance to return to prior trends later we believe the strong first quarter performance illustrated that while the popular content can indeed energize PC game activity in revenue if they are launched right. For Smartphone games, the revenue was up 57% year-on-year and 21% quarter-on-quarter, our key titles such as Honor of Kings and Cross Fire Mobile expanded paying user accounts and increased user activity during Chinese New Year. In the quarter, we released eight new games including two casual and six mid-core games. We reinforced our lead in multiple game genres in the genre of mobile Honor of Kings expanded its user base and increased user engagement via in-game competition, video broadcast, and video replay of multiple platforms. We believe Honor of Kings is one of the most popular mobile games globally by daily active users. In FPS, Cross Fire Mobile enlarged its user base leveraging our operational expertise and marketing knowhow from PC shooter games. Seasonal gifts packed promotions boosted user activities and ARPU. In RPG we deepened penetration in key sub-categories leveraging licensed IP games, with Dragon Next mobile in the action sub-category, JX Mobile in the MMO sub-category and Fantasy Zhu Xian Mobile in the turnbase sub-category, we now operate three highly popular RPGs in the China market, representing a major step forward in our mobile gaming strategy. Now I would invite James to talk about online advertising.

Thank you, Martin. Online advertising segment revenue was RMB6.9 billion, up 47% year-on-year and down 17% quarter-on-quarter. Mobile contributed over 85% for advertising revenue. Under our product classification, brand advertising revenue was RMB2.1 billion, down 1% year-on-year and down 31% quarter-on-quarter but performance advertising revenue was RMB4.8 billion, up 87% year-on-year and down 8% quarter-on-quarter. Given we're seeing advertisers increasing by performance from net advertising we are introducing brand or properties such as cost of kick-ads in news apps, news fees the distinction between brand and performance is becoming decreasingly useful. Starting this quarter, we will therefore classify online advertising revenue by the type of ad property rather than by ad pricing models. On to the new classification theme, media advertising revenue includes advertising carried on our news, video, and music properties which was historically mostly brand format but it is not becoming increasingly performance driven especially for newsfeeds within our news apps. Social and other advertising revenue includes advertising on our social properties version in Q2, appstore browser and net books which is mostly performance format in the past continues to be so. Using this new classification, media advertising revenue was RMB2.5 billion, up 20% year-on-year due to more inventories created by traffic version of our video and news apps together with increased advance in our news fees. Sequentially media advertising revenue decreased 26% quarter-on-quarter because of 1Q seasonality. Social and other advertising revenue was RMB4.4 billion, up 67% year-on-year driven by higher ad bill rates in moment, better clicking rights and sufficient accounts and more advertisers buying our app store revenue declined to 11% quarter-on-quarter because the fourth quarter is the peak season for eCommerce advertising. Leveraging partners such as JD.com, 58.com, and [indiscernible] as well as advertising agencies were substantially expanded our social advertisement base especially among offline merchants buying moments advertisements and with enhanced locations based targeting capabilities for moments which allows retailers to target customers who keep close to their shops locations. And with that, I will pass on to John to discuss our financials.

