Thank you for standing by, and welcome to the Tencent Holdings Limited 2018 Fourth quarter and Annual Results Presentation. 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'd now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip.

Thank you. Good evening. Welcome to our 2018 fourth quarter and annual results conference call. I'm Jane Yip from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market 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 website. Let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick with a short overview. President, Martin Lau, will discuss strategic highlights. Chief Strategy Officer, James Mitchell, will speak to business overview. And Chief Financial Officer, John Lo, will go through the financials followed by a Q&A session. I will now turn the call over to Pony.

Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us. 2018 marked the 20th anniversary of the founding of Tencent. Throughout our history, we embraced changes to stay at the forefront of the industry. Recently, we launched a strategic organizational upgrade to expand our strength in the consumer Internet and to increase the opportunities of the industrial Internet. We will share key milestones with you in the future. During the year, we strengthened our market leadership in key areas and built deeper connection with our users, advertisers, merchants, and enterprise partners. In social, Weixin becomes the way of life in China, aided by Weixin Pay and Mini Programs penetrating more use cases. The sharing of mini videos within chat also drove rapid growth in user activity. Mobile QQ continued to focus on young user engagement via social video sharing and news feed. Benefiting from increased user traffic and advertiser demand, social and other advertising revenue rose 55% year-on-year. In online games, we are the world's largest game platform by users, revenues, with the technical capabilities to operate multiple blockbusters simultaneously. By MAU, League of Legends continued to be the biggest PC game and PUBG MOBILE becomes the most popular smartphone game globally. In China, we sustained market leadership and also implemented the Healthy Gameplay System in our most popular mobile titles to encourage balanced game time for young users. In media and content, we grew digital content subscriptions 50% year-on-year to over 100 million, thanks to our popular self-commissioned productions. News feed, short video and mini video views increased rapidly across our media platforms, QQ Browser and WeiShi. We grouped our content businesses to form a new Platform and Content Growth, we call PCG, enabling us to focus resources on systematic content creation and management, as well as algorithm enhancement. In ecosystem, our payments service expanded users and merchant adoption, enabling us to grow commercial transactions rapidly and upsell fintech products. We stepped up investments in Tencent cloud, integrating the AI and big data into the offering, to drive organic growth of our own cloud business and assist the digital transformation of various industries. Our customized solutions for smart industries are equipped with tools, leveraging our social and technical capabilities. Now, let me go through the headline numbers. And John will provide more detailed discussion in the financial section. For the fourth quarter of 2018, total revenue was RMB 84.9 billion, up 28% year-on-year and 5% quarter-on-quarter. Total games revenue, which includes platform revenue share booked under social networks, was 36% of total revenues compared to 45% for the fourth quarter of 2017. Non-GAAP operating profit was RMB 22.4 billion, up 2% year-on-year or down 1% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB 19.7 billion, up 13% year-on-year and stable sequentially. For the full year of 2018, total revenue was RMB 312.7 billion, up 32% year-on-year. Non-GAAP operating profit was RMB 92.5 billion RMB, up 13% year-on-year. Non-GAAP net profit attributable to shareholders was RMB 77.5 billion, up 19% year-on-year. For our key platforms, in social, combined MAU of Weixin and WeChat improved 11% in the year to 1.1 billion, driven by user communication needs as well as adoption of Mini Programs and Weixin Pay. Total MAU for QQ was over 807 million. Smart devices MAU increased 2% year-on-year to 700 million. For Qzone, smart devices MAU was 532 million, down 4% year-on-year. In online games, we expanded total user base, benefiting from the popularity of tactical tournament games and action games on mobiles. In PC, we released several niche channel games and received intelligent feedback from players. In media, Tencent video expanded market share in China in terms of mobile, DAUs and paying subscriptions. We also used short and mini video to boost time spent in our media feeds business across Tencent News, QQ KanDian, QQ Browser and other news properties. In payments, we further broadened its use cases and grew total commercial payment volume rapidly despite intense market competition. We are now operating the largest mobile payment platform in China, measured by active users and the number of transactions. In utilities, QQ Browser and Android app store, [indiscernible], maintained market leading positions. Our online security team expanded their research to cover a range of new use cases such as automobile security. With that, I will pass to Martin to discuss strategic highlights.

