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

Grace Chen - Morgan Stanley Eddie Leung - Merrill Lynch Alex Yao - JP Morgan Gregory Zhao - Barclays John Choi - Daiwa Thomas Chong - Credit Suisse Alicia Yap - Citigroup

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

Good evening. Welcome to our fourth quarter and annual 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 the IR section of our official 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 short 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.

Thank you, Jane. Good evening, everyone. Thank you for joining us. In 2017, we delivered a strong set of financial results. For the fourth quarter of 2017, total revenue was RMB66.4 billion, up 51% year-on-year and 2% quarter-on-quarter. Non-GAAP operating profit was RMB21.9 billion, up 46% year-on-year or 1% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB17.5 billion, up 42% year-over-year and 2% quarter-on-quarter. For the full-year of 2017, total revenue was RMB237.8 billion, up 56% year-on-year. Non-GAAP operating profit was RMB 82 billion, up 41% year-on-year. Non-GAAP net profit attributable to shareholders was RMB 65.1 billion, up 43% year-on-year. Our platforms also continued to gather strength. Combined MAU of Weixin reaching and WeChat increased 11% year-on-year to 989 million in 2017 and exceeded 1 billion after the 2018 Chinese New Year. Total MAU for QQ was 783 million. Smart devices MAU was 683 million, up 2% year-on-year. KanDian, the newsfeed within QQ achieved higher user engagement and traffic. For our social network, Qzone, smart devices, MAU was flat quarter-on-quarter at 564 million. In games, we maintained our leadership in mobile and PC. On mobile, we recently launched several popular new titles including QQ Speed Mobile and two mobile games based on the popular survival shooting game, PUBG. For our media business, we strengthened our video content and capabilities, moving us to first place in China in terms of the DAUs and subscriptions. In mobile payment, we continued to lead by MAU and achieved a rapid growth in offline commercial transactions. In mobile utilities, we maintained our leading position in China in mobile security, mobile browser and Android App Store. With that, I will pass to Martin to discuss strategic highlights.