Thank you, James. Hello everyone. For the first quarter of 2017, our total revenue was RMB49.6 billion, up 55% year-on-year or 13% quarter-on-quarter. Gross profit was RMB25.4 billion, up 37% year-on-year or 8% quarter-on-quarter. Net other gains were RMB3.2 billion was due to net disposal, disposal gain on investments, semi-annual dividend, income from Supercell subsidies, and tax rebates which were partly offset by donations made to the Tencent charity fund and the impairment provision charges for certain industry companies. Shared losses of facilities and joint ventures was RMB375 million in the quarter. On a non-GAAP basis we generated profits of RMB199 million in first quarter 2017 comparing to losses of RMB339 million in first quarter 2016 of profits of RMB391 million in fourth quarter 2016. Income tax expenses were RMB3.7 billion, up 43% year-on-year and 52% quarter-on-quarter. The effective tax rate for the quarter was 20.1%. Net profits attributable to shareholders was RMB14.5 billion, up 58% year-on-year or 37% quarter-on-quarter. After adjustment to non-GAAP operating profit for the quarter was RMB18.5 billion, up 37% year-on-year and 24% quarter-on-quarter. Operating margin was 37% down 5 percentage points year-on-year and up 3 percentage points quarter-on-quarter. Net profit to shareholders was RMB14.2 billion, up 42% year-on-year or 15% quarter-on-quarter. Net margin was 29% down 3 percentage points year-on-year and up 1 percentage point quarter-on-quarter. Let's turn to segment gross margin. Gross margin for value added services was 60.9% down 4.7 percentage points year-on-year mainly due to revenue mix change to low margin products including digital content subscriptions. This sequential decline of 2.3 percentage point mainly due to higher content cost, especially for our video subscription services. Gross margin for online advertising was 34.8% down 8.9 percentage points year-on-year due to increased video content in VAS. Sequential decline of the 11.8 percentage points reflected lower revenue generated during weak seasonality in the first quarter. Gross margin for others was 21.9%, up 14.9 percentage points year-on-year or 1.5 percentage points quarter-on- quarter. The year-on-year increase in gross margin was due to the charging of cash flow trophies from the beginning of March 2016. Moving on to operating expenses. Selling and marketing expense was RMB3.2 million, up 55% year-on-year or down 29% quarter-on-quarter. The year-on -year increase was mainly due to higher marketing and promotional spending for games, video, and news apps as well as SAP course sequentially it reflected slowdown in promotion and marketing activities during Chinese New Year holidays. Selling and marketing represented 6% quarterly revenue. Total G&A expenses was RMB7 billion, up 61% year-on-year and 1% quarter-on-quarter. Under G&A, R&D expense was RMB3.6 billion, up 54% year-on-year and broadly stable quarter-on-quarter. The year-on-year increase mainly reflected higher SAP course. As a percentage of quarterly revenue, total G&A was 14% and R&D was 7%. At the end of the first quarter we had just over 39,000 employees year-on-year growth of 26% was mainly due to one-off inclusion in our headcount of consultant manpower who engage in our customer support remaining in quarter three 2016 and were previously classified as consultants and the business combination of music streaming extruding these two factors headcount grew by 13% year-on-year. Looking at the margin ratios for the first quarter gross margin was 51.3% down 6.8 percentage points year-on-year mainly due to increasing contribution from other segments, which carry lower margin and decreased value added services gross margin. Other segment revenues accounted for 15% of total revenue now compared to 7% the same quarter of last year. Gross margin dipped 2.6 percentage points sequentially primarily reflecting lower gross margins of value added services and online advertising businesses. Non-GAAP operating margin was 37.4% down 4.7 percentage points year-on-year primarily reflecting lower gross margin partially offset by an increase in net other games. Sequential increase of 3.3 percentage points was mainly due to lower selling and marketing expenses and higher net other games which was partly offset by lower gross margin. Non-GAAP margin was 29% down 2.7 percentage points year-on-year and broadly stable quarter-on-quarter. For the first quarter total CapEx was RMB2.1 billion down 49% year-on-year and 26% quarter-on-quarter. Operating CapEx was RMB1.7 billion, up 27% year-on-year or down 20% quarter-on-quarter. The sequential decrease was mainly due to the purchase of servers in first quarter 2017 as we prepared most service in fourth quarter 2016 for the period during Chinese New Year. Non-operating CapEx was RMB395 million down 86% year-on-year mainly due to the fact that there was no value spread purchase in the first quarter of 2017 as opposed to first quarter of 2016. Sequential decrease of 44% was because of lower slower construction work for our new offices during Chinese New Year holidays. Free cash flow was RMB24.2 billion, up 74% year-on-year and 41% quarter-on-quarter. The sequential increase was mainly due to seasonally strong operating cash flow generated from both our PC client games and platform games. Our net cash position at quarter end was RMB27.6 billion or $4 billion up 1% year-on-year and 52% quarter-on-quarter. Sequential increase in net cash was driven by free cash flow generation partly offset by payments for M&A initiatives and licensed content. Fair market value of our listed associates and available for self-financial assets were approximately RMB112 billion or $16.2 billion at the quarter end. Thank you.

Thank you. We shall now open the floor for questions. Operator, we will take one main question and one follow-up question each time. Shall we invite the first question now.

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Deutsche Bank, Mr. Alan Hellawell. Please ask your question.