Thank you, Pony. And good evening and good morning to everybody. In this section, I will discuss some of our strategic initiatives that have firstly contributed to the growth of our social platforms as well as our core businesses in payment, advertising, cloud and, secondly, have formed our key proposition to help our enterprise partners to embark on their digital transformation. Starting with this page on Mini Programs, the platform has become very popular among users. It benefits from a number of key drivers. Firstly, for users, given the ubiquity of Weixin Mini Programs enables to further enhance [indiscernible], providing easy access to a broader range of daily live services. Total active users of Mini Programs grew more than 250% year-on-year and daily visits per user also increased 54% year-on-year in the fourth quarter. With service providers, they can connect with consumers via Mini Programs and drive transactions leveraging mobile payment, social sharing, data analytics and targeted advertising. Our Mini Programs are distinguished partly by the benefits they bring to long-tail service providers. Daily visits to long-tail Mini Program increased from 13% as of the end of 2017 to 43% as of the end of 2018. For developers, our Mini Programs are designed to facilitate cross-platform development and instantaneous deployment, a unique advantage that increases development efficiency. On top of that, we also provide cloud-based development kits to make the development process even easier. As an emerging platform, we are helping to develop the talent pool in the developers. On that front, we partnered with more than 100 universities to include Mini Programs in their curriculum and students now make up 24% of Mini Programs developers in China. Now, turning to the next page is Weixin Pay. That platform has grown from strength to strength. By the end of 2018, tens of millions of mom-and-pop stores can now accept mobile payments via our easy-to-deploy QR code solutions, which does not require expensive point-of-sales equipment. In total, the number of merchants actively transacting via Weixin Pay increased 80% year-over-year in the fourth quarter of 2018. We also made significant progress in the food and retail categories with a well-executed strategy that leveraged Mini Programs, scan-to-pay, customized management tools, and partnership with investee companies such as Meituan-Dianping. Merchants using Weixin Pay typically see fast customer adoption. Average daily commercial transactions on Weixin Pay more than doubled year-on-year in 2018 as did the accompanying merchant revenue through Tencent. On a daily basis, there are over 1 billion transactions on Weixin Pay, the majority being commercial transactions. We believe Weixin Pay is the clear mobile payments leader in China in terms of daily users and the number of total as well as commercial transactions. Built upon our extensive user reach and deep user engagement, we are able to upsell fintech products to consumers at low acquisition cost. Our wealth management platform, LiCaiTong accumulated over RMB 600 billion of customer assets as of year-end. We also helped WeBank distribute micro loan products, WeiLiDai, to individual consumers, which loan balance has been growing very rapidly. We also launched a new product called WeiYeDai to service small and micro businesses alongside with WeBank. Moving on to our advertising business, in our recent strategic organizational upgrade, we have merged our app sales team to enable them to sell both brand advertising as well as platform advertising. Key advertising accounts now benefit from coordinated sales coverage and the ability to buy efficiently across all our ad inventories. SME advertisers benefit from the ability to bid and place ads in a more timely and efficient fashion. We've also centralized our advertising data and analysis platform, greatly enhancing our ad targeting capabilities. And now, we can optimize traffic value by dynamically allocating our partner our own inventories to the most suitable pricing models, including CPC, CPM and optimized CPA. We continue to support our partners in achieving sales growth with a rich content partnership, smart retail solutions as well as technology support. We have a broad portfolio of inventories, attracting a healthy mix of advertisers across industries and budget ranges. We continue to focus on enhancing ROI to deliver value to advertisers and this is particularly important to make headways in the current macroeconomic environment. Ad loads on our properties are generally lower than most peers in the market and we'll continue to manage it conservatively to produce sustainable growth over the long-term. For our cloud business, we made good progress in 2018. For the full year, cloud revenue was more than double to RMB 9.1 billion. In the fourth quarter, cloud paying customers also more than doubled year-on-year. Tencent cloud has become a clear market leader, catering to online games and video customers, leveraging our infrastructure and operational expertise. In Internet services, by leveraging our strategic partnership in key verticals, we have quickly expanded the customer base in categories including e-commerce, social media and community, handset manufacturers and smart transportation. In financial, we are the partner of choice for top banks and that provides showcases for small and medium-sized financial institutions. In retail, we assist retailers to execute their digital transformation. We help them strengthen customer engagement via CRM and data analytics, enhance their marketing ROI using customer marketing and antifraud technologies and also help them to upgrade their internal operations via smart solutions, integrating AI, LBS and big data technologies. We will continue to invest aggressively to enhance our cloud capabilities and offerings. Finally, talking about our ecosystem, which continued to expand during the year, partly driven by our strategic investments. Making strategic investments brings benefits to our core business, by leveraging best-of-breed category leaders to tap into new opportunities, allow us to focus our own attention and resources on our core platforms. Also, through upstream investments, we have enriched our IP portfolio in games and our digital content. In addition to that, partnership with investee companies also enable us to capture emerging opportunities and help us to expand our offerings to meet evolving user needs, usually in different verticals where our investee companies have unique and domain expertise. It also helps to accelerate the adoption of our enterprise-facing services such as payment, advertising and cloud. As a strategic investor, we are committed to creating value for investee companies by offering access to a large user base as well as supporting the business growth by providing them with infrastructure, technology and capital. During the past decade, we have built a hand-picked portfolio covering games, digital content, O2O services, fintech and emerging tech areas to over 700 investee companies. More than 100 investee companies were valued over $1 billion each and over 60 are publicly listed already. Going forward, we will continue to make strategic investments to strengthen our ecosystem and, in the process, bring benefits to our users, our partner companies as well as ourselves. And with that, I will pass to James to talk about our business review.