Thank you, Pony, and good evening and good morning to everybody. I will first give you an overview of our annual strategic highlights for the full year of 2017. Starting from our social vertical. We grew the user base of Weixin and WeChat to a combined MAU of approximately 1 billion. Mini Programs games popularity following the launch of enhanced features and Mini Games. QQ deepened engagement with teenagers through personalized newsfeed and AI assisted photo and video features. Our social advertising business delivered strong year-on-year revenue growth as more advertisers came on board. In the gaming vertical, we expanded our smartphone games franchise and games market share in terms of DAU user time and revenue. During the year, Honour of Kings achieved mass adoption in China and enjoyed initial success in Southeast Asia with further increased market share in RPGs and established our leadership in strategy and car racing genres. In PC client games, our operational expertise and content updates rejuvenated key titles such as DnF, despite the challenging overall market environment. We achieved late-mover success in survival shooting games, through the launch of two PUBG mobile titles right before Chinese New Year and built the solid foundation for this emerging genre. Our investee company, Epic Games also launched Fortnite, which has achieved great results in the global market. In media and content, total monthly subscriptions grew strongly year-on-year, in particular Tencent Video became number one in China by mobile DAU and subscriptions with faster growth rate than our industry peers. Tencent Music Entertainment Group operated China's top three music apps by DAU including QQ Music, Kugou and WeSing. In the content feeds business we upgraded Tencent Open Media Platform to centralize the content library and facilitated content curation to our matrix of apps including our news app, browser and our social apps. In our ecosystem, our mobile payment service grew rapidly, driven by commercial transactions. Offline daily commercial payment volume more than doubled year-on-year. Our cloud services continued its rapid growth, maintained sector leadership in games and video verticals and expanded their customer base in finance and government sectors. We continued to increase our investment in AI and deployed the technologies in areas including medical imaging, diagnosis and translation tools. We embraced a decentralized smart retail approach to support offline retailers with customer, traffic customer connectivity and technology. Next, I'll give you an update on a few of our newer strategic initiatives, starting with mobile payment. We have sustained our market leadership in an intensely competitive environment. We believe we are the largest mobile payment platform in China in terms of both monthly active users and daily active users. Social payment is a differentiating feature of our payment platform. At the beginning of the launch of the platform, we have leveraged the red envelope gifting to cultivate user habit and convert them to utilize our platform for additional services. Red envelope penetration is approaching maturity, but we have seen strong growth in users using our platform for peer-to-peer money transfer. This has become the main driving force behind the growth of our social payment. On the other hand, commercial payment has been increasing rapidly. We further increased penetration and coverage to more than 30 industries such as restaurants, transportation, convenience store, gas station and hospitals. By the fourth quarter of 2017, our daily offline commercial volume more than doubled compared to the previous year. We are, at the same time, boosting merchant adoption through self-service platforms, through our relationships with traditional merchant acquirers as well as key channel partners such as Meituan-Dianping. We are empowering small merchants and store managers with technologies such as business analytic tools to enhance their operational efficiency. We’re increasingly providing financial services to our payment user base. Our wealth management platform, LiCaiTong grew total AUM to over RMB300 billion as of January 2018. We also helped WeBank distribute its micro loan product, Weilidai, over our social platform. As at the end of 2017, Weilidai was managing an outstanding loan balance of over RMB100 billion. Next, I will talk about Mini Programs, which has significantly increased users, user engagement and use cases during the past several months. Mini Program daily active users have reached over 170 million and as of January, we had more than 580,000 Mini Programs running on our platform. Along with expanding user base, user engagement also increased. The new feature on top of the chat screen displaying recently used Mini Programs have facilitated user revisits and grew traffic to the Mini Program ecosystem significantly. Mini Games, which attract a lot of daily active users, has also helped developing user habit to use Mini Programs on a frequent basis. Mini Programs QR codes, which are increasingly placed in offline locations also helped drive popularity of the ecosystem. Overall, the top 5 use cases of Mini Programs are retail, e-commerce, local live services, municipal services and Mini Games. There are increasingly more developers who are proficient in creating Mini Programs, and more universities and teaching institutes are offering coding classes for Mini Programs. We view Mini Programs as a simple and innovative way to connect service providers with consumers. It’s a light feature embedded in Weixin to facilitate discovery, sampling and download of native apps. Mini Programs is a good complement to native apps, particularly in three ways, number one, the light feature suits industries that require online and offline integration; number two, complex and heavy apps can provide users with convenient access to selected popular functions; and number three, low-frequency services that need to increase exposure can leverage Mini Programs platform. In the next two slides I will discuss our smart retail strategy which has attracted quite a bit of attention. Smart retail is driven in our view by three major trends, number one, increasing integration of online and offline user behavior due to the proliferation of smartphones; number two, widespread use of mobile payment by consumers on offline -- in offline promises; and number three, the emergence of AI and big data technologies. By contributing our social traffic user ID and advanced technologies, we empower retailers in a decentralized way. What it means is that we help them to strengthen their capabilities, enabling to serve their customers better in channels that they own and control. Our smart retail solution will create value for consumers, retailers and ourselves as a whole. To consumers, they can enjoy a seamless shopping experience spanning across online and offline premises as well as a widening range of personalized services via retailers’ Official Accounts and Mini Programs. To retailers, they can strengthen their brands online and offline, as well as improve their customer lifecycle management and personalization. To Tencent, our payment, advertising and cloud services can all benefit from our increased presence in the retail vertical. In addition, adding offline data, particularly transaction data through our online databank, enables us to be better in targeting our users as well as in providing product recommendation. Our smart retail solution will empower retailers in three major ways. First, help them to acquire users and retain customers better. Our social platform will enable retailers to bring some of our large user base to their offline stores via a number of different tools including LBS apps, nearby Mini Programs, Official accounts and tailored gift cards. We can help retailers strengthen their engagement with customers and extended their connection from offline to online via the Mini Program QR code or e-coupons. They can continue to engage with customers even after they have left the store, enhancing revisits and repeated purchase. Our advanced technologies enable retailers to develop personalized recommendation and marketing to target consumers and increase conversion. Second, it enhances customer shopping experience. Our indoor maps navigation system enables shoppers to easily locate stores; our QR code allows them to quickly access product information; and Weixin Pay facilitates fast checkout. Our ecosystem partners like JD, like Meituan can support retailers to deliver products to customers more efficiently offline and our WeChat work enables more effective after sell services. Thirdly, it increases operational efficiency for the retailers. Our AI-based cloud service helps to upgrade retailers IT infrastructure. Our big data analytic tools can help retailers optimize their marketing plans and supply chain and also enhances retailers CRM system by leveraging social networking, unified ID system, Official Account, Mini Programs and eLoyalty cards. Finally, looking into 2018. I would say, 2017 was a stellar year for Tencent. And I would say many of the achievements achieved in the 2017 are results from investments that we have been making years ago. This demonstrates the importance of forward-looking investment for Tencent. So, therefore for the year of 2018, we’re planning to step up further our investment in the number of key areas. For video, we’re stepping up our investment in long form and short form content to sustain and expand our industry leadership. For payment, we’re providing subsidies to merchants and sustain market growth as well as to users to increase mindshare. For cloud services, we’re investing in infrastructure and also in people to enable us to better serve vertical industries. For AI, we’re strengthening our talent pool in fundamental research as well as applications. For smart retail, we’re building up teams to drive cooperation with key retail industry partners and in some cases investing in certain partners to facilitate their digital transformation. We believe these investments will probably negatively impact our near term profitability but would generate long-term value and new growth opportunities for the future. And with that, I will pass to James to talk about business review.