My first question relates to subscriptions. I would love to just get a sense as to what our subscription base is now and then I heard some reference from John about digital content subscription seeing lower margin. I hope I was correcting that and we would love to get little more context about that and specifically with video, if we were again to try to construct a hypothetical video P&L with advertising and subscriptions as inputs to revenue, has gross margin narrowed and would we expect margin to improve year-after-year going forward? Thank you all, I will state my follow-up.

So Alan, we disclosed the total subscription counts which includes both subscription through our traditional privileged services such as QQ VIP and Super QQ as well as subscriptions for digital content services such as our streaming music, streaming video, literature and so forth. And as a general rule would be privileged subscriptions have been declining partly because we have been consolidating the Super QQ and VIP QQ together into the Super VIP QQ package. But that decrease in privileged subscriptions has been more than offset by growth in our digital content subscriptions around video, music, literature, and so forth. And the combination of the overall subscription base increased plus the mixed shift from privilege subscriptions which generally lower ARPU to digital content subscriptions with a higher ARPU plus the mixed shift within privileged subscriptions lower ARPU to the higher ARPU Super VIP package together have resulted in a pretty rapid growth that we’re experiencing in our digital subscriptions revenue. In terms of the margin, it varies by digital subscription products but in general the incremental margin on a digital subscription is lower than the incremental margin on a virtual privilege because the virtual privilege is generally piggybacking on our social networks and carry low incremental expense versus the digital content subscriptions carry incremental cost related to movie studio output deals to record label output deals and so forth. In terms of the margins of the video business, in recent quarters we have taken a number of amortization charges against our video program library and that had some impact on both the advertising gross margins and this quarter on the value added services gross margin. For the first quarter, for the first time our digital subscription video revenue exceeded our video advertising revenue that's partly a seasonal factor because the first quarter is seasonally weak for advertising and seasonally strong for consumer digital spend, so we wouldn’t necessary expect that to be the case in subsequent quarters. Finally I just add is we often do that the video product for us is very much an investment mode, it is a heavy loss making and we expect to remain loss making for the foreseeable future but it's gratifying that while we are incurring those losses, we are also seeing growth in traffic, growth some extent in video advertising revenues, and then substantial growth in video subscription revenues.

The next question comes from Alicia Yap of Citigroup. Please ask your question.

Hi thank you. Good evening management, congrats on the strong results. I have a questions relating to the Cloud and the AI. So we noticed that Tencent Cloud is actually stepping up investments in penetrating into more industry verticals and also oversee expansions and also recently Tencent U2 Lap actually breaks the record, world record in the facial recognitions path. So can management share with us, what is your current thinking about the Tencent Cloud growth opportunity in the coming years and also your investment -- investment target in the AI and do these initiatives actually have any connections or rationale behind your recent public market purchase of the Tesla shares. So any comment or color would be appreciated and second on the housekeeping questions, just what is the company deferred revenue policy on the average duration if there are different for PC games versus mobile games? Thank you.

Okay. In terms of Cloud well thank you for being very observed on a lot of our releases. I think you are right in observing that we have really stepped up our efforts in cloud and the reason is we view cloud business as a very strategic piece of our business in terms of providing infrastructure to support a broader ecosystem of internet penetration, the way we see it as more and more users become internet enabled and mobile internet enabled, all industries including companies, corporates, governments will have to embrace internet businesses in much bigger way. And as a result, there will be a number of infrastructure businesses that will be very important for them to make that transition and cloud business is one of them. So that's why we have really been stepping up our investments and corresponding to that we have actually been growing our business very rapidly as indicated in our prepared remarks, our cloud business continues to grow in triple digits and looking forward we do believe that we can actually scale -- continue to scale up the cloud business, we have a lot of -- we have very big scale infrastructure which offers efficiency as well as cost effectiveness for our clients. At the same time because of our very long history of developing all kinds of different technologies for our own use now as we step into the cloud business, we've increasingly opened up these technologies and capabilities to support our cloud customers. And going forward I think these capabilities will help us to sign up more and more customers and obviously sort of the bigger gap in terms of the cloud business is actually in terms of sales force and marketing and this is certainly something that we have been building on the instrumental basis to give us the capability to cover more customers to support more channel partners and at the same time to do a better job in marketing our brand name and services. As it relates to AI, we view AI as one the core capability for us to continue to build our own businesses. AI actually touched a point lot of our existing business in the area of advertising for increasing our targeting capability in the area of our newsfeeds and information to allow us to customize and personalize our offerings to our users in the area of online connections to help us to target users in the right in there with the right profile so by developing artificial intelligence and these core technologies will benefit our core business. AI can also help us to get into new businesses in the future and we are actively developing these capabilities. And finally AI as we continue to build our cloud business I know will become a core capability that will be opening up to our cloud partners as well as our ecosystem partners. So that's sort of you know the way we look at it. As it relates to test lighting sort of it's somewhat related to AI but what we feel is that sort of the automobiles as they become more and more connected with the internet as well as, as it becomes smarter in terms of control and autopilot, assistant pilot and over time autopilot. That automobile is becoming a smart device and there will be much more connection between the physical world and the virtual world. So that's the reason why we felt we want to partner with the leading company in such field right now in order for us to get on with these capability as well as to figure out whether we can learn something new or whether we can actually build some businesses together. Now as it related to deferred revenue, I think John will answer the question.