Thank you, Martin. And good evening or afternoon or morning everyone. For the fourth quarter of 2018, our total revenue grew 28% year-on-year. As a percentage of revenues, VAS represents 51%, online advertising was 20% and the other segment accounted for 29%. Starting with our VAS business, segment revenue was RMB 43.7 billion in the fourth quarter, up 9% year-on-year, though down 1% sequentially. Social network revenue was up 25% year-on-year and up 7% quarter-on-quarter, with growth flowing from live streaming videos services and video subscriptions. Our total VAS subscriptions increased by 19% year-on-year to 160 million as our video and music subscriber bases grew rapidly due to self-commissioned video content and our music content library. Online game revenue in the quarter was down 1% year-on-year and down 6% quarter-on-quarter. In our social networks, video interaction and consumption contributed substantially to our activity growth in both QQ and Weixin. For Mobile QQ, AI-enhanced filming capabilities helped young users create imaginative and find content to share with friends, boosting short and Mini Video uploads by over 50% year-on-year. In QQ KanDian, we added new video categories and enhanced recommendation algorithms, introducing users to more relevant and interesting content and so significantly increasing daily video views. We also added bullet chatting within videos as a tool for viewers to interact. The Weixin and new function allows users to film and share instant videos that are available for 24 hours. And Weixin is providing background music matching the context of these user-created videos. Our enterprise app, WeChat Work, is gaining popularity, especially among large enterprises. WeChat Work can assist productivity in several ways. Thus, through integration with Weixin and Mini Programs, WeChat Works helps enterprises deepen their customer engagement and strengthen their post-sales interactions. Second, WeChat Work supports customers' database management, allowing enterprises to more powerfully analyze their data. And third, WeChat Work facilitates office administration via plugins for capabilities such as expense claim approvals. For smartphone games, total revenue for the quarter was RMB 19 billion, up 12% year-on-year due to new action and RPG titles, but down 2% quarter-on-quarter as we generally prioritized user engagement and other measures over monetization initiatives in a seasonally slow period. We released nine new games in the quarter. As many of you know, monetization approval for new games resumed in December. So far, seven new smartphone games, for which we have publishing rights, have received such approvals. These include titles in the role playing, strategy, casual and functional genres. Given the backlog game releases both for ourselves and the industry as a whole, [indiscernible] will initially be slower than in previous years. At our own initiative, we launched a pilot project to introduce to Healthy Gameplay System, promoting balanced gameplay for under 18-year-olds. Starting with Honor of Kings, the system is now implemented in 39 of our smartphone games, covering a large majority of young players. As a result, play time for minors reduced significantly whilst adult players activity and consumption were not materially impacted. Within China, our action games such as QQ Speed Mobile and Crossfire Mobile grew users by seasonal initiative and the introduction of season passes. We released several roleplaying games based on popular IPs including Battle Through the Heavens, our Mobile MOBA game Honor of Kings held its flagship e-sports event in December, attracting over 75 million unique viewers, an industry record for smartphone games. And we released an expansion pack for Honor of Kings in late January which has been well-received. In international markets, AppAnnie has ranked PUBG MOBILE the most popular game globally by MAU for iOS and Android since last November. Google Play named PUBG MOBILE its best game of 2018, citing its competitive and immersive game experience. Following the release of its Royale Pass in January, we believe PUBG MOBILE became the highest grossing game developed and published by a Chinese company in international markets. Several of our investees' mobile games also attained notable success. Supercell's new MOBA game, Brawl Stars, was the most downloaded game in 50 markets. Epic's Fortnite ranked number one in the US iOS grossing chart in the fourth quarter. And Free Fire, Arena's first self-developed game, was the fourth most downloaded game globally in 2018. Our investees' success benefits us financially, but also operationally in terms of shared insights into industry trends and user behavior, enabling us and our partners to influence the development of a healthy game industry globally. For PC cloud games, revenue for the quarter was RMB 11.2 billion, down 13% year-on-year due to users shifting to mobile and down 10% sequentially due to seasonal unfavourability. For League of Legends, user engagement trends have improved globally due to new game content and improved specifically in China with the additional benefit of a China team winning the world championships in November when 99 million viewers watched the live broadcast of the League of Legends finals in South Korea. Our recently-released NBA2K Online 2 game has significantly expanded NBA2K franchise user base with a more powerful game engine, superior graphics and better balanced game play. And we launched two new PC games, Iris Fall and Bladed Fury, to better serve niche audiences. Moving to online advertising, fourth quarter revenue was RMB 17 billion, up 38% year-on-year and up 5% quarter-on-quarter. Media advertising revenue was RMB 5.2 billion, up 26% year-on-year and up 2% quarter-on-quarter. Within media, media advertising increased year-on-year, helped by a rise in documentary shows, but rescheduling several highly-anticipated drama series out of the fourth quarter of 2018 and into later into 2019 led to a sequential revenue decline. Our news advertising revenue, on the other hand, increased year-on-year as we added inventory following the revamp of our news feed ad system and increased quarter-on-quarter benefitting from sports events and news feed. Media revenue generated from feed ads grew over 10 times year-on-year, benefitting from traffic growth, recovering from system revamp and rising scale rates. Our social and other advertising revenue was RMB 11.8 billion, up 44% year-on-year and up 6% quarter-on-quarter. Advertiser demand and increased ad inventory, especially in Weixin Moments, Mini Program and QQ KanDian drove the year-on-year revenue growth. Impressions growth in Mini Programs and positive e-commerce seasonality boosted revenues quarter-on-quarter, albeit to a lesser extent than in 4Q 2017 because the growth of mini programs advertising revenue in 3Q 2018 created an unusually high base for quarterly comparison. During the quarter, we showed a second ad unit in Weixin Moments to approximately 50% of Moments' DAUs. Click-through rates remained high for both the first and second ad units. Focusing on our Tencent Video business, we continue to lead the China online video market in terms of DAU, time spent and revenue. Driven by premium content, we had 89 million video subscriptions at quarter-end, up 58% year-on-year. Revenue from subscriptions increased 65% year-on-year. User engagement trends were healthy as video views per DAU increased over 40% year-on-year and contributed to advertising revenue growth of 21% year-on-year. Our operating losses remained lower than those of industry peers. We released sequels for several popular IPs, including season three of our adventure drama, Candle in the Tomb, and season two of our animated series The Land of Warriors. In December, we upgraded our video VIP loyalty program, enabling subscribers to access tiered benefits including e-commerce and travel privileges. We are the leading destination for viewing sports online in China, with the richest portfolio of major sports rights. For example, we've helped expand the NBA's audience in the country, leveraging our user base, communities, content curation, and video streaming capabilities. Average unique visitors per livestreamed NBA game in China has almost tripled over the past three years. Moving on to our payments and fintech services, revenue sustained rapid growth powered by three engines. First, merchants paying us transaction fees for use of our payment services. Second, users, particularly heavy users, paying us cash withdrawal fees and credit card repayment charges. And third, financial institutions, including our affiliate WeBank, paying us service fees for making available wealth management and micro loan products. On the regulatory front, we completed the full transition of our payment rails to central clearing and settlement systems and we moved all custodian cash to PBOC accounts in January this year. On the product front, Weixin Pay saw continued growth in users and per use transaction volume. We added new consumer features such as virtual cards for dependents and we enhanced our account management tools for enterprises. Our LiCaiTong wealth management platform has accumulated 100 million users subscribe to money market funds paid by their bank cards. In parallel, our new LingQianTong service allows users to invest excess cash balance in their Weixin Pay accounts directly into money market funds. And with that, I'll pass to John to talk to the financials.