Thank you, Martin. Good morning or afternoon or evening as the case may be. In the fourth quarter of 2017, our revenue grew 51% year-on-year. VAS represented 60% of our revenue, within which online games contributed 37% and social networks 23%. Online advertising was 19% of our revenue and the others segment accounted for 21% of our revenue within which payment related services delivered triple digit year-on-year revenue growth. For value-added services, segment revenue was RMB39.9 billion in the fourth quarter, up 37% year-on-year, down 5% quarter-on-quarter. Social networks’ revenue was RMB15.6 billion, up 45% year-on-year, and up 2% quarter-on-quarter with the growth mainly driven by video subscription and live broadcast services. Our total VAS subscriptions increased by 22% year-on-year to 135 million subscriptions, benefiting particularly from the video product. Our online games revenue was RMB24.3 billion, up 32% year-on-year and down 9% quarter-on-quarter. On a year-on-year basis, revenue growth was mainly driven by mobile games. Sequentially, our PC game revenue declined due to negative seasonality and the longer term trend of users migrating to mobile. Our mobile game revenue also declined sequentially due to lower monetization from role playing and shooting games and from the timing of new game launches. For Weixin, we enhanced the ePass function that enables users to store their verified electronic identities such as social security cards, student campus cards and driver’s license for the convenient handling of administration on their smartphones. For example, a user who’s bound his social security numbers in his ePass can then use the smartphone to book an appointment with the local hospital and to pay the medical fee online. Our upgraded bookkeeper service which facilitates tracking and analysis of in-store sales, has become one of our most used Mini Programs, especially for small businesses. For QQ, we’ve deployed machine learning to upgrade the tools allowing our users to create amusing photo, audio, and video-based messages. These features are particularly popular among teenagers, contributing to increased MAU. Our newsfeed service KanDian continues to enhance its recommendation algorithm, boosting user time spent and video views. Looking at PC client games. For the fourth quarter, revenue grew 13% year-on-year, but dropped 13% quarter-on-quarter to RMB12.8 billion. Active users of PC client games declined quarter-on-quarter due to increase in time spent on mobile games. Revenue dipped to fewer users but also to negative seasonality. We operated fewer marketing activities during the fourth and the third quarter. Looking forward, our revenue from PC games is likely to be on continued pressure due to the PC to mobile shift. Within this challenging environment, we seek to further strengthen our market position, first, by better serving core PC gamers with enhanced live operations and content updates. Second, by popularizing game streaming and eSports streams. For example, Riot hosted this year’s League of Legends World Championship series in Beijing and we saw 43% year-on-year audience growth for the event. Thirdly, by identifying and partnering with breakout games that can reenergize the overall PC game market as PUBG and Fortnite have recently done. And finally, by discovering innovative types of games open out new PC game niches, especially those niches not anymore suited [ph] to PC than in smartphone environment. For smartphone games, our fourth quarter revenue was RMB16.9 million, up 59% year-on-year but down 7% quarter-on-quarter. The sequential decline reflected several factors including first, for our shooting game CrossFire Mobile, we launched a survival shooting mode, which drove a sharp increase in the game’s player base but adversely affected its revenue as many of the existing players moved into new mode which we’re not yet monetizing. Second, for role-playing games, revenue from several substantial titles including Legacy TLBB and Dragon Nest declined, reflecting the maturation cycles. And third, for the portfolio as a whole, we launched some of the bigger new games relatively late in the quarter. The performance of some of these new games is quite instructive though. QQ Speed is an internally developed PC game that leads the racing car genre in China. One of our internal studios created a smartphone interpretation of that IP, called QQ Speed Mobile which we published at the end of last year. That game has retained over 20 million daily active users with robust monetization, ranking among the top few grossing games in the iOS app store since launch and successfully expanding the racing car genre from PC to mobile. Moving on to PlayerUnknown's Battlegrounds or PUBG, it's globally popular survival shooting game on PC. We secured a license from Bluehole, its developer to operate PC game in China but also to develop mobile games based on the PUBG IP, two of our internal studios created a couple of smartphone PUBG games which we released just last month. Both games have achieved rapid user adoption and robust user retention with our PUBG Exciting Battleground, becoming the clearly leader in the genre and have twice many daily active users as any competing game in China. So, now, we're purely focused on expanding these two games’ user base and have not yet commenced monetizing. We believe the success of these games speaks to our team's capabilities in identifying emerging user needs, nurturing our own or our partners’ key intellectual properties, developing best-in-category mobile game space on those properties and then publishing those mobile games to large engaged audiences. For online advertising, our fourth quarter revenue was RMB12.4 billion, which was up 49% year-on-year and up 12% quarter-on-quarter. Mobile contributed about 90% of our advertising revenue. Our media and advertising revenue was RMB4.1 billion, up 22% year-on-year and flat quarter-on-quarter. Our video advertising revenue grew at a healthy rate year-on-year and quarter-on-quarter and successful content increased user traffic and advertisers invested to reach the growing audiences. But, our news advertising revenue declined year-on-year and quarter-on-quarter as we revamped our news feed ad system and focused on optimizing the content we display on our news feed products. Our social and others advertising revenue grew RMB8.3 billion up 68% year-on-year and up 19% quarter-on-quarter. Year-on-year revenue growth benefitted on the demand side from its larger advertiser base and from us providing advertisers with enhanced targeting, and on the supply side from increased ad impression volume, especially from Weixin Moments, Weixin Official Accounts and on mobile ad network. Sequential revenue growth benefited from e-commerce positive seasonality as well as some of the factors I mentioned earlier. We continue to explore a new ad format such as cost-per-click ads inside Weixin Official Accounts, which link users directly through to Mani Programs. We're particularly pleased with the operating progress in our video business where we believe we have achieved China market leadership, based on several metrics including mobile DAUs, the number of subscriptions and the advertising subscription revenue. For the fourth quarter of 2017, Tencent Video's average mobile DAU grew 44% year-on-year to 137 million users, benefitting from DAU growth, our video ad revenue increased 68% year-on-year to RMB2.7 billion. At the end of 2017, the number of Tencent Video subscriptions had increased to 121% year-on-year to 56 million and in February grew further to approximately 63 million. Our video subscription revenue grew 149% year-on-year to RMB2.2 billion in the fourth quarter. We believe our video market share gain stems from several factors including the following: Our original and licensed content. During 2017, we sharply increased investments in original content, at times utilizing IP generated by our video content generation businesses such as China Literature and Tencent Games. We also continued to identify and purchase the rights to category leading drama series, variety shows, animations, movies, documentaries and so forth. Secondly, our platform capabilities. Our large, highly engaged user base generates substantial demand for video consumption and video sharing. We have got a sophisticated content scheduling system which together personalized recommendations, enables us to allow users to a fast flowing stream of new content relative to their customer needs, which enhances user retention from video service in general and our subscription service in particular. To deepen user engagement and time spent on our platform, we nurture fan-celebrity interactions in Doki, our new social community within our Tencent Video app. Third, our partnerships with adjacent businesses. Upstream, we have made dozens of equity investments and established new entrant content studios, which provides us with reliable content output and to some extent hedges us against content cost inflation. Downstream, we’ve partnered with a number of major TV set manufacturers who pre-install our TV launches on their sets, accelerating the growth of our over-the-top video streaming to TV set service where we believe we’re also the China market leader. I will now pass on to John to go through the financials.

