Jane Yip - IR Pony Ma - Chairman and CEO Martin Lau - President James Mitchell - Chief Strategy Officer John Lo - CFO

Chi Tsang - HSBC Eddie Leung - Merrill Lynch Jin-Kyu Yoon - Mizuho Securities Alicia Yap - Citigroup Alex Yao - JP Morgan Grace Chen - Morgan Stanley Alan Hellawell - Deutsche Bank Ming Xu - UBS Piyush Mubayi - Goldman Sachs

Thank you for standing by and welcome to the Tencent Holdings Limited 2017 Second Quarter and Interim Results Announcement Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip.

Good evening. Welcome to our second quarter and interim results 2017 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 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 Risk Factors and non-GAAP measures, please refer to our disclosure documents on our IR website. 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 brief overview; Martin will discuss strategic highlights; James will speak to business overview; and John will go through the financials before we take your questions. I will now turn the call over to Pony Ma.

Thank you, Jane. Good evening, everyone. Thank you for joining us. During the second quarter of 2017, we delivered strong growth across all revenue segments including smartphone games and PC games, payment related to services, online advertising, and digital content subscription and sales. Let me highlight the key financial numbers for you. Total revenue was RMB 56.6 billion up 59% year-on-year and 14% quarter-on-quarter. Non-GAAP operating profit was RMB 20 billion, up 36% year-on-year and 8% quarter-on-quarter. Non-GAAP net profit to shareholders was RMB 16.4 billion, up 45% year-on-year and 15% quarter-on-quarter. John will provide more details in the financial section. Moving on to online platforms. Combined MAU of Weixin and WeChat increased 19% year-on-year to 963 million. Total MAU for QQ was 850 million, within which smart devices MAU was 662 million, down 4% year-on-year due to fewer cash users, while engagement with core users increased. Specifically, PCU including PC and mobile increased 8% year-on-year to 268 million. In addition, smart device MAU for users age 21 years or below was up year-on-year, demonstrating QQ’s increased popularity among younger users. Popular features within QQ such as Kandian news feeds increased average user time spent within QQ. For social network, Qzone smart device’s MAU was 586 million. In games, we maintained our leadership in mobile and PC as measured by users and revenues. Our media business grew users and traffic at healthy rate, and we retained leadership in the core news, video, music and literature categories, while developing new categories such as online comics. In mobile utilities, we remain the China industry leader in mobile security, mobile browser and Android apps store. With that I will pass to Martin to discuss strategic highlights.

Thank you, Pony, and good evening, good morning to everybody. I’m going to elaborate our thoughts in this strategic review upon artificial intelligence which is a hot topic. We have been investing heavily in AI but relatively quietly, as we view AI as an essential capability that enhances user experience and empowers us to capture the new exciting opportunities to grow our businesses for the future. We’re confident that our existing strength in computing power, data, engineering, technologies as well as use cases coupled with our proactive build-up of AI content -- talent will give us a favorable position in this strategic initiative. Especially a wide and diversified business scope creates a variety of use cases for AI research and application across a range of AI fundamental research areas, such as machine learning, computer vision, speech recognition and natural language processing. We will be persistent but patient with our AI investment, because we believe it is a long-term initiative, and we do not necessarily require a research to generate revenue directly in the short-term. On the other hand, AI will significantly benefit all of our existing products, services and businesses in many ways. For example, in consumer-facing products, AI enhances user experience as we understand more about the users; for enterprise related businesses, AI optimizes monetization [ph] as we sharpen our targeting technology; for our ecosystem, our investee companies and could partners can leverage our strong AI capability, allowing all of us to achieve mutual benefits. Now, on the next page, I will give you three more specific examples on how we can apply AI to our existing products and services. These three examples are performance ads, information-based services, and FinTech businesses. For performance ads, we applied AI technology to the processes of ad placement from understanding users’ preferences, contextual and ad content, to ranking, the bidding price, optimizing the display formats and eventually to matching the most appropriate advertisers. This increases the ROI for advertisers while at the same time enhancing the reading experience for our users. For information-based services including news apps, video, music and App Store, AI enables us to have a better knowledge of users’ interest. This will help us to make more relevant and customized recommendation to users, so that they can access their favorite content more efficiently. Across, Tencent platforms, there are multiple digital content access points which we believe will all benefit from the smarter recommendation engine. For internet finance businesses including mobile payment, wealth management, and microloans, we use AI to predict users’ behavior in financial activities more precisely. This will help us to provide the most suitable products to the most appropriate users and in the process, minimize the risk involved. On top of these existing business lines, I’d also like to give you some example on our selected breakthroughs to-date, developed by our AI teams in-house. These include our computer Go Chess Master called Fine Art, face recognition technology, and medical imaging AI product. Early this year, Fine Art won the UEC Cup, a global Computer Go tournament. Fine Art was developed by our AI lab in less than a year. We have accumulated in this process significant know-how in the development of Fine Art. And the strategy and reinforced learning AI technology behind Fine Art can be applied to many other use cases in the future. Our face recognition technology also scored excellent results with the world-leading Face Detection Dataset and Benchmark, FDDB. We have gradually applied this technology in a variety of different ways. For example, firstly, enhance and enrich the features of our photo editing app Pitu, which has become the number two app of its kind in China. Secondly, enable users to complete ID -- identification online for financial services and government, municipal affairs. Thirdly, assisting the search for children and elderlies report missing, helping many families in the process. In addition, we have recently released our first medical imaging AI product, MIAIS, which applies deep learning to detect early signs of disease in images generated by various medical imaging technologies, including endoscope, CT and MRI. We believe this tool can help increase the accuracy and efficiency of early detection and diagnosis. These areas may not generate revenue immediately but we think they’re important and beneficial for advancing our AI know-how which will benefit us in the long-run. So with that, I’ll pass to James to talk about our business review.