In relation to the deferral asset for virtual game items on the PC side basically for both of the games is within six to nine months whereas for some special category just like the mobile and all the A type of games it might be up to 12 to 18 months. And on the mobile side generally game items have been amortized over three to six months and more on the three month side with for specialty category of games again such as mobile it might be up to now nine to 12 months.

Thank you. May we have the next question, please?

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

Good evening. We have further some social media mentioned that they would focus more short-form video as a format for social users to communicate. So just wondering what your thought on the trend and any information or operating metrics that you could share with us that just seems a change in user behavior on the Tencent platform would be helpful. And then finally just a housekeeping question wondering if John can share with us the ARPU of our various types of games. Thank you.

Yes, in terms of short-form media I think certainly it's definitely is picking up I think short-form video is really sort of an extension of photo and we have seen short-form video growing very rapidly across all our properties. In terms of sort of that the social platform the short-form video has been growing very quickly particularly with QQ which ceded to young user base I think sort of -- the new generation are much more accustomed to be sharing short-form video. So that's growing very quickly at the same time we also believe that short-form video is increasingly got to be a form of media consumption so across a lot of our media properties including our news, Kuaibao, as well as Tencent video, the short-form video has also been growing very quickly.

In terms of ARPU for NMOG the ARPU ranges from 320 to 520 in the quarter, ATG 100 to 370, Smartphone games within 125 to 135.

Thank you. And the next question, please.

Thanks. Next question comes from Alex Yao of JPMorgan. Please ask your question.

Hi good evening everyone. Thank you for taking my question. I have a question regarding the music business you guys apparently have majority of the market share after the acquisition of Tencent Music Group. Can you talk about the difference between music and video in terms of market structure content supply demand relationships and the long-term monetization of profitability outlook? My follow-up question is video industry move towards original content production direction, how do you think the competition in terms of content budget will impact the industry and your profitability. Thank you.

So in terms of the music industry market structure there is a number of competitors in the music streaming business in China but they're not necessarily the same companies in the subscription video business. So for example in the Nettie's house relatively clear strong position in music streaming in China to we actually sublicense music to Nettie's. I think I would also say that the music industry has been plagued more recently by piracy and so in the music industry a great deal of what we're trying to do with their cooperation of Warner Music, Sony Music, now Universal Music as well as with the cooperation of our downstream partners such as Nettie's is try shift the use behavior away from the pirate model into what the paid model because if we can do that we can make the bigger for everyone and you may be aware I think in that China is undoubtedly the world's largest music market in terms of music listening but it's historically the world's 20 largest market in terms of music industry revenues, so that's a great deal of work for us to do but we're pleased with the progress so far. Looking at the content supply in music versus in video I think in video 80% of the content is from primarily mid-sized domestic suppliers and 20% is from foreign suppliers for supplying English language or Korean language or Japanese language, video content into the Chinese market. For the music industry quite different you have a handful of global music labels including Universal, Warner and Sony. That not only have a very strong English language music presence but also have a decent Chinese language music presence particularly in Taiwan, Hong Kong and more recently and in Mainland China itself. So there are those three right its larger labels that account for a decent double-digit chunk of total music supply in China and then there's a long-term of many small domestic record labels as well as a few Korean and Japanese record label that account for the majority of the music of screens in China. So quite a different content supply structure but we're quite pleased as I mentioned we have excellent relationships with the three global music labels as well as very strong relationships now with many of the smaller domestic and Korean music labels as well. So that’s the music industry structure. With regards to the video industry you're correct it’s -- we ended up and our peers in the industry are increasingly commissioning our own content just have several advantages one advantage is the ability to schedule the content when we choose so we can space out the most important programs through the year. And other if we commission the content we can decide whether to put it into the pay window or free window or how to allocate the time between the pay and free windows and that's something that worked very well for us in the first quarter and as part of the reason why you saw video subscription revenue grow several 100% year-on-year when I take out video advertising revenue. In terms of costs, to some extent means we have more visibility over our cost structure but obviously those are very substantial expenses associated with commissioning to content directly as opposed to sub-commissioning it from a TV broadcaster. So when we and our peers talk about the video industry costs increasing shoppy this year then substantial component of that cost increase yes indeed the commissioning of original CD content. Thank you.