Hello, everyone. For the fourth quarter of 2017, our total revenue was RMB66.4 billion, up 51% year-on-year or 2% quarter-on-quarter. Gross profit was RMB31.5 billion, up 33% year-on-year and down 1% quarter-on-quarter. Net other games were RMB7.9 billion for fourth quarter of 2017. It primarily reflected net deemed disposal gain relating to the IPOs of Yixin, Sea, and Sogou, subsidies and tax rebates as well as dividend income for certain investee companies. Share of losses of associates and joint venture was RMB120 million in the quarter compared to share of profits of RMB818 million for the third quarter. On a non-GAAP basis, share of profits of associates and joint venture was RMB495 million in the quarter versus RMB802 million for the third quarter. Income tax expense was approximately RMB3.1 billion, up 30% year-on-year or down 37% quarter-on-quarter. The year-on-year increase was mainly due to greater profit before tax. The quarter-on-quarter decrease was mainly due to reversal of income tax expense for certain subsidiaries in China, which were qualified for high tech enterprise in quarter four to enjoy lower corporate income tax. Effective tax rate for the quarter was 12.6%. Net profit attributable to shareholders was RMB20.8 billion, up 98% year-on-year or 16% quarter-on-quarter. For the full year of 2017, total revenue was RMB237.8 billion, up 56% versus last year. Gross profit was RMB116.9 billion, up 38%. Operating profit was RMB90.3 billion, up 61% versus 2016. Net profit attributable to shareholders was $71.5 billion, up 74% year-on-year. The effective tax rate for the year was 17.8%. I will walk you through our non-GAAP financials for the fourth quarter and after adjustments to non-GAAP. Operating profit for the quarter was $21.9 billion, up 46% year-on-year or 1% quarter-on-quarter. Operating margin was 32.9%, down 1.2 percentage points year-on-year and broadly stable quarter-on-quarter. Net profit to shareholders was RMB17.5 billion, up 42% year-on-year or 2% quarter-on-quarter. Net margin was 27.7%, broadly stable year-on-year and up 1.4 percentage points quarter-on-quarter. Let's turn to segment gross margin. Gross margin for value added services was 59.3%, down 3.9 percentage points year-on-year and broadly stable quarter-on-quarter. The year-on-year decrease was mainly due to higher channel cost of smartphone games paid to third-party app stores, including Tencent manufacturers, and revenue mix change to lower margin products such as digital content services. Gross margin for online advertising was 37.2%, down 9.4% percentage points year-on-year and broadly stable quarter-on-quarter. The year-on-year change was mainly due to increased video content cost and higher traffic acquisition cost due to a rapid growth of advertising network business. Gross margin for others was 22.8%, up 2.4 percentage points year-on-year and 2.5 percentage points sequentially. The year-on-year and quarter-on-quarter improvement were mainly due to gross margin improvement of payment-related services, as a result of larger base. For the full-year 2017, gross margin for VAS decreased 5 percentage points to 60.1%. Gross margin for online advertising decreased 6.2 percentage points to 36.7% and gross margin for others increased 5.9 percentage points to 21.9%. Moving on to operating expenses. Selling and marketing expenses were RMB6 billion, up 35% year-on-year or 25% quarter-on-quarter. The year-on-year increase mainly reflected greater marketing spending on products and platforms, such as online games, online media and payment related services. The sequential increase was primary driven by greater marketing spending on products and platforms such as payment related services and online media as well as seasonal marketing and promotional activities for our online games. As a percentage of revenue, selling and marketing expenses increased to 9.1% for the fourth quarter versus 7.4% for the third quarter of 2017. Total G&A expenses were RMB8.8 billion, up 28% year-on-year and down 3% quarter-on-quarter. Under G&A, R&D expenses were RMB4.8 billion, up 33% year-on-year and down 1% quarter-on-quarter. The year-on-year increase mainly reflected higher staff costs. The quarter-on-quarter decreased was mainly due to true-up of our bonus forecast at year-end. As a percentage of revenue, total G&A was 13% and R&D was 7%. At the end of the fourth quarter, we had about 45,000 employees. The year-on-year increase of 16% was mainly due to our expanded business growth. On a full-year basis, selling and marketing was RMB17.7 billion, up 45% and represented 7% of revenue. Total G&A excluding R&D was RMB15.5 billion, up 47% and represented 7% of revenue as well. Let's go through margin ratios for the fourth quarter. Gross margin dipped 6.5 percentage points year-on-year to 47.4%, mainly due to decrease in VAS segment gross margin and increasing contribution from other segment which carried lower margin. Gross margin was down 1.2 percentage points sequentially. Non-GAAP operating margin was 32.9%, down 1.2 percentage points year-on-year, primarily reflecting lower gross margin, partially offset by higher other gains and lower selling and marketing and G&A expense as a percentage of revenue. Quarter-on-quarter change was flat. Non-GAAP net margin was 27.7%, down 0.6 percentage points year on-year, up 1.4 percentage points quarter-on-quarter, mainly due to lower income tax expense. On a full-year basis, gross margin was 49.2%, down 6.4 percentage points. Non-GAAP operating margin was 34.5%. Non-GAAP net margin was 27.9%. Turning to earnings per share and proposed dividend for 2017. For the whole year, GAAP basic EPS was RMB7.598 and diluted was RMB7.499. Non-GAAP basic EPS was RMB6.92 and diluted was RMB6.83. Subject to the approval of shareholders at the AGM to be held on 16th of May 2018, we are proposing an annual dividend of HKD 0.88, representing an increase of 44% from last year. Let’s share some of the key financial metrics with you before rounding up this presentation. For the fourth quarter, the CapEx was RMB5 billion, up 75% year-on-year and 42% quarter-on-quarter. Operating CapEx was RMB3.8 billion increased by 69% quarter-on-quarter, mainly due to the increased number of servers for cloud [ph] and Weixin businesses. Non-operating CapEx was RMB1.1 billion. For the full-year of 2017, total CapEx increased 12% year-on-year to RMB13.6 billion. Free cash flow reached RMB24.2 billion, up 41% year-on-year or down 12% quarter-on-quarter. The quarter-on-quarter decrease was mainly due to lower operating cash flow and higher operating CapEx. On a full-year basis, free cash flow was RMB93.4 billion, up 70% year-on-year. At year-end, our net cash position was RMB16.3 billion, down 10% year-on-year and 13% quarter-on-quarter. The sequential decline primarily reflects the payment for M&A initiatives, partly offset by free cash flow generation. The fair market value of our listed associates and available-for-sale financial assets, of course, excluding subsidiaries were approximately RMB210.8 billion or about US$32 billion as at year-end. Thank you. We shall open the floor for questions.

