Ladies and gentlemen, thank you for standing by and welcome to the Tencent Holdings Limited 2020 First Quarter Results Announcement Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I will pass the call to Wendy Huang from Tencent IR team. Thank you. Please go ahead.

Good evening. Welcome to our 2020 first quarter results conference call. 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-IFRS 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. Non-IFRS measures are intended to reflect our core earnings by excluding certain one-time and/or non-cash items. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosures on the IR section of our website. Now, let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick-off with a short overview. President, Martin Lau and Chief Strategy Officer, James Mitchell, will provide a business review. Chief Financial Officer, John Lo, will conclude with financial review, before we open the floor for questions. I will now turn the call over to Pony.

Thank you, Wendy. Good evening [ph]. Thank you for joining our call at this unusual time. As the world tackles COVID-19, our thoughts and hearts go out to all the people who are suffering from the pandemic. During this difficult period, we seek to provide online services that keep people connected, informed, productive, and entertained. So far, our businesses have proved resilient and cash flow generative, enabling us to increase our investment to fulfill our mission of “Tech for Good”. We are allocating time and resources, including over RMB2 billion of donations, to contribute to COVID-19 relief initiatives in China and globally. And now, I will highlight the results for the first quarter of 2020. Total revenues were RMB108 billion, up 26% year-on-year and 2% quarter-on-quarter. Gross profit was RMB53 billion up 33% year-on-year and 15% quarter-on-quarter. Our non-IFRS operating profit was RMB36 billion up 25% year-on-year and 17% quarter-over-quarter. Non-IFRS net profit attributable to equity holders was RMB27 billion, up 39% year-on-year. Our platforms and short ads have never been more neat and relevant as users based at home. We believe this experience will also lead to realization of digitalization going forward. In short, users heavily rely on our social platforms to stay connected. Combined MAU of Weixin and WeChat increased 8% year-on-year to over 1.2 billion. In games, more players spent more time online further strengthening our number one position in China. Our games also continued to grow internationally. In media, video views and subscriptions continued to expand as we released top tier content. Music subscriptions increased driven by disruptive content [indiscernible] strategy. In FinTech we operate the largest mobile payment platform in China by DAU and number of transactions, increasing efficiency and supporting more business. In cloud we are number 2 public cloud services provider in China steadily picking up market share and earnings. In utilities, we maintained our industry leadership in mobile security, mobile browser and Android app store in China. I will invite Martin and James to discuss business review.

Thank you, Pony, and good evening and good morning to everybody. For the first quarter of 2020 our total revenue grew 26% year-on-year. VAS represented 58% of our total revenue within which online games was 35% and social networks was 23%. FinTech and business services represented 25% of total revenue and online advertising represented 16% of total revenue. For value added services segment revenue was RMB62.4 billion in the first quarter, up 27% year-on-year and 19% quarter-on-quarter. In social networks revenue grew both year-on-year and quarter-on-quarter mainly driven by item sales in sports and games. Total VAS subscriptions increased 19% year-on-year to 197 million reflecting robust growth in video and music subscriptions as users spend more time online. Our video subscriptions increased 26% year-on-year to 112 million due to popular self commissioned drama and Chinese anime series such as Sansheng Sanshi Pillow and The Land of Warriors Season 3. Our music services and expanding paid music library contributed to subscriptions growth of 50% year-on-year to 43 million. Online games revenue grew 31% year-on-year and 23% quarter-on-quarter driven by more active users and higher paying ratio during the stay-at-home period. Consumption will normalize as users return to work. Total smartphone games revenue increased 64% year-on-year to RMB34.8 billion driven by key titles including Honour of Kings, Peascekeeper Elite and PUBG Mobile, as well as consolidation of Supercell. Sequentially revenue grew 33% due to more playing time during the Chinese New Year and stay-at-home period. PC client games revenue decreased 15% year-on-year to RMB11.8 billion due to temporary closure of internet cafes and softer DnF performance. Revenue increased quarter-on-quarter unfavorable seasonality. Turning to social networks, we are highly motivated by our roles and responsibilities in creating and helping people to stay in touch with their friends and families and in connecting people to necessary services during this critical period. User engagement on Weixin and QQ increased with daily messages and time spent on each service up double-digits year-on-year. We strengthened several functionalities on Weixin and QQ platforms to better serve specific use cases. For example, for e-learning teachers can now customize QQ groups to involve relevant Mini Programs such as online exams and homework collection tools to better manage online classes. Students can experience community study time, year, virtual study rooms. For healthcare Services we connect Weixin users with medical professionals in private or group chats, initiated via Tencent Health Mini Programs or access splint embedded innovation pay. To support remote presentation, we extended QQ's screen sharing function [indiscernible] from PC to mobile devices. On daily services we increased penetration in off-line use cases contributing to Weixin Mini Programs exceeding 400 million DAU. We helped to accelerate digital distribution or omni-channel consumption for off-line services, especially grocery shopping and municipal services. We assisted local governments and businesses to disseminate e-vouchers expediting the recovery in off-line consumption after the lockdown is over, especially for retailers and restaurants. Let's move on to online games. During the stay-at-home period users spent more time on our games for entertainment and social interactions, leveraging our best-in-class game content and large in-game social communities. We captured incremental entertainment demand. Our smartphone games DAU recorded strong growth year-on-year and quarter-on-quarter. Among our leading mobile titles in China we upgraded Honour of Kings game engine last year, which allowed us to enhance audio and visual experiences of the game, enabling more attractive content, such as the five [indiscernible] themes games we released during the Chinese New Year. We also introduced location-based play system which encouraged more interactions among players in the same city. Peacekeeper Elite collaborated with Rocket Girls 101, an idol girl group managed by Tencent, which emerged from our popular TV variety show. This drove user engagement to a new high, demonstrating the success of our cross-IP synergy. Internationally, PUBG Mobile celebrated its second anniversary with multiple in-game events, but we tailored our operations regionally to increase user reach and engagement. For League of Legends we launched Teamfight Tactics mobile app as well as new content contributing to higher user retention and time spent for this longstanding franchise. For Brawl Stars’ the high cadence content updates kept user engaged and optimized player-matching mechanisms further enhanced user experience. We do have a substantial new game pipeline. In China we will launch more titles across different genres by June. Internationally, licensed mobile RPG Code: D- Blood achieved initial success by downloads as well as growth in Japan. Riots new PC tactical shooter Valorant drew enthusiastic responses from players during closed beta testing and was the most viewed title on Twitch in its first month. Looking forward, we expect in-game consumption activities to dip back toward more normal levels as players go back to work and time spent in games normalizes. With that, I'll now pass on to James.