Thank you. The next question comes from Jane Young of Mizuho Securities. Please ask your question.

Can we have the next question, please?

Certainly. Your next question is comes from John Choi of Daiwa. Please ask your question.

Good evening and thanks for taking my question. I have a question on the mobile games basically I think management did share that the paying accounts has one of the key factors of the strong performance but as we go-forward, how should we be thinking of the key drivers, obviously seems like the RPG download is being doing a lot better with three strong games, should we be expecting ARPU be the major force or should we expect -- expecting the paying accounts to improve so the paying ratio to follow. And just quickly on the Weixin moment advertisers, I was wondering where management could share with us where we are at right now because it seems to us that the expansion pace of the advertising is a little bit weaker than what market has previously expected, so any color on that would be very helpful? Thank you.

In terms of mobile games, I think obviously the most important thing is actually sort of to be able to come up with successful games on an ongoing basis but sort of -- if you look at our overall strategy always been saying we have been very strong in casual games and we wanted to develop a genre of a player versus player mid-core games and we are growing our RPGs by working with our partners as well as sort of doing internal development. So on each one of these initiatives, I think sort of we are making progress in the past year. So if we look at player versus player games typically I would say sort of they have a longer life span because it's like a competitive sports right now, it has every time you play the game, the game experience is actually very different, it is sort of not that much content driven. And then sort of in the area of RPGs, I think we’re at the beginning of developing sort of new strategy, we have a few games which have been popular, we will continue to work with our partners as well as leverage our development to come up with RPG games now, whether the games will be successful, I think sort of will be tested out over time. So I think that’s what we have been doing on mobile games. Now in terms of performance ads I would say we continue to look at performance ads as a long-term opportunity and we will be solving this problem and exploiting this opportunity in that manner which means that we will focus a lot on building our own capability in terms of understanding the user's needs in terms of perfecting our targeting technology in terms of developing the right apps format, so that it has the best tradeoff between response as well as user experience. And of course there is a component of releasing more inventories but that's something which is sort of very intuitive. That's exactly why we do not want to do it in a very fast manner. So what we have been focusing on is really sort of making sure that we get all the capabilities right, so that we can actually -- based on existing inventories we can actually do a better and better job and we can sign up more advertisers and over time we will release inventories on a national basis. In fact we have increased our inventories a little bit but not that much but I think what we continue to focus on is that we want to make sure that our news experience is not compromised and by having a better targeting capability, we can actually take in more advertising without compromising user experience. And that's something that we're going to be focused on.

Thank you. Your next question comes from Richard Kramer of Arete Research. Please ask your question.

Thank you very much. I guess just a quick follow-on to that is my follow-up. Is there any plan that now that you're lapping the high growth rates in moments to consider potentially increasing the ad loads there and do you see additional formats as you see in other large Internet or social networking companies do, you see other formats you could start to introduce which would further increase pricing and my main question was really on payments clearly --

Let me just step to you on that.

Okay.

I think certainly I don't know sort of how you get the impression that sort of moments ads is actually entering into slow growth and at the same point we need to set up overload our users with more inventories. I think it is not that is the right interpretation right, I think number one the performance ad launches actually growing at a rate which we thought is actually quite encouraging and two we are far from being sort of approaching the end of improving our own capabilities so that we have to sort of keep an increasing the ad inventories. So I just want to make sure that nobody gets misled by your statement.