We will now begin the question-and-answer session. [Operator Instructions] First question comes from the line of Grace Chen from Morgan Stanley. Please ask the question.

Hi. Thank you. Thank you for taking my question. I have two questions. My question is about your accelerated investments in e-commerce and various offline retails. Can you share with us your insight about how your recent offline investments ranging from Yonghui, Carrefour, Wanda and Heilan Home, how these investments would help realize your smart retail strategy? And how we can expect there will be more investments in offline retailers to come. So, can you help us understand what will be your key considerations for more offline investments in the future? So, that’s my first question. And my second question is on other business segments. Payments and cloud have been growing very fast. So, this segment made up 21% of total revenue already in the fourth quarter. And we also noticed that gross margin for this segment in a quarter also improved to 23%, so which I think should be the highest ever. Can you help us understand the drivers for the margin improvement in the quarter and also share with us the monetization progress of the payment business specifically, given the rising contribution from this segment, which should have a bigger impact on blended margin going forward? Thank you.

Okay. Thank you. In terms of smart retailer, I would say, as we have pointed in our prepared remarks, smart retail is an important strategic initiative for the Company to enable retailers and also allow Tencent to get a stronger presence within the retail vertical. And we believe that this is going to benefit our payments, it’s going to benefit our advertising as well as cloud services. And at the same time, it will allow us to help retailers to leverage as well as to benefit from the increasing online and offline integrated user behavior of the users, given that smartphones are being used in a very ubiquitous way by the users. Now, with respect to the investment itself, what we try to do there is really -- it’s an add-on to our smart retail strategy. If you look at our smart retail strategy, we have solutions that we’re developing to enable different types of retailers, merchants. And when we started working with them, some of the retiles and some of the players would tell us that look, it will -- we may have specific project that we want to explore with you, it’s very strategic in nature, they would like us to help them on the digital transformation. But sometimes the value of the project is very hard for us to figure out exactly how to divide up the value that’s created. So, in those situations and usually, it’s a pioneering type of corporation. We will say okay, maybe one way to overcome this uncertainty in terms of how do we add value to each other is that we take a stake in you, so that we show our commitment. And at the same time, we would benefit, if you benefit. So, that’s more of a special case in smart retail, rather than a general practice. A lot of times when we look at retailers, we maybe would benefit from their digital transformation and we want to invest, and they say, we don’t need capital. There are a lot of cases like that in which we basically work with them on a commercial basis. So, I would say, retail is an important sector that we believe given our traffic, given our technologies, we can actually help them to create more value. And we can create more value through commercial cooperation. We can also create value through sometimes investing, if they find a situation that they need capital and we want us to invest.

In terms of your second question about other revenue line, so the primary driver of the revenue line -- and of the revenue growth in that revenue line and of the gross margin for that revenue line is payments and financial services business. And you asked about the monetization. So, there’s a few drivers, one is the consumer withdrawal fees that are tied to usage of Tenpay, particularly for money transfers. Second one is the merchant fees that is tied to usage of Tenpay for commercial transactions. Third one is interest income on the float, which is subject to regulatory changes. And the fourth one is building up adjacent financial services, such as the Weilidai micro loan. And the improvement in gross margin you’re seeing, reflects a few factors. One is over the scale benefits and the second one is a gradual revenue mix shift towards some potentially higher margin products. And then, the third one is us putting levers on individual products. I think during the quarter, we mentioned that we adjusted some of the leases around using Tenpay to settle credit card outstanding liabilities. Now, on the flip side, we think this is a very early stage growth market, and we see ability for us to sustain and extend the market share gains we’ve recently been enjoying. So, we intend to invest, reinvest very aggressively in our payment business during 2018 to further drive adoption and that may have a negative impact in margins. I think that both we as market participants and you as market observers focus a great deal on the short-term dynamics of the subsidies and competition and margins and so forth. But sometimes it’s important to step back and look at a bigger picture, which is that China is arguably the most successful mobile payment market in the world. And part of the reason for that success is because there are two big strong companies competing to rally drive mobile payments adoption. And so, while the competition has caused up margins to be volatile in the past and will cause our margins to be volatile in the future, we think that we together with our competitors and our customers and our merchants are creating a really big interesting market opportunity over time here that is an example to the world.