Hello, everyone. For quarter four 2018, our total revenue was RMB 84.9 billion, up 28% Y-on-Y and 5% Q-on-Q. Gross profit was RMB 35.2 billion, up 12% year-on-year or down 1% quarter-on-quarter. Net other losses were RMB 2.1 billion, which mainly consists of one-off expenses relating to ordinary share issuance to strategic partners of TME and impairment provisions for certain investees. Share profit of associates and joint ventures was RMB 16 million compared to share loss of RMB 120 million for the fourth quarter of 2017. On a non-GAAP basis, share of profit of associates and joint venture was RMB 1.9 billion versus RMB 495 million for quarter four 2017. Income tax expense was approximately RMB 1.9 billion, down 39% year-on-year or 41% Q-on-Q. The year-on-year decrease was mainly due to preferential tax benefit entitlements. The sequential decrease mainly reflected the reversals relating to the entitlements of preferential tax benefits, partially offset by higher withholding tax. Effective tax rate for the fourth quarter was 12%. GAAP net profit attributable to shareholders was RMB 14.2 billion, down 32% Y-on-Y and 39% Q-on-Q. The Y-on-Y decrease in GAAP profit was greatly affected by non-cash expenses relating to capital raising as mentioned above, coupled with substantial disposal gains in relation to the capital activities of certain investee companies such as the IPOs of Yixin, Sea and Sogou in quarter four 2017. Let me walk you through the non-GAAP numbers. For the fourth quarter, operating profit was RMB 22.4 billion, up 2% Y-on-Y or down 1% Q-on-Q. Operating margin was 26.4%, down 6.5 percentage points Y-on-Y or 1.6 percentage points Q-on-Q. Net profit to shareholders was RMB 19.7 billion, up 13% Y-on-Y or broadly stable Q-on-Q. Net margin was 23.8%, down 3.9 percentage points Y-on-Y or 1.5 percentage points Q-on-Q. Turning to gross margin, gross margin for value-added services was 53.4%, down 5.9 percentage points Y-on-Y or 3.1 percentage points Q-on-Q. The Y-on-Y decrease was mainly due to higher content costs for video and music services and lower revenue contribution of higher-margin PC client games. The quarter-on-quarter decrease was mainly due to lower proportion of revenues from our PC games, lower revenue contribution from self-developed smartphone games and increase content costs because for our live broadcasts and music services. Gross margin for online advertising was 36.6%, broadly stable Y-on-Y and Q-on-Q. Gross margin for others was 23.1%, again broadly stable Y-on-Y and Q-on-Q. On operating expenses, selling and marketing expenses were RMB 5.7 billion, down 5% Y-on-Y or 13% Q-on-Q. The year-on-year and quarter-on-quarter decrease were mainly driven by the reduction of advertising and promotional expenses due to cost control initiatives. Total G&A expenses were RMB 11.4 billion, up 29% Y-on-Y or 4% Q-on-Q. Under G&A, R&D expenses were RMB 6 billion, up 24% year-on-year or down 5% Q-on-Q. The year-on-year increase of total G&A mainly refer to greater R&D and staff costs. The quarter-on-quarter increase was mainly reflecting greater spending on staff fringe benefits and conveyance fees. At quarter-end, our employee counts increased to approximately 54,300, a year-on-year increase of 21%, reflecting an expansion of our business scope. Let's go through margin ratios for quarter four. Gross margin was 41.4%, down 6 percentage points Y-on-Y or 2.6 percentage points Q-on-Q. Gross margin contraction and revenue mix shift to other segments which carry a lower margin are the main reasons. Non-GAAP operating margin was 26.4%, down 6.5 percentage points year-on-year or 1.6 percentage points Q-on-Q. Non-GAAP net margin was 23.8%, down 3.9 percentage points Y-on-Y and 1.5 percentage points Q-on-Q for 2018. On a GAAP basis, basic EPS was RMB 8.336 and diluted was RMB 8.228. Non-GAAP basis basic EPS was RMB 8.203 and diluted EPS was RMB 8.097. Subject to shareholders approval at AGM to be held on 15 May, 2019, we are proposing an annual dividend of HK$1 per share payable on 31 May, 2019. Before I close my remarks, I will share a few key financial metrics for fourth quarter. Total CapEx was RMB 4.6 billion, down 8% year-on-year or 24% Q-on-Q. Operating CapEx was RMB 3.7 billion, down 29% Q-on-Q. Non-operating CapEx was RMB 893 million. As at quarter-end, free cash flow was RMB 28.6 billion, up 18% Y-on-Y or 9% Q-on-Q. For 2018, free cash flow was RMB 83.4 billion, down 11% year-on-year. Net debt position improved by 58% to RMB 12.2 billion quarter-on-quarter. Healthy operating cash flow plus the disposal of our shares in certain investee companies and capital raising from TME more than offset M&A cash outflows in the fourth quarter. The fair value of shareholdings invested in investee companies excluding subsidiaries was approximately RMB 238 billion or roughly $34.7 billion at year-end. I would like to let you know that following our strategic upgrade from the consumer Internet to the industrial Internet, we will add a new revenue segment to further reflect our evolving business mix in this quarter. Thank you.