Thank you, Martin. Good morning, good afternoon and good evening to everyone. In the second quarter of 2017, our total revenue grew 59% year-on-year. VAS represented 65% of our revenue within which online games contributed 42% and social networks 23%. Online advertising was 18% of revenue, the others segment accounted for 17% of total revenue. Within this others segment payment-related services and cloud services drove the year-on-year growth, both sustaining triple digit revenue growth rates. Payment-related services, revenue from coproduced TV shows and movies, and cloud services contributed strongly to the quarter-on-quarter revenue growth. For value added services segment revenue was RMB 36.8 billion in the second quarter, up 43% year-over-year and up 5% quarter-on-quarter. Social networks revenue was RMB 12.9 billion, up 51% year-on-year and up 5% quarter-on-quarter. From a year-on-year perspective, digital content services including our video subscription businesses, music gifting and subscription businesses and literature transaction business are primary revenue growth drivers. From a quarter-on-quarter perspective, increased revenue from digital content services including live broadcast and from virtual items, smartphone games more than offset decreased revenue from our legacy privilege subscriptions such as the Qzone Yellow Diamond product. Online games revenue was RMB 23.9 billion, up 39% year-on-year and up 5% quarter-on-quarter. From a year-on-year perspective, revenue grew primarily due to more smartphone game users and a higher proportion of those users making payments as well as increased ARPU from our key PC games titles. From a quarter-on-quarter perspective, user growth in our established as well as new smartphone games drove sequential revenue increase. Turning to social networks. For Weixin, we made it easier for users to access Mini Programs by our initiatives such as enabling keyword search and location-based search for the relevant Mini Programs. These initiatives significantly increased the number of unique visitors and interactions with Mini Programs. Weixin Pay grew commercial transactions at a rapid rate in cooperation with channel partners such as Meituan-Dianping as well as major commercial banks. We added a substantial number of offline merchants. Our average daily commercial payment transaction volume more than doubled, year-on-year, driven by strong growth in offline commercial transactions. For QQ, we continue to enhance functionalities most suitable for young internet users such that while overall MAU declined, smart device MAUs under 21 year olds increased year-on-year and daily time spent also rose. Some of you may have experienced Kandian, an algorithmic news feeds service embedded inside QQ where we enhanced the recommendation technology and added social sharing features. As a result, DAU and time spent for Kandian increased significantly and Kandian has become an important destination within the QQ app. For our live streaming app, Now, we enriched our offering by content verticals such as campus life, cosplay and outdoor game shows. We also distribute these content verticals through QQ, Qzone and our video and music apps, providing an attractive breadth of uses to professional and amateur content creators. Looking at PC client games, revenue grew 29% year-on-year, driven by unusually strong performance for our key established titles. Revenue declined 3% quarter-on-quarter due to seasonality. Average revenue per user broadly increased year-over-year and quarter-on-quarter, particularly for League of Legends and Dungeon Fighter. Active user accounts generally declined year-on-year due to the ongoing trend of some users shifting a percentage of their playing time to mobile games. League of Legends released some popular updates with new skins that drove user activity and spending. We also ran festival promotions, eSports tournaments and a variety of show around the game, which enabled users to enable with the game in multiple ways, so it’s further deepened