Thank you, Matin. Turning to online advertizing, revenue was RMB17.7 billion in the first quarter. The above trend year-on-year growth rate of 32% reflected A) increased consumer time spent on our apps during the stay-at-home period which we expect to normalize in future quarters and B) our platforms ability to deliver attractive returns on investment to advertisers. Sequentially, advertizing revenue decreased due to seasonality. By industry, games, internet services and online education add spend rose year-on-year as these categories increased spending in reaction to more traffic and consumption for their services during the stay-at-home period. Fast moving consumer goods, auto and travel related ad spends declined. Looking forward, we expect the overall China online advertising industry to experience industry wide headwinds, including first, consumers normalizing down the time spent online, second online services advertisers adjusting their customer acquisition budgets as they reflect revised customer lifetime value assumptions, and third, multinational brands reducing their spending significantly as they face the pandemic in their own markets. For social and others advertising revenue grew 47% year-on-year driven by increased ad impressions particularly on Moments. Our mobile ad network revenue also expanded sharply on more traffic and higher eCPMs with video ads now representing over one-third of our ad network ad impressions. We expect our social advertising revenue to revert to what its prior trend growth rate from the second quarter as ad impressions normalize somewhat and as some advertising categories review their customer acquisition budgets. For media advertising, revenue was RMB3.1 billion for the first quarter down 10% year-on-year within which sponsorship ad revenue declined year-on-year as well as quarter-on-quarter due to budget cuts, delays in producing and airing certain variety shows, and suspension of NBA basketball games. In-feed advertising revenue grew year-on-year and quarter-on-quarter due to the popularity of several top-tier drama series and demand for reliable news and information during the pandemic. We expect media advertising revenue trends will be more challenging in the second quarter as multinationals reduce their brand budgets. Looking at FinTech and Business Services, segment revenue was RMB26.5 billion, up 22% year-on-year and down 12% quarter-on-quarter. Within FinTech, revenue decreased sequentially as commercial payments, especially off-line payment activities and cash withdrawals reduced during the Chinese New Year and stay-at-home periods. FinTech margins were stable sequentially with higher margin revenue streams such s wealth management and lending continued to grow, and as we managed our marketing and subsidy costs. Looking forward we see a healthy rebound in payments activities across off-line and online and QR Code as well as point-of-sales transactions. For example, during the last week of April, our average daily commercial transactions value had recovered to late 2019 levels. Our wealth management business grew at a stable rate in the first quarter, as aggregated customer assets increased year-on-year and quarter-on-quarter. And our WeiLiDai’s loan book remained healthy, reflecting WeBank’s prudent risk management policy. Within business services, the pandemic delayed project deployments and new account acquisition resulting in a sequential revenue decline. However, our Tencent Meeting software achieved breakout success and became the leading video conference app in China. We strengthened its security measures and introduced new functions to facilitate discussion and conference call management. In late March we launched an international version of Tencent Meeting. For WeChat Work we enhanced industry solutions and deepened integration with Weixin, helping us to sign more key accounts, especially in the retail, education and public sectors. Consequently, WeChat Work DAU has grown significantly during the period. Looking forward, we expect business services to remain challenging in the short term due to disruptive sales cycles. But we will continue increasing our investments especially in enterprise, software and cloud services as we believe the experience of remote working will ultimately prompt off-line industries and the public sector to accelerate digitalization. And with that, I'll pass it to John to speak to financials.