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

Certainly. [Operator Instructions]. The first question comes from the line of Thomas Chong from Credit Suisse. Please go ahead.

Good evening. Thanks, management, for taking my questions. I have a question related to advertising. Can management comment about the macro headwinds to our advertising, including social and others as well as media? And how should we think about the growth trend in Moments as well as Mini Programs? Should we expect to increase the ad loads in Moments in coming quarters? Thank you.

Thomas, thank you for your question. In terms of macro headwinds, it does appear that the uncertainty late last year may have resulted in slower advertising spending, particularly in some high ticket price categories such as automobiles, reflecting a deceleration in sales of automobiles. So, I suppose that's not desirable, but it's fairly natural. As far as Tencent was concerned, we believe we continued to grow substantially faster than the market in the fourth quarter. And in turn, we think that reflects the quality of the inventory that we bring, the targeting technology that we provide around the inventory and the attractive prices that we charge. Looking forward then, you can see from our latest quarterly results that we still have ample room to increase ad load over time at a measured pace in some of our key inventory, such as Weixin Moments where we are currently running 1 to 2 ad units per day versus global peers running around 10 ad units per day. And we are also starting to bring online news feed inventory where we've been focused on really increasing traffic first. And now that we are in a position where the traffic is growing nicely, you can see that, in the fourth quarter, the revenue began to pick up as well on the news feed side. So, that's how we see the advertising environment.

Thank you. May I have a quick follow-up regarding the online video advertising? Given the fact that we see some delay in terms of the launch of some of the drama programs, how should we think about the trend in Q1 and 2019? Thank you.

Well, as you observed, there are some delays across the industry to launch certain categories of content – online video, for example, costume drama series. And costume drama series are relatively important in terms of their ability both to drive advertising and also subscription revenue. So, obviously, the subscription revenue reacts with a longer time lag to changes in the content, but the advertising revenue reacts relatively immediately. So, yes, there may be some pressure for the overall online video industry's advertising revenue in coming months as the industry waits to bring onstream some of the content.

Thank you. And the next question please.

Certainly. Next question is from the line of Wendy Huang from Macquarie. Please ask your question.

Thank you. First, can you give us update on the games in the pipeline with approval considering that you launched the new titles in Q4, but additionally you get seven titles with approval? And also, can you clarify whether the seven titles you mentioned will get approval, that actually include the licensed titles which is actually developed by other companies? And also, a quick follow-up on the second question Thomas asked earlier. So, how should we think about advertising margin change going forward? It seems actually it stabilized a little bit this quarter. And also, related to that, what will be the content cost in 2019? Thank you.

So, in terms of our new games, just to clarify, seven new smartphone games have been approved since the BanHao resumed – the issuance of BanHao resumed. But we've also had one PC game approved. So, in total, eight games approved since resumption of BanHao. That includes license games. We have several dozen more games in the approval pipeline awaiting approval. And as we commented in the opening remarks, the fact that there is this backlog for approval will likely have some impact on the industry growth and our growth within the industry in the next few months. But we are pleased that the situation is clearer now and that the backlog is being worked through at a fairly rapid pace. In terms of the margins for advertising segment, as you know, historically, those depend to a great extent on the mix of different products. So, for example, when we grow the advertising within Weixin Moments, that's a relatively high margin stream. As we grow the advertising around video entertainment content, that's a relatively low margin stream. And then, inventory where we share advertising with partners, such as official accounts, fall somewhere in the middle. In the near term, the flipside of not being able to show some of the video content one might otherwise show is the video content costs may not be as heavy as they would otherwise be for the industry and for us within the industry.

Thank you. The next question comes from the line of Han Joon Kim from Deutsche Bank. Please ask your question.

Great. Thank you for the just asked question. I have a question on the margins. And if I'm reading this correctly, it seems like Weixin Pay gross margins improved sequentially and we talked to a few factors that drove it. But as we think about 2019, could you walk us through some of the puts and takes and how much operating leverage we can kind of see here in terms of gross margins?

Well, I think for Weixin Pay, the gross margins, number one, I think, is kind of the – driven by a number of different factors, which are actually quite dynamic, because we actually take in revenue from the merchants as well as from consumers, but at the same time we actually have to pay very big chunk of that to the banks as bank charges. And at the same time, nowadays, we actually have sort of lost the interest income from the reserve cash. But we are now trying to compensate partly for that through cross-selling of our fintech products. So, it will be a pretty dynamic situation in the course of the year of 2019. A big swing factor would be the bank charges. Another swing factor is actually competitive dynamics and also our ability to cross-sell more financial products. And at the same time, what you see is the gross margin. But below the gross margin, there is actually a marketing cost, which is actually also very high because, despite the fact that we have positive gross margin on the growth side, we are actually engaged in a lot of marketing activities, including consumer subsidies and including some merchant rebates in order for us to continue to build market share and also make our payment platform more popular with merchants. So, that actually is another cost which is quite dynamic as well. So, all in all, what I want to say is it's a dynamic situation. We run our payment platform more as an infrastructure business for now. And, over time, I think if we can achieve more success in cross-selling the financial products, then it may generate more revenue and more margin. But, again, it's a long-term vision for our business. For the near term, I think we are very focused on making sure that we can continue to make WeChat payment even more popular among the users and merchants.

Got it. Understood. And if I just have a quick follow-up question, I noticed a pretty sharp spike in content costs in the cost breakdown. So, I just wanted to understand the nature of that and if that happens to be more one-off or something that's going to be recurring. Thank you.

It's John again. Can you just repeat the question about for the content cost?

Yeah. The cost breakdown actually shows a fairly sharp increase in the content costs in the fourth quarter relative to prior trends. So, I just wanted to see if there was any particular one-offs included in there or if this is something that's going to be recurring?