our engagement. All these attributes reinforce League of Legends’ position as an immersive and hardcore game, appealing to the most professional players. Dungeon Fighter outperformed the industry to grow active users year-on-year and increased paying users, running on successful expansion packs. At our first case study for across media intellectual property strategy Dungeon Fighter published its first animation series following on themed comic books and novels. We believe these initiatives broaden user engagement and contribute to DnF’s impressive longevity. The smartphone games revenue was up 54% year-on-year and up 14% quarter-on-quarter, surpassing that from PC games. Active user accounts also increased year-on-year, mainly driven by midcore games. In the quarter, we released five new titles including one puzzle game, one ARPG, one massively multiplayer role playing game, and one strategy game. In player versus player competitive games, we both have strong products, publishing expertise and substantial audiences for key titles and genres such as battle arena, shooting, sports and board games. For these types of games, big player base tends to virally attract new users as well as providing better matching and liquidity for existing users, creating a virtuous cycle of new player activation and existing player retention. For role playing games, we utilized our knowledge of user behavior, our gaming content-oriented communities and our targeting technologies to highlight the most appropriate role playing games to the most suitable users, which has contributed to us gaining market share in the action role playing game and massively multi-player role playing game subcategories. Our published role playing games Dragon Nest Mobile from Shanda, JX Mobile from Kingsoft and Legacy CLBB Mobile from Changyou all ranked in the iOS top grossing apps chart in China during the period. Our console start [ph] games, we had licensed from Konami, the right to develop a mobile version for China of its classic console IP Contra. We launched this game Contra Return in the second quarter and it generated enthusiastic response from players, ranking number in China’s iOS top grossing chart in June. For online advertising, our revenue was RMB 10.1 billion, up 55% year-on-year and up 47% quarter-on-quarter with mobile contributing over 85% of this revenue. Our media advertising revenue was RMB 4.1 billion, up 48% year-on-year and up 62% quarter-on-quarter. Popular video content, improved video content distribution, resulting in the substantially increasing our media traffic and thus our advertising revenue, which was the primary driver for this rapid growth. The second quarter is seasonally stronger for our media advertising than the first quarter and this year drama series such as Ode to Joy season 2 and Surgeons and self-commissioned variety such as Go Fridge season 3, boosted our user engagement and traffic, contributing to an unusually rapid quarter-on-quarter improvements in media advertising compared to the first quarter when some of our strongest video content was prioritized for video subscribers. Our media news products are primarily focused on enhancing our news feed algorithms and our news advertising revenue grew at slower rate than our video advertising revenue. Our top five brand type advertising categories during the quarter included food and beverage, transportation, online services, online games, and consumer electronics. Our social and other advertising revenue was RMB 6 billion, up 61% year-on-year and up 39% quarter-on-quarter, driven by higher fill rates in Weixin Moments and Weixin Official Accounts by more advertisers buying mobile browser advertisements from and by more advertising impressions coming to us from our affiliate ad network. We extended our self-service platform capabilities to facilitate nationwide buying and we enabled more of the official accounts to carry advertisements benefiting creators of those official accounts. And now, I will pass to John to go through the financials.