No I think maybe it was misinterpreted a little bit, I think the point is that you’re reaching the year-on-year comparisons and there is still a quite high levels but I'm wondering if there are ways to further improve the performance of the performance by any formats adding new formats?

Yes I think the performance is actually quite good already.

Okay.

We should be overloading our users with lot of ads.

Okay. And my second question was on payments and I guess it’s clearly part of the other business which is growing at a very high rate, do you expect it to be permanently sort of an enabling service for your other social network services or do you see a standalone role for it which would include may be some more distinct disclosure of how the adoption has been faring and the user base and the range of services that we could provide since it’s mentioned in a very cursory way in the release, thanks.

Well I think some of business perspective that we do our payment business as a infrastructural service for our ecosystem, that's not just for our social network but also all sorts of different activities within our ecosystem and with our partners. So it should cover all aspects of our users' everyday life and when they are sort of shopping online, when they are subscribing to contents and then sort of when they are shopping offline, when they are experiencing different kinds of offline services. So I think that's sort of decisioning and from a -- I would say sort of business perspective, we do not view it as a profit center for the foreseeable future. We want to make sure that we continue to build our coverage in terms of both users as well as user frequency as well as merchant coverage, so that we can really make our payment services as a biggest service for our users. Now in terms of the payment service right now essentially it has a number of different components one is sort of the social payments and that would include sort of our very famous packet there is sort of money transfer aspects when sort of people can transfer money back and forth in a very cost effective as well as convenient way. And then there is an online commercial transaction where if people shop on a e-commerce sites or if they order for delivery, they can actually sort of use our payment service. And then there is also an offline merchant component in which merchants can leverage our payment platforms to get paid, so in a lot of different retail outlets and restaurants as well as sort of new offline services like DD, you can actually sort of find out payment solutions sort of feature. And even in some of the hawker stores when they are not covered by any POS, if you just get a QR code you can actually sort of get paid using our payment service and I think sort of these are the different categories of payment services that we offer.

Thank you. Your next question comes from Grace Chen of Morgan Stanley. Please ask your question.

Thank you. Thank you for taking my questions. My question is about your successful mobile game Honor of Kings, can you help us better understand the design of the game and other factors that help contribute to the success of this game. And also can you help us compare the key metrics of Honor of Kings with other games may be Legal Legends in terms of the life cycle paying ratios and ARPU and I will believe that Honor of Kings is now a substantial contributor to the over mobile games and how does the mix change has been affecting a key game in performance metrics that we discussed above. Thank you.

I think Honor of Kings is definitely a very successful game and I think the success has came from -- the fact that sort of game format is sort of very attractive game format as approved in lead imagine when you have all sorts of different categories five-on-five team play against each other player versus play I think sort of this mobile is actually an attractive game format. I think secondly is the fact that sort of technically we actually solved the very difficult challenge of having a real time fighting on mobile and if it actually overcomes a lot of latency within mobile network that's a key breakthrough and I think we also benefit finally sort of from our longstanding operating experience in the mobile category. And if you look at sort of your the way we manage E sports the way we actually manage the promotion and how do we sort of talk to the different gaming groups, so that there's a sort of, what we have accumulated over years of operating the mobile journal. And as we said right, we believe Honor of Kings right now is one of the highest DAU game, mobile game globally and I think at this point in time it's relatively early in terms of its life cycle we want to make sure that we continue to develop the game continue to add exciting features and content so that we will keep our users happy and I think that's sort of the focus at this point in time.

Thank you. Your next question comes from Chi Tsang of HSBC. Please ask your question.

Great, thank you and good evening and thanks for taking my questions. And there are two things I wanted to ask you about firstly I was wondering if you can comment on some of the different habits of rechecked users in tier 1, tier 2 cities as well as sort of the lower tier cities in particular I'm curious about things like time spent so the different types of services of content that may be different user groups are consuming if used different areas. And secondly I was wondering if you can give us an update in terms of online finance, the businesses separate from your payment business in particular things that WeBank things like lending, things like asset management and any sort of update on that will be very useful. Thanks so much.