I think it's something to be recurring due to the fact that there are a lot of things that are included on the content costs, such as Intel Active live video. If we had more revenue, then there would be more sharing.. And also, there have been more content costs in respect to what music is being paid for. So, we have been on more content costs. And on top of that, online games, mix and things like that would affect the content costs we need to share with the developers.

Thank you. And the next question please.

Sorry.

Please go ahead.

Next question comes from the line of Alicia Yap from Citigroup. Please ask your question.

Good evening, management. Thanks for taking my question. I have a question on online games. Given Perfect World just launched and the initial ranking was very strong. From the past record, usually, the MMO tends to spike in the first couple of months and then dropout very quickly after that. Do you think Perfect World will be the similar case or do you think it will be different this time? And could you share with us the reasons that boost the strong games performance? Is that because of the game quality or is it because of the Tencent successful promotion effort? And the follow-up questions I have is related to advertising. So, just wondering, because of the Mini Program advertising, if I remember correctly, it was actually introduced late 2Q. So, it actually benefited the 3Q. And just wonder how we reconciled 4Q that we didn't get much of the benefit. Is it really because of the macro or is that we were too optimistic about the ramp up of opportunity within the Mini Programs? Thank you.

Hi, Alicia. So, first of all, on the Perfect World game, it has been commendably successful and we obviously have remained so. I think in terms of the factors that contributed to its success, the game quality is obviously one. The long history of the intellectual property is another. Our ability to target the games to the right audience is a third. And then, I think our publishing skills in general are our fourth. You made a comment that MMORPG games sometimes have a big bang and then diminish quickly. I think if you actually look at our game portfolio, then you'll see that we have many MMORPG games that have been successful and revenue generated and profitable for many years. And that would include TLBB or the MT4 game or new or a number of games. And while it's true that, compared to a game like Honor of Kings that starts monetization at a low level as its building audience and then gradually matures into a higher and higher amortization over time. Role-playing games, you often see a burst of activity and spending in the first month and then it consolidates down to a lower level. A, that's something that's two across the industry. And, B, the lower level to which the revenue consolidates down to can still be a very attractive level in absolute terms. So, that's on the role-playing game side. On the advertising side then, we've said in the past and we will say again, you shouldn't read too much into changes in the rate of growth year-on-year from one quarter to the next. If you look back at the last five quarters, I think every quarter, we've either accelerated or decelerated and then accelerate and decelerated, and it's important not to overreact to those. As you observe, we did begin to put advertising into the Mini Programs from the middle of the year and that resulted in a very strong advertising result for us in the third quarter. And the Mini Program ad revenue continued to increase at a double-digit rate from Q3 to Q4. But relative to our previous years, I think that, A, we didn't have as much benefit on the video side because of the deferral of certain key content out of Q4 into the following year. And then, there may have been some macro impact in terms of the very high ticket price advertising as well.

Okay, thank you.

Thank you for the question. Next question comes from the line of John Choi from Daiwa Capital Markets. Please go ahead.

Thank you. I have a question on cloud. I think this quarter, you guys have also done a pretty good job. I think RMB 9 billion for the full year. I think fourth quarter alone, roughly about RMB 3 billion. Could management give us more color, apart from games and video, I know that Internet services, financial, retail have been also stated. And I think Martin kind of emphasized these verticals. But could you kind of give us more color on either contribution of these verticals in terms of paying customers or revenue, that will be great. And what will be the growth average going forward? And if I have a follow-up quickly on advertising, given that short-form video continues to be a pretty big success right now, are you seeing any behavior changes from our advertisers that is impacting our advertising business? Thank you.

Well, in terms of cloud, I would say we have actually provided quite a bit of color around the cloud business. And it's a combination of we have more paying customers. And as we continue to serve the existing customers, they should increase the spending with us over time. So, I think these are the drivers. At the same time, we have been increasing our product portfolio, from just the infrastructure to also pass. For example, we have been launching our online security cloud service which has been a pretty distinctive advantage for us because we have been engaged in the online security industry for a long time. And when we package these technologies and capability into a product, into a pass for our users, they adopt it. So, I think it's a combination of more paying customers, higher spends with existing customers and also enriching portfolio of products. In terms of the growth for 2019, I think continuing to work on the areas in terms of signing more customers, in terms of serving the existing customers better, so that we can increase their spend. Some of these customers have multiple cloud providers including also their own IDC operation. So, over time, you want to prove that we have cost competitiveness as well as a service level and the product portfolio, so that we can move more of their data center usage into our cloud. And at the same time, we'll continue to improve our product offering, so that we can get into more revenue sources as well as high margin areas. And finally, we want to build up our relationship with partners both in terms of distribution as well as in terms of SaaS partners, so that we can actually distribute a larger portfolio of SaaS services which are, in nature, higher margin to our customers.

On the question around short form video, it's certainly true to observe that services like Kuaishou and Douyu have grown their traffic very quickly in the last course of 2018 and have grown their advertising revenue fairly quickly as well. I would observe that there is some advertiser overlap, but it's not complete advertiser overlap relative to Weixin Moments, which attracts more brand conscious advertisers. The short video sites tend to attract more clearly platform-oriented advertisers. Also, if you look at the identities of the top two or three biggest advertisers on those platforms, they would generally be companies that don't advertise Tencent inventory for competitive reasons anyway. And I think the bigger picture is that the China advertising market would always have multiple companies in a growing share. There's never been a point in time, and there probably will never be a point in time, when we're the only company growing share. So, what's important to us is not who are the other companies growing share at any point in time, but are we actually outgrowing the market. And I think that if you look at the data reported across the industry, there are some successful companies growing advertising revenue in the mid-20% year-on-year and there are others whose advertising revenue is growing in teens or flat or even down year-on-year. And we grew advertising revenue at over 30% year-on-year, 38% year-on-year in a season – in a macroeconomically difficult quarter. So, we feel that we are clearly outperforming the market and we look forward to attempting to continue to do so, given that the tailwinds that we enjoy in terms of substantial traffic, substantial traffic growth, information about our users and ability to target the right apps to them and the technologies that we are increasingly bringing to bear around advertising.