Thank you, James. Hello, everyone. For the second quarter of 2017, our total revenue was RMB 56,6 billion, up 59% year-on-year or 14% quarter-on-quarter. Gross profit was RMB 28.3 billion, up 38% year-on-year or 11% quarter-on-quarter. Net other gains were RMB 5.1 billion. We recorded net other gains totaling RMB 5.1 billion for the second quarter of 2017, which mainly consists of fair value gains as a result of significant increase in valuations of certain investment in verticals including sharing [ph] and FinTech, as well as deemed disposal gains arising from capital activities of certain investee companies, particularly the IPO of Korean mobile game publisher Netmarble, they are partially offset by impairment provision charges for certain investee companies. Share of profit of associates and joint venture was RMB 498 million in the quarter on a non-GAAP basis. We generated profits of RMB 947 million in quarter two comparing to losses of RMB 206 million in the second quarter of 2016. Income tax expenses were approximately RMB 4 billion, up 43% year-on-year or 9% quarter-on-quarter. Effective tax rate for the quarter was about 18%. Net profit to shareholders was RMB 18.2 billion, up 70% year-over-year or 26% quarter-on-quarter. I will walk you through our non-GAAP financial numbers which provide a useful reference to evaluate the operating results of our organic businesses. After adjustment to non-GAAP, operating profit for the quarter was RMB 20 billion, up 36% year-over-year or 8% quarter-on-quarter. Operating margin was 35%, down 6 percentage points year-over-year and 2 percentage points quarter-on-quarter. Net profit attributable to shareholders was RMB 16.4 billion up 45% year-over-year or 15% quarter-on-quarter. Net margin was 29%, down 3 percentage points year-on-year and pretty stable quarter-on-quarter. Let’s turn to segment gross margin. Gross margin for value added services was 60.6%, down 6.1 percentage points year-on-year, mainly due to higher channel costs of smartphone games paid to third-party app stores including handset manufacturers, and revenue mix change to low margin products such as digital content services. Quarter-on-quarter change was broadly stable. Gross margin for online advertising was 37.8%, down 7.5 percentage points year-over-year due to increased video content investment. Sequential increase of 3 percentage points reflected strongest seasonality in the second quarter. Gross margin for others was 22.4%, up 11.8 percentage points year-on-year and broadly stable sequentially. The year-on-year increase was mainly due to gross margin improvement of payment related services. Moving on to operating expenses. Selling and marketing expenses were RMB 3.7 billion, up 55% year-on-year or 16% quarter-on-quarter. The year-on-year increase was mainly due to higher marketing and promotional spending on products such as online games, payment-related services and online media as well as higher staff cost. The sequential increase mainly reflected seasonally more advertising and promotional activities in the second quarter versus the first quarter. Selling and marketing expense was 6% of quarterly revenue. Total G&A expenses were RMB 8.2 billion, up 54% year-on-year or 17% quarter-on-quarter. Under G&A, R&D expense was RMB 4.2 billion, up 54% year-on-year or 18% quarter-on-quarter. The year-on-year increase mainly reflected higher staff cost. As a percentage of revenue, total G&A was 14% and R&D was 7.5%. At the end of the second quarter, we had over 40,000 employees. Year-on-year growth was mainly due to, number one, organic headcount increase; number two, one-off inclusion in our headcount of some outsourced manpower, who engage in our customer support work. And three, the business combination of our music businesses. Excluding the later two factors, headcount grew by 16% year-on-year. Looking at the margin ratios for the second quarter. Gross margin was 50%, down 7.3 percentage points year-on-year, mainly due to decrease in VAS segment gross margin and increasing contribution from low margin others segment. Gross margin dipped 1.3 percentage points sequentially, reflecting change of revenue mix. Non-GAAP operating margin was 35.4%, down 5.8 percentage points year-on-year, primarily reflecting lower gross margin, partially offset by an increase in net other gains. Sequential decrease of 2 percentage points was mainly due to lower gross margin and higher G&A spend. Non-GAAP net margin was 29.1%, down 3.1 percentage points year-on-year and broadly stable -- sequentially, sorry. For the same quarter, total CapEx was RMB 3 billion, double year-on-year and up 43% quarter-on-quarter. Operating CapEx was RMB 2.3 billion, up 124% year-on-year and 36% quarter-on-quarter and it represented about 4% of total revenues. Non-operating CapEx was RMB 683 million up 47% year-on-year or 73% quarter-on-quarter. Free cash flow was RMB 17.5 billion, up 80% year-on-year and down 28% quarter-on-quarter. Sequential decrease was mainly due to weaker seasonality for our PC client games. Our net cash position at quarter-end was RMB 21.3 billion or $3.1 billion, down 4% year-on-year or 23% quarter-on-quarter. Sequential drop in net cash was mainly due to payment of final dividends for 2016. Fair market value of our listed associates and available for sale financial assets was approximately RMB 146 billion or $21.5 billion at quarter-end. Thank you. We shall now open the floor for questions.