The next question comes from the line of Eddie Leung from Merrill Lynch. Please ask the question.

I have a question on more of the content side. Could you share your thoughts with this on the industry development of short form video and self media? We have seen Tencent being very strong in professional content. So, just wondering how you think about the potential cannibalization on user time between professional content versus this type of more user-generated content and what’s our strategy going forward?

Yes. That’s a good question, Eddie. I think number one, there’s definitely a very strong growth in terms of short video content, and I would say it's content around content feed. So, basically, when you have a feed, you can actually put self media content, news magazine type of content, interest type of content as well as short video. But, what we have seen is that this is -- the growth of this market is more of incremental to the growth of the professional content. So, while -- as an example, while all the growth happens within the content feed industry, our Tencent Video business continues to break new records in terms of DAUs, user time and subscriptions. So, I would say, it's a new opportunity. And in terms of this new opportunity, if you go back, self media was really almost created by WeChat when Weixin came up with the official account. And that allows a lot of different types of content owners to have a channel, so that they can sign up subscribers and start pushing their content to the subscribers. Now, some of our industry peers actually took advantage of that and created content feed. And that's arguably a more efficient way for users to read and explore a new content. So, as a result, that market started to bloom. And at the same time, when content feeds become more and more popular, then short video becomes a very important content type for the content feed business. Now, for us, I think, in response to this very, very big incremental market opportunity that we have been doing number of different things. Number one, we have actually launched a number of different products with the content feed, frontend. And that would include our Kuai Bao that would include our news and video and that's in our traditional media business. But, we have also put it into our social platform. So, if you look at KanDian if you look at [indiscernible] which is on WeChat, KanDian, which is on QQ, and also our browser has got this content feed frontend. And we have seen very strong growth in a lot of this frontend content feed business, in particular for KanDian, which has a very strong growth in the past year. And in addition to the frontend, we are actually working on the backend content side. And of course, we have official account, which is already a very strong content ecosystem. At the same time, we are also launching our Tencent open platform -- media open platform, which tries to integrate the acquisition, acquiring of all the different types of content including self media, including news, interest-based content and short video, and use that as a way, so that we can distribute across all our frontend content feed business. And that has seen a very strong progress. And so, I think, it is -- and at the same time, we are also developing our targeting technologies, so that we can support our frontend content feed with more personalized content. So, across the board, I think it is a great opportunity for us. We have a lot of user touch points. And we believe that if we can really get the content integrated and well distributed and technology well distributed, then we can actually grab a very significant part of the new market. And at the same time, these content feeds are actually great venues for putting performance based ad as well. So, over the longer term, that would become a revenue opportunity for us as well. Now, in the meantime, we felt it’s such a great opportunity that we need to invest more into the content acquisition. So, that’s why we pointed out in our prepared remarks that this year we are going to step up in a pretty aggressive way in acquiring video content, be it long form or short form.

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

Hi. Good evening, everyone. Thank you for taking my question. So, you guys mentioned in the prepared remarks that 2018 will be a year of more aggressive investments. While vast majority of the investment areas were already in place way before 2017, I am just wondering what triggers you to make the decision to more aggressive in 2018. Is there a change in the competitive landscape in those markets and areas or is it something related to Internet macros such as the slowdown of mobile traffic? The second question is more or less related to the first one. In the past, you guys have been quite balanced operationally and financially speaking. As you turn more aggressive in investment in 2018, what will you increase monetization to potential alleviate the financial impact from this investment? Thank you. I will stop here.

Yes. I think, in terms of the aggressive investment, I think, there are a number of factors which is driving this decision. Number one, of course, is the amount of opportunity that we see. We build a company that -- on the principle that we want to go for long-term large opportunities, and that’s what we focus on. So, as we continue to explore and develop our different verticals where you found the amount of long-term opportunity that’s available is actually increasingly bigger, and we believe that it’s actually very important at this stage for us to make the necessary investments, so that we can actually achieve a better market decision and grab -- and accelerate the development of our business. And secondly, I would say, clearly in a lot of the areas, we’re actually doing well, so that it’s actually worth for us to double down in terms of our investment, so that we can accelerate the growth. For example, in video, last year was a banner year for us in which we have worked on a multi-year journey, so that we became the absolute leader in the market by the end of year last year. And we enjoy a much faster growth in terms of our DAU, in terms of our subscriptions. And that’s why I really thought that if we increased our investment in 2008 and in 2009, (sic) [2018 and 2019] we are going to reap a much bigger benefits for the future. And finally, I would say, obviously, we have a very strong profit growth. So, we can really look forward to make such investments. And we felt that every dollar invested today is going to generate to much more for the future. In terms of monetization, I would say, we don’t monetize for the sake of monetization. We have always been pretty measured in terms of our monetization. We focus much more on how much is monetizable than how much is monetized. So, if you look at -- an example is our advertising right now. I think, our performance ads business on the social front has got a lot of potential for inventory growth. But, I think we have been pretty measured and disciplined in terms of adding inventories, so that we maintain a great user experience and at the same time we only monetize more with our -- at the growth of our technical capabilities. And another example is in our content feeds business. I mean, our ad load is much lower than our industry peers, which we felt there is room for us to grow, but then at the same time we will be doing it in a measured and disciplined way. The other example is in this survivor shooting game genre, in which I would say, if you look at the amount of success that we have achieved with two PUBG mobile games, we have a very large DAU, which is non-monetized yet, and we felt pretty good about this. In the future, when you have such an engaged user base, we believe there is a lot of potential for us to monetize. But, in the meantime, it's actually much more important for us to keep on improving the user experience, the game content -- adding the game content, so that we can really solidify our position.