Thank you. And the next question please.

Next question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please ask your question.

Hey, good evening. Thank you for taking the question. I have a question on industrial Internet strategy. Enterprise services seem to have long education and sales processes. So, just curious on how you guys internally prioritize the resource allocation among various, let's say, industry verticals and use cases? I suppose at these early stage, it may be difficult to use concrete ROI analysis or am I wrong? And just as a follow-up question, again, on your industrial Internet strategy, for the upcoming quarter, you mentioned that AI will be a separate segment. So, should we assume most of that revenues at the moment are both under the others segment? Thank you.

In terms of industrial Internet, I think, Eddie, you're right. The sales cycle is typically long and it varies across different industries. So, I think what we do is actually taking a longer-term approach, which means that as we identify the industries that has the potential, then we will put our resources to target those industries. And knowing that it may take some time in order to break into the industry, but this is not something that you can actually avoid. If you never allocate resources, then you'll never break into the vertical. So, that's why what we try to do is we dedicate the resources. We actually create also the product in order for us to demonstrate our technology as well as capability. And, over time, once we can win certain showcase deals within the industry, right, then we can actually start to make a much better sales within the sector. So, take an example. We know that, in the financial sector, there's actually a big need for cloud services, right, but then the requirement for security, the requirement for services is actually very high. So, in breaking into the financial sector, what we do is, one, we have a showcase around WeBank, which is very clearly from ground-up, buildup through our Tencent cloud. And the other one is actually breaking into some of the very key banks such as consortium banks, consortium Bank of China. And once we have been able to break into this very large accounts, we've been – a lot of the other financial institutions would take that as a point of comfort and then they would come into using our services. So, I think that's how we do it. What was the second question? I think that's true. Your understanding is true. The new segment will be coming out from others to provide more information around it.

Thank you. And next question please.

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

Hi, thank you. Thank you for taking my questions. I just have a quick question about the gaming business, in particular cloud gaming. It will be great if the management can share with us your view about the market potential of cloud gaming in China and how Tencent positions itself to capitalize on cloud gaming. Thank you.

Well, we think over the medium term, the potential for cloud gaming is quite interesting because it will allow people to play more sophisticated graphically immersive games on low-end devices, whether those be low-end PCs or TV screens or low-end smartphones. And I think that that's true globally. It may be, to some extent, disproportionately true in China, given – China has an unusual combination of actually very good bandwidth, but a relatively low-end PC and smartphone mix compared to some developed markets. In terms of whether this is an appropriate opportunity for Tencent, then I think it's a very appropriate opportunity for Tencent for a few reasons. One is that we are a fairly capable game company and this is a natural evolution of games. The second is that we're a company that has increasingly substantial cloud resources. One of the critical success factors providing cloud stream games, particularly cloud stream games or active games, is actually having servers in relatively close physical proximity to the users because if you're trying to enable people to play a competitive cloud stream game, central server on the other side of the world or the other side of the country, then no matter how good the bandwidth, there's the physical latency means that for fast-paced games involving bullets it's actually impossible to provide an experience equivalent to what you would get from a client processed game. So, we have that distributed server infrastructure across China. We have the game experts we use. It's something that we are naturally very excited about, both from an evolution of games perspective, but also from a deepening of our cloud services perspective. And it's something that we're looking into closely. But it's also something that I think will take a few years to fully materialize. In the initial stage, they may be more about supporting single player games where the latency is less of an issue and then gradually upgrade to multiplayer games, which is obviously the bigger revenue opportunity with, of course, a number of years.

Thank you.

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

Thanks very much. A couple of things. First of all, you mentioned in the release about more accurate targeting of advertising and having merged your platforms to allow for multiple charging modes. Can you comment a bit more specifically about how much of the Weixin data will be available to advertisers for targeting purposes maybe beyond products like WeChat Moments? And how closely integrated Weixin will be with the rest of the content ads? And maybe my second question, if I'm looking across your portfolio of services, whether it's music, video, gaming content and others, what sort of prospects do you see for bundling those services into a sort of all-encompassing content bundle where when someone is taking multiple services, they might be less prone to the churn that you very commonly see in China content services? Thanks.

Yeah. In terms of targeting, it's very important to note that we don't provide any data to outside parties. Within the targeting, basically, it's a process in which the advertisers will specify what they're looking for. And then, we will, within our own rules, figure out who are the people to target for them within our own network. So, there's absolutely no sharing or providing of data outside our own service, not to advertisers and not to the other traffic partners. So, I think that's very important to know. But because we have our mining algorithm that runs within our own firewall, so then we can actually provide the kind of advertising targeting and keep on iterating to make it better. So, that's how we do it. At the same time, as we have pointed out quite a few times, we do not subscribe to the notion that you need to have a sharing of data among all our different platforms because I think, as a company, we actually put our user privacy at the forefront of our concern. So, that's why we felt if you look at the ability for us to target, a lot of the benefit would actually come from the fact that we keep on improving our own technology. When we pool together our technical expertise is actually focused on improving our targeting and data analytics technology, so that we can make every single platform better in terms of targeting the new users. But it's not going to be blindly sharing of the different data across different platforms, even internally.