Operator, we will take one main question and one follow-up question each time. May we have the first question, please?

Certainly. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Chi Tsang of HSBC. Please ask your question.

Hi. Good evening. Thanks so much. I was wondering if you could discuss online video for a few minutes. In particular, how do you think this business will evolve over the next few years in terms of things like paying, subscriber ratio, ARPU and margins? And what do you think it will take for this business to reach breakeven? Thank you very much.

On online video, I think it’s going to take quite some time, unfortunately, for the business to breakeven. I think dynamics at this point of time is that number one, there is a lot of usage, more and more people are watching online video at longer and longer time, on a daily basis. But at the same time -- and at the same time, advertising revenue has been increasing, and there is also an increasing willingness from consumers to pay. So, the subscription number as well as revenue has been increasing quite rapidly. On the other hand, the flip side of this is the cost of content has been increasing, even faster. So, what we see is that over time, we believe the content will continue to increase, but the rates would probably be lower. And the subscription, as we continue to increase, would deliver higher revenue per active user. So, we will get closer to a more equilibrium between cost and revenue at some point in time. But I think unfortunately at this point in time, the net loss of the business is still increasing. Although, depending on how much revenue we generate from advertising as well as from subscription, the rate could be -- the increased rate could be slower than before.

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

Good evening. Thank you for taking my questions. Two questions. The first one is about your advertising business. It’s quite obvious that traffic has been growing rapidly; you also had some advertising inventories. Just curious, if you could talk a little bit about the trends on the conversion rate or click-through rate as well as pricing. How important rate they in terms of driving the advertising growth, in the past let’s say one or two quarters, besides the traffic and inventories. And then secondly, also curious to hear your thought on the usage of user-generated video in social networks. How important you think this trend can be and any update would be great? Thanks.

In terms of the advertising, I think most of the growth has actually been from the click-through rates as well as the improvement in targeting technology. As a result, the pricing achieved has been higher. There is some help from the other two factors, which is slight increase in terms of the inventory and an increase in terms of the general traffic. But, I think from the inventory angle, we have achieved a second ad for some cities, but within a 24-hour period, not everybody is seeing two ads. So, compared to our international peers, I think the amount of inventory is relatively small. And at the same time, the traffic increase has been most significant around Moments. Then, if you look at our performance ads, it’s across pretty large number of different properties. So, the traffic growth in the other areas might not be as great as the Moments traffic increase. Now, in terms of user-generated video, I think there has been a pretty large amount of user-generated content, video content in our social network. It has already been the case and it has been increasing. But at the same time, I think as you would notice, there are a lot of other apps which are also hosting these user-generated contents, including our investee company Pai Sho as well as a lot of the newest apps, which has customized content for people; in addition to text and picture, they’re also adding short video to the overall content. And of course, you also have the video apps which are not only having the professional-made content but also user-generated content. So, the user-generated content has already been spread over many, many different platforms in China. And I think everybody has been seeing a general growth in this. I think overall, it’s definitely good in terms of user engagement. It’s a little bit tough to make advertising revenue from that because we usually -- these video are relatively short; and depending on how aggressive you are in terms of balancing user experience and monetization, I think if you really care about user experience and the trends of putting advertising on these short videos are more limited.

Thank you. Next question is from Jin-Kyu Yoon of Mizuho Securities. Please ask your question. Jin-Kyu Yoon: Yes. Thanks very much for your time. So, can we just go back to video revenues again? So, as subscriptions ramp and video -- as subscriptions ramp, I assume that people are going to be watching less ads. Is there potential -- are you seeing any impact where those potential video apps could be more directed towards social going forward? Have you seen that trend or is that even a possibility? And just a follow-up on that. Any commentary on the Unicom investment today? Thanks.

I think the video side, in different quarters of the year, our biggest and best content appears in different, in monetization windows. So, in the first quarter, we mentioned that the drama serial, the Ghost Blows Out the Candle was prioritized for subscription -- for subscribers and that coincided with a very sharp upsurge in subscription revenue. Now in the second quarter, some of our biggest content was including Go Fridge season 3 and Surgeons and Ode to Joy and so forth, was made available to the advertising consuming viewers. And so, while our subscription revenue continued to increase quarter-on-quarter, the rate was not as sharp. On the other hand, you can infer from our media advertising revenue that video advertising revenues were very sharp, sharp at the seasonal uptake quarter-on-quarter supported by strong content. So, as you would expect, video in the short-term is a content-driven business. We have stated in the past that there is an increase in proportion of our video users become subscribers and those subscribers become subject to fewer video ads. Now, the video advertising doesn’t completely disappear. And if you watch in some of our really hallmark content like the Ghost Blows Out the Candle, we have sponsorships and so on that appear on the screen during the program. But, I think you’re also asking whether the video advertising gets displaced elsewhere. And I think that’s difficult to say. At this point, my guess is that the big advertisers have a certain budget for television and then for online video and then they have a separate budget for social and a separate budget for search and so forth. And then, the migration between those buckets happens relatively slowly, typically at the beginning of each year rather than happening on a month-by-month basis.

So, on China Unicom, I would say, the mixed ownership reform scheme of China Unicom in our view is very monumental step in the economic development of the country. And as such, we are actually very-honored to participate in the scheme. And on the business side, we have always been seeking more and more, and deeper and deeper cooperation with telcos, because we believe they are very important ecosystem partners of ours. And in this particular case with China Unicom, you’re at a very important juncture of their business development. We are very happy to be involved in this strategic manner. And in terms of business cooperation, we’ve already got a lot of cooperation with China Unicom including most recently the joint launch of broadband card [indiscernible] card, which provides unlimited data bandwidth for Tencent apps, and that has been a very, very great success and we help China Unicom to sign up a lot of new users. So, we actually look forward to with this strategic partnership, to look forward to developing more and more cooperation with China Unicom. We believe -- if you look at the participants, there are a lot of different potential -- there are some partners who can bring potential skills and resource into China Unicom. And we think it is beneficial to the entire industry, and we look forward to a deeper relationship with China Unicom. And we also hope to have a deeper relationship with all telcos across the board.