Next question comes from the line of Gregory Zhao from Barclays. Please ask the question.

My first question is about your social e-commerce. In the past year, we saw very strong growth momentum of the social e-commerce and in terms of both genre growth and social influence. Can you help us understand how WeChat can benefit from this trend and what’s the potential monetization opportunity to WeChat? And my second question is a follow-up question to payment. So, in the past Q4 and the Chinese New Year gala, we saw that Alipay increased its investment in marketing and user acquisition. So, what will be your strategy and response to the competition, and we will follow that strategy, and how should we think about the implication to our margin going forward? Thank you.

Yes. I think, around social commerce, we felt this is an important way through which people shop for products. So, you can do it offline, you can do it online in a centralized e-commerce site. But at the same time, you can also engage in social commerce, and it allows smaller -- it allows smaller merchants to be able to find their users through social channel. But, there is also a lot of interaction between social commerce and a shop-front. If you look at [Indiscernible] for example, it has both the centralized store front and social commerce. If you look at JD, it has a very strong centralized shop-front, and it's also getting better in terms of leverage and social traffic to increase their engagement of users. So, we felt social commerce, if done well, is actually a net addition to the user experience for our users. But, it's actually very important to make sure that the quality of the products are actually well-maintained. So, in the past, we’ve seen -- there are a lot of companies which tried to leverage social e-commerce in the wrong way, in terms of over-spamming the users, in terms of providing bad products. And those are the kind of things that we want to weed out. So, I would say, we have a lot more work to do in order to cultivate the good kind of social commerce, but at the same time, we need to protect our users against abusing social commerce in a bad way. Now, in terms of Alipay, right now, I would say, yes, we have seen a significant increase in terms of our peers' subsidy level. And starting from the beginning of this year, we have also rolled out a pretty aggressive program of providing subsidies to merchants and users and have received great result. So, I would say, going back to what James said, right, in a market where the opportunities is much bigger than what we see today, in which there is a lot of growth opportunities, then it makes a lot of sense for any player, right, to invest more, so that we can expand the market further, even if we cannot grab share from each other. So, that's why we have said, we would be investing more in this year in the payment platform, so that we can catalyze a faster growth in the overall market and hopefully we can also grab more share.

Your next question comes from the line of John Choi from Daiwa. Please ask your question.

Good evening guys and thanks for taking my question. I have two questions here. First of all, I noticed that Tencent completed the revamp of the news feed ad system and also launched a unified advertising platform to integrate all their inventories across the news feed products. So, I mean, should we expect notable increase in terms of the revenue from the media advertising in the coming quarters, since this has been behind us? And second is on the Mini Programs, just wondering that it’s been a little bit more than a year since the Mini Programs has been launched. We now have 120 million DAU. What has of you guys seen in terms of the user behavior change within the reach out for these users and how do you think you could further monetize or seize the opportunity in the Mini Programs in the coming years? Thank you.

Yes. So, I think on the news feed side, we have a number of tasks ahead of us. It's obviously a relatively competitive market with [indiscernible] as a dynamic first mover that keeps pushing in new directions including short video. And on our ad side, there’s a number of products that incorporate news feeds. And in the near-term, our primary focus is really on the content we show to those users in the news feed. It’s on securing more, better content. It's on surfacing the right content to the right users in a more targeted fashion. We have been in the process of centralizing and upgrading our advertising capabilities, but I think you will see those advertising capabilities put to work in a major step by step function. You will probably see it first in KanDian newsfeed which sits within Q2. It’s already quite popular and relatively well-established and relatively stable platform. Then, you may have see it extend some of our other news feed distribution such as the Kuai Bao or the newsfeed product within our mobile browser and over the medium to longer term, we’re also ramping up new news feed products such as the such as the KaniKan [ph] product within Weixin. But generally speaking, we’re more focused on the product today than we are on the monetization.

In terms of Mini Programs, we are very encouraged by the recent development of Mini Programs, as you know we launched the Mini Program more than a year ago. In the very beginning, there was a lot of fanfare, a lot of expectation, but then it was actually off to a slower start. I think, the main reason at that time was really the time for education as well as also for us to build up the necessary infrastructure supporting Mini Programs. After a whole year of development, we actually have seen the first breakout in Mini Program. And that’s mainly circularized by, I would say three things. One is the accumulation of Mini Programs and the increasing adoption of that in the offline world. That’s the slow build up. But then, toward the beginning of this year, we have launched mini Games, which is I would say easy way for people to get to know what Mini Programs is. Not everybody would have run into Mini Program QR offline but everybody can sample a mini Game. And that’s a great way to educate the users about the ecosystem. And we also provide this in the chat screen. We have this pull down menu for most recently used Mini Apps and Mini Programs which allowed people to access, Mini Programs that they have used in a very convenient way. And the two new measures really I would say capitalized the latent and buildup growth of Mini Programs that are already in place and the three factors added together, has brought Mini Program to a new height. And I think going forward, we continue to build Mini Programs as a way for service providers to engage with users in a very light and convenient way. And particularly, it would help offline, online integration, it would help, apps which are complicated right now to serve their users in a very simple and fast and convenient way, and it would also help offline -- some long-tail services which you used to be very hard for them to convince users to download the apps. And now they can actually provide their services directly to the users and get a chance to have their app downloaded if users like their app. So, we would say, it would be a platform for all kinds of innovation to happen and it would also become a service ecosystem for WeChat.

Next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question.