On the portfolio bundling question, it's an interesting topic and it's certainly something that we think about. You linked it to churn reduction. And actually, I'd say that, on 2the churn reduction side, the industry and Tencent within the industry are making good progress anyway. And that's partly because we have more regular, better content now. So, instead of someone subscribing to watch a single Hollywood movie and then churning once they've watched that movie, increasingly it's built around drama series, TV series to the more recurring episodic in nature and people tend naturally to stay for longer. Also, as increasingly providing the subscription billing through our mobile payment solution, then that tends to result in a more convenience of payment, therefore, higher stickiness, therefore lower churn. So, when we look at the portfolio bundling opportunity, we're looking at it less from a churn reduction perspective and more from a sort of value enhancement perspective. Tencent is the recipient of the seamless payments, but also to the consumer in terms of whether they are actually getting appropriate value and making full use of the content that's available. I think that's something that is – the jury is still out globally. Amazon Prime is doing great, bundling in video and music, but then Netflix and Spotify are also doing great, providing video and music individually. In a China context, we have 160 million subscriptions now. The majority of them are digital content subscriptions. On the one hand, that's a gigantic number. It's bigger than the entire pay television industry in the United States in terms of subscriptions. But on the other hand, it's still only a teens percentage of the population. For the immediate future, while we are doing some interesting experiments around bundling, the primary focus is on making each individual product, be it our video subscription service, our music subscription service, our literature services, be as strong as they can be and fully satisfy their user bases as possible within their vertical domain rather than trying to provide a full horizontal solution at a higher price.

Thank you. And maybe accept the last two questions.

Certainly. The next question comes from the line of Natalie Wu from CICC. Please ask your question.

Hi. Good evening. Thanks for taking my questions. I have two questions. First one is related with your mobile game. For your – just wondering, for the strong performance of HoK during Chinese New Year, how much is related towards the seasonality and how much is related with the Battle Pass? Should we expect the part of the – a part of this chance to continue throughout this year if it was, to some extent, related with the Battle Pass system? And my second question is really to do with the e-commerce endeavor within WeChat ecosystem. For example, the function of shopping within WeChat based on a friend's recommendation, which is called [indiscernible], that has just been launched. What kind of the strategic resources you are planning to promote this function? And how big can that kind of the function grow? Thank you.

In terms of Honor of Kings, I think we're actually quite happy to see the fact that this game has been actually able to not only sustain its user base, it has actually been able to attract a lot of users who have been paying less to come back to the game during the Chinese New Year period. And that's actually mostly due to the fact that we have done a very large upgrade which improve the entire graphics to a new level and, at the same time, we have improved the matching mechanism, we have improved the tech behind it, so I think it's actually a testimony to the fact that when you have a PvP game that has been popular, that hasn't reached such a large user base, whenever you provide a good upgrade, a lot of people actually then come back to play the game. So, I think the most important thing in the pretty good uptake is actually because of this. And then, there's the seasonality. And then, the Battle Pass is really a new trial. I don't think it does provide a lot of benefit yet. But, over time, hopefully, the Battle Pass can become another addition to our – continue the revenue generation. In terms of the e-commerce, I think we are doing a lot of different trials within our platform. I think at this point in time, it's too early to tell. But at the time when we have seen more insights, then we can provide an update to our investors.

Thank you. And last question please.

This is the last question. It comes from the line of Gregory Zhao from Barclays. Please ask your question.

Hi, management. Thanks for taking my question. So, on that question about the sales and marketing expense, so the press release mentioned that you decreased some advertising and promotional expenses and reduced some less effective marketing campaign. So, just want to have a better understanding, which business category and what kind of marketing campaigns you cut your advertising budgets? And one quick follow-up on the content cost. So, your industry peers like IGE who mentioned on their conference call, they expect the overall online advertising, for online video content market to be more rational in 2019. So, given the control of celebrities' income by the government, so just want to check what's the implication to Tencent Video services, especially on cost and margin. Thank you.

Well, in terms of selling and marketing expenses, I must say that we have done a stringent cost control on a number of matters. Number one, since we understand that there's a latency in the provisioning rights approval, so some of the games for the prelaunch promotion, we have cut down. Number two is we review a lot of different products, some of which are still under research and fine-tuning. And we have decided not to spend too much money at that point in time. But instead, we will look at the ROIs for some of the campaigns. While we are doing it, we find out that if it not as good as expected, we will cut it immediately. And there are a lot of different campaigns including the offline as well as the online because selling and marketing costs is something that we can dial up or down easily according to how much we would like to spend. So, it's pretty easy for us to control. Say, for instance, margin expansion earlier, in some circumstances, if we want to invest further, we can spend more money on the payment platform side, whereas we feel like that's in good shape, we can lessen it to some sort of extent.

In terms of your question about content costs, then it is correct to observe that the content costs we would pay, top tier drama series, for example, are a little bit lower than they have been in the past. Now, of course, there's some caveats attached to that one, is the other format cost continue to increase. Second is that, while the costs we'd be paying and capitalizing today are stabilizing or dipping, they wouldn't flow through to a P&L benefit for a year or more given the relatively lanky production cycle for these top tier drama series. And I'd also refer back to a comment I made earlier that, to the extent, that the companies in the industry aren't showing some of the high quality content that they had earlier commissioned or paid for, then they aren't expensing it either, which is good for costs, but they also aren't generating the advertising revenue that they would otherwise have generated, which is not so good for revenue. So, as usual with the online video industry, there's a lot of moving parts and sometimes they cancel each other out a little bit.

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 Tencent website at www.tencent.com. The replay of this webcast will also be available soon. Thank you. And see you next quarter.

Ladies and gentlemen, that does conclude our conference call today. Thank you for participating in Tencent Holdings Limited 2018 fourth quarter and results presentation. You may all disconnect now.