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

Hi. Good evening, management. Thanks for taking my questions and congratulations on another strong quarter. I have two questions. Number one is related to your AI technology. You mentioned some of the recent breakthrough achievement by your team in this area. I wanted to get management’s opinion on a broader view as almost all large internet companies are investing heavily in the AI technology. So, in your view, what are the most important competitive strengths and advantage that could set each company different from their peers, and what are the competitive strengths for Tencent AI? And then separately for this AI; I understand it may help in better targeting, improving user experience and benefit overall monetization over time, but then besides benefiting internal business, in the longer term, will AI also help your platform partners, any chance that AI could become a service that you can license to your external partners that help enhance your monetization even more, in the longer term? And then, second question is on advertising. Just, can you share briefly what are some of the initial tractions and contributions from the video ad format within your Weixin properties, what are the user feedback and the click-through on those video ads? And are these video ad formats mainly consumed by bigger brands and the first tier city at this stage? Thank you.

Okay. In terms of AI, I think all large internet companies would benefit from this. To some extent, it’s a little bit like the mobile internet, in which when mobile internet came around, a lot of users can use mobile internet on a more frequent basis. And for the companies who can develop their mobile apps in a successful way, then you can benefit from that big trend. And I think AI is, to some extent, similar in nature. But of course, a lot of it -- since it is early days, a lot of it depends on whether you’re able to develop the technology, who can develop the technology better. And we have highlighted in our prepared remarks that there are few things which are very important in AI that include AI talent, that include the ability to have a lot of data and a lot of use cases and of course computing power and engineering capability also are very important. So, if you look at Tencent, we believe for us, we have a very wide and diversified business scope, not only in our own businesses, we have a very line of business, but at the same time in our ecosystem. We have a lot of partners, in the form of investee companies, in the form of commercial partnership, and in the form of cloud business customers. So, because of the availability of these use cases, it provides the best venue for our AI and our engineering talent to develop AI technologies. And at the same time, I would say, we are very patient in our overall approach, and we take a long-term perspective, so that we will not be too eager to say, you have to generate revenue in a very short term. But we believe when we get all these technologies, it will benefit our existing business almost immediately. And at the same time, while we keep on advancing our technology and developing new applications, it will help us to open up new business areas as well as help our partners to open up new business areas. In terms of providing AI-as-a-service, I think this is definitely a one direction that we are going into in our cloud business already and we are seeing a lot of demand on that. And we have been able to sign up a lot of customers because of our ability to offer them AI capability. And that’s just the beginning. Over time, I think we will do much more on that. I think in terms of advertising, you are talking about the video ads on Moments, I think right now video ads on Moments, is still a very small part of our overall revenue.

Next question comes from Alex Yao of JP Morgan. Please ask your question.

Thank you, management, for taking my question, and congrats on another solid quarter. My first question is about the payments. With the payment MAU exceeded 600 million in December last year, I think consumer adoption for the payment has come to an end. Can you talk about the rationale of payment subsidy strategy that you guys introduced in second quarter and continue into the third quarter? And then, related to that, can you talk about the implication of official introduction of Nets Union, [indiscernible] recently, how will this change the economic interest of various players in payment value chain? And then second question is on the SNS for QQ casual users who reduced their usage of QQ and Qzone, are they migrating to Weixin and Moments or something else? With such a mixed operating metrics between QQ and Weixin, do you think your position in China’s SNS and communication market is equally strong or is your position slightly changing? Thank you. I will stop here.

Yes. On payment, I would say, again, the overall strategy for our payment service is to provide an infrastructure or service for our own business as well as for our ecosystem partners. And as a result, it’s not a business that we would want to make a profit. It’s not the target to make a profit from it. So that’s the overall guiding principal. And as a result, we do want to reinvest the revenue and potential profit that we can make from this business into growing the coverage, the usage of the service. So, one of the important aspects of payment is we want to not only cover the transactions online but also in O2O services as well offline. So a lot of the marketing expenses are directed in that direction. We want to support commercial transactions in O2O area as well as in offline scenario. And at the same time, I want to point out that there is an increasing competition also in this area. So, that’s why we do expect our investment into this payment business to increase over time. Now, in terms of Nets Union, Nets Union is backend clearing system which allows a third party online payment companies to connect to the different banks via one centralized clearing system. And I think the PBoC wanted to have this system so that they can more control over the routing of the payment services. And we have been actively working with Nets Union, in developing the system. The way we look at the system is, it’s a backend system; we are still responsible for the frontend connection with the consumers as well as the connection with the merchants. But note that the connection to the bank would eventually go through the Nets Union. So, for us, the most important thing is to make sure that the Nets Union system can handle the amount of transactions that we handle in a reliable way. And we have dedicated a pretty large team of people to be working full time at Nets Union in the formation of the company and we provide a lot of technology and modules to enable it to be functional in a very short time. And we have the first transaction that goes through the entire system and it’s now experimenting with some payment traffic and we’re the biggest provider of such payment traffic right now. So, we believe if we can ensure the very stable and reliable operations of Nets Union, then it will be beneficial to us.