I’ve two questions about the online gaming space. First, can management comment about the mobile games, and the PC games industry landscape for this year, given the emergence of PUBG games? And my second question is about a more housekeeping question. Can management provided us with the ARPU for PC and mobile games?

First, I’ll attend the second question, the ARPU for MMOG is 400 to 660; for ACG it’s 120 to 590; and for the smartphone games, it’s 150 to 260.

In terms of the outlook, PC games, and mobile games, in the end, it really comes down to the quality of the games being released and the quality of the content upgrades and live operations activities for the existing games, but together a little bit more granular than that. I think for the PC game industry, in China is really undergoing a maturation, consolidation phase, because incremental users are spending more time on mobile games and less time or no time on PC games. So, that’s a headwind that everyone in the PC game industry including Tencent faces. And at certain points in 2017, we benefitted from particularly strong content upgrade on game X or from particular popular skins on game Y, but there’s some volatility to those content upgrades and skin releases. And I think we were somewhat fortunate in 2017, which creates a tough comparison for 2018. But, what’s interesting is if you look at the PC game industry outside China, then, it’s generally still growing at a decent single digit range. And that growth again is driven by breakout new products and that’s both massive scale new products such as PUBG and Fortnite, but also new products that invigorate particularly niches like the Monster Hunter game, or The Dark Souls game. So, we think at some point the PC game industry in China would have consolidated so the core PC gamers who play PC games for a reason and that point the growth opportunity will then belong to those companies who are still properly servicing those players with great new games and strong existing game content upgrades. So, that’s on the PC game side. On the mobile game side, we believe that the number of mobile gamers in China is still increasing as the smartphone installed base expands and as the quality of smartphones and the quality of the games themselves improves. Now, there’s some volatility as new genres are introduced to the market. If you look at PC games, when League of Legends first came to market and you can see this particularly clearly in Korea actually, where their habit of playing PC games in internet cafes is most established, then the immediate impact of League of Legends was to actually depress the PC game industry in Korea, because people shifted from high ARPU existing titles such as role-playing games into League of Legends, which initially didn’t really have an ARPU. So, in the same way, it’s possible that the China mobile game industry since late last year when the Survival Shooter genre exploded onto mobile, has experienced a similar negative shift where people who were previously playing higher ARPU games such as roll-playing games have shifted into these Survival Shooter which in some case to start off with no monetization. And that is indeed the case with our Survival Shooter games. It your focus is very much on quarter-to-quarter revenue trends and that's absolutely something that you should be thinking about and concerned about; if your focus is more on the long term industry potential, then, it shouldn’t be due concern. Because in our experience, whenever you have games that are highly engaging that are attracting substantial user base with great enthusiasm, then sooner or later and usually sooner, someone within the industry figures out how to monetize those games effectively and the rest of the industry follows fairly quickly. And you can already see with the Survival Shooter games, we are very substantial investor in an excellent North Carolina-based game studio called Epic Games. They released the Survival Shooter game in the middle of last year with Fortnite Battle Royale. Fortnite Battle Royale is completely free to download in Play. And I encourage those for you who are gamers who don’t already do so to try it. But then, in the last few months they’ve been innovating around Battle Pass concept, and that actually has achieved very healthy monetization within a free-to-play framework for that particular Survival Shooter game. So, again, the timing of monetization in new genre is such that survival shooting game can be uncertain. But longer term, probability of monetization is very high. And if that's the case, which we think it is, then we believe that the mobile game industry has a very bright future ahead of it.

This is the last question, Alicia Yap from Citigroup. Please ask the question.

Hi. Thank you. Good evening, management. Thanks for taking my questions. Two follow-up questions. One is actually related to your recent RMB1 billion investment into both Douyu and Huya. So, can management share with us the rationale for the investment in how management sees the overall landscape and the growth opportunity for the game live broadcasting industry going forward? And will there be more synergies if Tencent ultimately seek consolidated stakes in this company which potentially could complement the slight lower monetization from the survival games in the future? And then second, question is on the margins. So, given management comment of stepping up the investment, any color in terms of what would be the percentage points of the margins under pressure this year? And will these mainly for 2018 or will that drag further into 2019? Thank you.

So, I think in terms of the game broadcasting, we felt it's a great standalone business emerging as well as having great synergies with our gaming business. And we’re seeing an increasing number of our gamers spending more and more time on the broadcast communities. So, we thought there is a lot of synergies that the broadcasting sites can have with us including it's an extension of the user -- gamers' usage time. It also allows a lot of gamers who don't have the time to play the game to stay abreast of the games they like. And it also is a great way for people to engage in community activity. So, I think over time, games broadcast can also support eSports industry. And we will see, there is games which like sports, there will be sports stands who are beyond the number of people who play the sports and they will be watching ESPN for example and these broadcast sites will be like this media. And at the same time these platforms because they are communities that interact, they can facilitate lower communities being brought around games and interests. So, we believe these broadcasting sites can not only allow us to build more synergies with our games, it would also develop new business models, both in conjunction with our games as well as on their standalone basis. So, they will attractive standing business on their own and at the same time there will be synergies with our games. I think, it’s at early stage of development. The industry would benefit from having multiple entrepreneurial teams who are innovating in the industry. So, we felt it’s important for us to support a number of these companies and develop our own integration with them. And in terms of the margin, I don’t think we can actually provide you with that quantitative detail. But, it’s fair to say, in each one of the investment areas, we look at it much more on how much future value we can build. And if it’s going to generate very strong return for the future, we would make the investment.

Thank you. And we are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our Company website. 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 Fourth Quarter and Annual Results Conference Call. You may all disconnect now.