Well, I think, in terms of the different behavior across different cities I was in sort of at number one the lower tier cities sort of has got still more users using QQ as opposed to Weixin. And I think that if you look at the user behavior just sort of on social networks I would say, there are more business-related activities, it's so if you look at sort of e-commerce, first tier and second tier cities people are more active on those type of services and then lower tier cities people are less active on that. And then in terms of sort of what kinds of official accounts that people read there's sort, some differences in terms of the interest of people I think that's broadly speaking what it is but in terms of the amount of time that people spend I think it's actually pretty similar across the board because people spend quite a bit of time on recheck. Now in terms of online finance I think we continue to sort of make progress in each category of our online finance business. Obviously so the flagship is our online payment service which sort of you'll continue to grow in terms of our user base number of transactions. In terms of finance I think sort of we have been building, WeBank on a continuous basis and I think so its flagship product way you guys actually sort of seeing good traction. So we are able to sort of leverage our big data capability as well as our ubiquitous touch point with users to offer these consumer loans on a very convenient basis to users and it's growing on a nicely rate. And finally sort of in terms of our -- and I think sort of on WeBank we just wanted to sort reemphasize the way we manage, WeBank is that we have a very broad partnership with all sorts of different banks because we the way we fund WeBank right now is that while WeBank is in charge of originating the loans a lot of these consumer loans were actually a joint loans made in conjunction with a number a pretty large number of banks so that we have a profit sharing with the banks that are partnering with us. Now in and finally sort of the -- the loan quality that WeBank, is lending to is actually sort of quite good, from a delinquency ratio perspective so that means our big data analysis is actually, quite effective in controlling risk. In terms of our asset management platform the title our asset under management continues to grow but we also sort of want to do it in a very measured basis because we sort of knew we felt that it's very important for us to control the quality of the investment products that we offer. In China there's a sort of a broad base of different types of wealth management products, when we looked at the whole list there a lot of one’s which sort of we felt are sort of too risky to offer to our users so, that's what well we have been trying to do sort on one hand we have been trying to make sure that we source that wealth management products of the right quality and on the user end we have been trying to sort of do a lot of user education so that users will make decisions on an educated basis instead of blindly investing in wealth management products which offer supposedly high yields but in fact it's actually a risk that they cannot take. So that's sort of the move progressing pretty well.

Thank you. And due to the time constraint we would take the last three questions from the floor.

You next question comes from [indiscernible] of UBS. Please ask your question.

Thank you management and congrats on the strong earnings. So I'll ask two questions first is on the finance side so we noticed recently a serious stuff like regulatory event so for example you were not granted a credit rating license and also you and your main competitor was fined a little amount by the Central Bank but just want to understand that do you think it's a separate event or indicate a changing regulatory attitude and what's the impact to your financial payments business. And a follow-up is on the advertising side, so you announced a reorganization of the advertising business management the early 2Q so, is there any update on the -- on that front you can share with us and when can we see a pickup in your like the branded business. Thanks.

In terms of financial regulations adding sort of it is indeed, a very important area that we have to focus on a lot. And in terms of the fines it's actually sort of in relation to the earning policy required by the PBOC. And on that front I think sort of we treat the fines sort, and the penalty as very seriously and we are sort of making a lot of changes as required by PBOC. The key issue sort of new for us and I think sort of new for Artie's that our user base is that way beyond any measure right now so, so that the number of users using our payment service is in the hundreds of millions number and so then when we need to turn all these people into real name basis. We put in a lot of different measures but still it takes time for us to sort of do the conversion and we need to balance between how fast we can actually do it versus the user experience and user complaint and I mean a lot of pressure when we try to step up our measure actually turn people into real name users with all sorts of different certification. So I think so, that's something which, which corresponds to a time last year when we are not able to turn people into real name fast enough and I think certainly a lot of the issues we're rectified. The credit rating license another thing I think there is to some extent question of whether there is a business that can be built in China by offering credit ratings services. I personally think a third-party credit rating service which charge these financial institutions money is probably sort of not a very advanced model here it's sort of a model that that exists a long time ago and at the same time if you look at PBOC it is actually providing a better and better overall credit rating infrastructure for the entire country. So I think that's the reason why that the license was eventually not granted yet to anyone because sort of there is question of how do we define the scope and what, what value would it create for the overall financial industry so those are two different separate events but I think you're right in saying you're when we get into financial services regulations are very important and we will build up our infrastructure to talk to the regulators much more often and we're step up our effort in compliance.