The next question comes from Wendy Huang of Macquarie. Please ask your question.

Thank you. My first question is also about your others payment business. So, your total orders increased by 177% year-over-year. Can you give some color, which one is growing fast; whether it’s payment or cloud business? And also, the gross margin for this business seems stabilize at 22% level. So, is this other business already actually contributing to the bottom-line? If not yet, when do you expect it to be a meaningful contribution to the earnings? Second question is, can you help us to understand the future driver of your game business from both pipeline perspective and ARPU perspective? So, you just launched the five new games in the second quarter. What the pipeline looks like for the rest of year? And also PC game revenue increased by 29% year-over-year. You mentioned in the presentation earlier that it’s mainly driven by the ARPU. So, what’s the ARPU right now and where do you see the ceilings? Thank you.

Okay. On the others category, I would say the following. It’s mostly constituted of the payment business, revenue as well as the cloud revenue. And both of the two businesses grew at triple digit with the payment business growing faster, slightly. So, in terms of margin, bear in mind, this is gross margin and there is a lot of marketing expenses related to both, the payment business as well as the cloud business initiatives embedded in the sales and marketing. And hence, pretty big growth -- year-on-year growth rate in the marketing expenses. At the same time, there is also the human resource related to these businesses, which are embedded in the G&A. So, I would not go as far as saying, they’re making meaningful contribution to our earnings yet.

As far as the smartphone game are concerned, I think that with regards to the pipeline, you could refer to activities at the recent ChinaJoy conference, and there is a number of titles that we have to release in coming months that we’re quite optimistic about. But the bigger point to make here is that smartphone game playing in China is still at a relatively early stage of growth. And if you look at, for example our smartphone game daily active users in the second quarter grew over 40% year-on-year. And of course part of that’s driven by new games that we’ve released in the last several quarters but in other part of that is driven by the increased popularity of games that we released one, two, three years ago. So, we’ll continue to explore new market segments in smartphone games. I think we’ve done a good job of really cultivating the big DAU, moderate ARPU, player versus player competitive games like sports, shooting and so forth. We’ve started to do a good job of colonizing the small DAU, high ARPU role playing game segment that we talked about. And then, we’re also trying to develop a new game segment opportunity such as console games that we discussed. So, that’s on the smartphone games. In terms of the PC game ARPU, I’ll hand that to John.

Actually with reference to the description we’ve made in relation to increase ARPU from PC game titles, ARPU for MMOG is within 370 to 560 for the quarter. And advanced casual game ranges from 100 to 440 this quarter, which increased quarter-over-quarter and year-over-year.

The next question is from Grace Chen of Morgan Stanley. Please ask your question.

Hi. Thank you for taking my question. My question is also about the advertisement business. We understand Tencent have been focusing on enhancing capabilities such as tracking technology while releasing ad inventories on a major pace. As you’ve just mentioned that Tencent is doubling ad inventory in Moments in some cities, so can you share with us your thoughts about -- what you consider as key factors to determine how fast you would increase ad inventory and is there a timeline in your plan to roll out the ad increase nationwide? Apart from the increasing monetization in Moments, in Weixin Moments, we also understand Tencent has many other properties with great potential to increase monetization such as Tencent Video, Tencent News, Tian Tian Kuai Bao. So, can you also share with us your monetization plan in these properties as well? Thank you.

Yes. I think ultimately the question is really a balance between user experience and monetization. And we do want to make our targeting better and better and better. And so far, I would say, we are airing on the very conservative side in terms of releasing our inventories. And I think it will be a function of when do we feel more comfortable in terms of achieving a level of user experience. When people see the ads, they would not be turned off but rather they see it as a pretty delightful experience. At the same time, I think we also do a lot education and joint partnership with the advertisers so that we want to increase the quality of the advertising because we felt if we can have better and better targeting technology and at the same time we have better and better advertising content, then the user experience of seeing advertising will be better for the users. Right now, I have to say, there is really no urgency for us to put a lot of inventories out. And we do have some luxury of working on our technology and making sure that our user experience is the best in kind among all industry peers.