Thank you. The next question comes from Thomas Chong of Bank of China International. Please ask your question.

Hi, thanks management for talking my questions. I’ve a quick question about our overseas strategy in games payment and cloud, do have a probability in which we are -- we particularly focus in over the next few years? Thanks.

Yes, I think gaming definitely sort of would be a key area of our focus right now. I think as you can see we are already at this point in time through our investments and acquisitions been -- we're already pretty big in terms of our global gaming exposure and I think certainly will continue to build that practice through investments and acquisitions. At the same time we're also going to launch our self-developed games over time into the overseas market. Obviously this is something which we need to take much longer time to learn the lessons and to build the infrastructure to we’ll find the right games and so on and so forth right, so that will take some time for us to do. There -- but sort of gaming overall is definitely going to be a sort of number one priority. I think payments, at this point in time we will continue to leverage sort of the fact that Weixin payment is already very big a lot of users and a lot of these users are traveling aboard and they're spending abroad and I think sort of -- we would definitely sort of follow that trend. Now in terms of building presence of our payment services in different local markets to serve local people. I think sort of each local market has got, a different set of regulation and a different set of interaction protocol with financial institutions so that has to be done on a case by case and sort of on a much longer-term basis. I think certainly with our cloud business at this point in time we're very focused in building our presence in China and at the same time, we know that a lot of our customers actually have a presence outside of China and that's something that we will build up, in terms of infrastructure, in terms of our sales force in order to serve their needs outside of China market and that would be sort of the first layer of our strategy. And over time when we build if not present in different markets, we will continue, we will start serving local points.

Thank you. Your next question comes from Natalie Wu of CICC. Please ask your question.

Hi thank you for taking my questions. Just wondering can management update us what the current income of mobile games revenue between IoS and Android handset and especially on the Android handsets, what -- how much percentage of your mobile game revenue is generated from those distributed by external channel or third-party app stores, is there any notable change in the latest several quarters? And very quickly, just regarding the Weixin payment, just wondering about the promotion program for restaurant merchants that Weixin payments just announced earlier this month. How much budget Tencent propelled for this program and what kind of margin impact should we expect regarding payment promotion this year? Thank you.

So in terms of the mobile games split between IoS and Android, it bounces around a little bit quarter-to-quarter but generally speaking Android is a larger proportion of Android and then IoS is a significant double-digit but minority proportion of total mobile game revenue, interestingly that is also very high variance by genre of games, so for example shooting games tend to over index very heavily toward Android versus our real time games tend to over index a little bit toward IoS, which I think is also true if the industry as a whole that the IoS are more prone to spending money in real time games versus the Android more prone to playing and spending money in shooting games, racing car games, fast arena games, and so forth. Now within the majority, that is Android historically it relies largely on our own apps store in order to get our games to critical mass and now we are in a position where we have several games that are actually at very substantial mass through our own channels and we want to further increase the equity in China in order to facilitate during that, we are actually working more aggressively with third-party Android app stores than we have in the past. So as we probably know from looking at other mobile game developers that rely entirely on third-party app stores as you sort of rely more on the third-party app stores, you have to incur some cost of revenue to insiders to promote you and therefore there are some margin drag impact that we have started to experience and will continue to experience in our mobile game business as we increasingly visualize third-party app stores as well as our own higher margin distribution channels, so that's on the mobile games side. In terms of Weixin --

On Weixin payments, we are putting up quite a big initiatives around the restaurant vertical and the reason is because it is a vertical that’s very competitive and what we're doing is leveraging our relationship with [indiscernible] who has a very strong coverage among restaurants and at the same time, we can offer significant promotional budget as well as discounts for users. So that we can actually get back some of these restaurants customers because so that in the past half a year to a year, I think sort of we -- in fact have lost some market share in the restaurant category not the fact but sort of the more, the more do people sit down dinner type of restaurant categories. So we are indeed putting considerable budget to get back on the competition front.

Thank you. There is no more question on the queue. Ms. Yip, please begin your closing remarks.

Thank you, Operator. We are closing the call now. If you wish to check our press release and other financial information, please visit the IR section of our company website at tencent.com. The replay of this webcast will also be available soon. Thank you and see you next quarter.