Moving on, the next question is from Alan Hellawell of Deutsche Bank. Please ask your question.

Thank you, management. Congratulations on the strong quarter. This is Eileen Deng from Deutsche Bank asking question on behalf of Alan Hellawell. I want to ask with details of mixed ownership recently having been announced. Are we expecting any further government involvement in our business in gaming or social networking, and do we see growing regulatory risk on that front? Thank you.

I think mixed ownership is actually a direction for the government to embrace more market governance for state owned enterprise. So, I think that has no implication on more regulatory pressure on our business. In a way it’s actually the other direction. It’s hoping that the market force can help state owned enterprise to be more competitive.

Due to the time constraint, may we have last two questions from the floor?

Certainly. The next question is from Ming Xu of UBS. Please ask your question.

Thanks. Good evening management and congratulations on the strong quarter. So, two questions. Firstly on the payment and finance business. We read a lot of news regarding the loan -- strong loan growth of Weilidai from WeBank. So, I am just wondering, could you share with us except for you stake in WeBank, how should we think about the revenue opportunity from this strong growth for Weilidai for Tencent, and what’s the current revenue size inside from this business? And secondly is for the gaming business. I noticed in your slide, you mentioned that you use your targeting technology to acquire users for RPG games. Could you may be elaborate on that? Thanks.

In terms of WeBank, in addition to the ownership we have in WeBank, we also have a platform in which we charge to WeBank because we do offer a lot of value add to WeBank in terms of the acquired customers as well as helping them to assess the credit. So, as their business grows over time, we will book a revenue from them and at the same time we have an equity participation in their profits.

In terms of games and targeting, if you look at games playing globally, particularly on the personal computer, it’s moved from being media driven to being increasingly community driven. 20 years ago, people discovered new games on the PC in the U.S. and Europe through computer magazines; now, they’re discovering them through reddit, through Twitch, through those kinds of more communal venues. And some of the same trends are underway in China. And what we’re trying to do is working with the game developers to make sure that we target their games to the users who are likely to be most receptive. When a company like Shanda releases a mobile game like Dragon Nest Mobile, which is a mobile port of somewhat successful PC game and they share with us something about who played the PC games, then we can effectively catch up with those users 5 or 10 years on mobile and recommend this game to them on mobile and that is something that is highly effective. Similarly, if we know that there are certain users who are particularly interested in, for example, Japanese animations, then we can target games with the Japanese animation style to those users and so forth. So that’s what we were referring to and we were talking about the ability to target the role-playing games to the most appropriate users. There are some games which we think have transcendent appeal and can bring all sorts of different people onboard, and so we continue to market those broadly and widely. But there are other games that will resonate most with a very narrow but deep audience. And so, for the second class of games, we want to help the developers by reaching that narrow but deep audience rather than waste the developer’s time and money by trying to reach a much broader shallower audience who would display inferior retention rates. So that’s what we were talking about.

The last question is from Piyush Mubayi of Goldman Sachs. Please ask your question.

Thank you for the opportunity. Very specifically on HoK, what is the amortization that you’re following right now because that seems to be one area where we didn’t get meaningfully surprised on the revenue side? Second, question for Martin on AI. You talked about how it could transform your performance advertising and FinTech businesses with better targeting. How quickly do you think that can get manifested in these two businesses, for example? And very quickly also on payments, how much traffic in payment does an Meituan drive? Thanks.

In relation to the amortization of Honor of Kings, it’s about nine months.

In terms of AI’s impact on the FinTech business and advertising, I would say, it’s an ongoing process. And in the past, we have been already doing a lot of optimization, but those are more rule-based optimization. And when we now touch at deep learning to the process, we can see there is -- the headroom can be improved by a lot. But, at the same time, it takes time to develop the technology and also have it worked into our entire system. So, I would say, some of the impact has already been seen, but over time, there will be more to be explored and to be captured. In terms of Meituan, that’s the business which has grown quite significantly; and as a result, we also benefit from that. At the same time, I think the significance of having that ecosystem partner is that they are very deeply engaged with the food and beverage industry with all kinds of restaurants around the nation. And as a result, because of that coverage, we are able to have direct coverage of -- through them, of most of the restaurants in China. And I think that’s very important aspect of our cooperation. So, not only they generate transaction for us in their core business, but they also help us, so we can access to a lot of third-party restaurants, which also add to our total number of transactions.

Thank you, operator, and we are closing the call now. If you wish to check our press release and other financial information, please visit our IR website. The 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 Tencent Holdings Limited 2017 second quarter results announcement conference call. You may all disconnect now.