Thank you, James. Hello everybody. For the first quarter of 2020 total revenue was RMB108.1 billion, up 26% year-on-year or 2% quarter-on-quarter. Gross profit was RMB52.8 billion, up 33% year-on-year or 15% quarter-on-quarter. Net other gains was RMB4 billion, down 64% year-on-year or up 11% quarter-on-quarter. This item mainly comprised of non-IFRS adjustment items including net gain on disposal of certain investee companies as well as net fair value gains on the investee companies. It was partially offset by RMB2.6 billion donations, primarily to combat the COVID-19 pandemic globally. Operating profit was RMB27.3 billion, up 1% year-on-year or 30% quarter-on-quarter. Net finance costs were RMB1.7 billion, up 51% year-on-year or down 39% quarter-on-quarter. The year-on-year increase was mainly driven by greater interest expense resulted from higher amount of indebtedness. The quarter-on-quarter decrease was due to the recognition of forex gains for Q1 2020 while we recorded a forex loss a quarter ago. Share of losses of associates and joint ventures was RMB281 million down 90% year-on-year or 79% quarter-on-quarter, mainly due to changes in non-IFRS adjustment items of certain associates. On a non-IFRS basis we recorded share of profit of RMB164 million for the first quarter of 2020 comparing share of losses of RMB518 million a year ago. The change mainly reflected improved performance of certain investee companies. Income tax expense were RMB5.9 billion, RMB2.1 billion, and RMB4.8 billion for quarter 1 2020, quarter 4, 2019 and quarter 1 2019 respectively. Effective tax rate for the quarter was 16.7%. IFRS net profit attributable to equity holders was RMB28.9 billion, up 6% year-on-year or $34% quarter-on-quarter. Diluted EPS was RMB2.999 up 5% year-on-year and 33% quarter-on-quarter. Now, let me walk you through our non-IFRS financial numbers. For the first quarter, operating profit was RMB35.6 billion, up 25% year-on-year or 17% quarter-on-quarter. Net profit after NCI was RMB27.1 billion, up 29% year-on-year or 6% quarter-on-quarter. Diluted EPS was RMB2.817 up 29% year-on-year and 7% quarter-on-quarter. Turning to segment gross margin. Gross margins for VAS was 59%, up 1.4 percentage points year-on-year and 8.9 percentage points quarter-on-quarter. The year-on-year growth was mainly due to improved margin for both PC and smartphone games resulting from improved revenue mix towards high margin in-house games. The sequential increase was benefited from revenue mix shift towards high margin in-house smartphone games, increase in margin of video subscription business as a result of high subscription revenue and lower content cost due to the pandemic, and the absence of major eSports events, therefore lower content costs quarter-on-quarter. Gross margin for online advertising was 49.2% up 7.3 percentage points year-on-year or down 5.1 percentage points quarter-on-quarter. The year-on-year increase reflected lower content costs for video advertising and improved efficiency. Sequential decline mainly reflected revenue decrease due to negative seasonality. Gross margin for FinTech and business services was 27.9% broadly stable year-over-year and quarter-on-quarter. On operating expenses, selling and marketing expenses were RMB7 billion, up 66% year-on-year or 5% quarter-on-quarter. Marketing spending increased year-on-year particularly in content platforms including Weixin's marketing campaigns during the Chinese New Year. As a percentage of revenue selling and marketing expense increased from 5% in the first quarter of 2019 to 6.5% this quarter. G&A expenses were RMB14.2 billion up 25% year-on-year or down 12% quarter-on-quarter. The year-on-year increase mainly reflected greater R&D expenses and staff costs as we invested in talent and technology to support business development. The Q-on-Q decrease reflected reduced outsourcing activities for R&D projects, and reduced traveling and entertainment expenses due to the pandemic. As a result - as a percentage of revenue, G&A and R&D represented 13.1% and 7.4% respectively. As at quarter end, we had approximately 64,000 employees, up 18% year-on-year or 2% quarter-on-quarter. Let's take a look at the margin ratios. For the first quarter of 2020, gross margin was 48.9%, up 2.3 percentage points year-on-year or 5.3 percentage points quarter-on-quarter. The year-on-year increase mainly reflected segment gross margin ratios improvement built through to a branded gross margin, especially for VAS and Online Advertising segments. Sequentially, the margin increase was mainly due to revenue mix shift to VAS which carry a higher margin. Non-IFRS operating margin was 32.9%, broadly stable year-on-year or up 4.2 percentage points quarter-on-quarter. Non-IFRS net margin was 25.9%, largely stable both year-on-year and quarter-on-quarter. Finally, I'll share with you some key financial metrics for the quarter. Total CapEx was RMB6.2 billion, an increase of 37% year-on-year or decrease of 64% quarter-on-quarter, within which operating CapEx grew 41% year-on-year to RMB5.5 billion, mainly due to more spending on servers to support operation of Tencent Cloud business, such as Tencent Meeting; non-operating CapEx increased 7% year-on-year to RMB682 million. At quarter end, free cash flow was RMB39.2 billion, up 133% year-on-year or 25% quarter-on-quarter. Starting from 2020, we adjusted our free cash flow parameters according to the latest market practice by subtracting payments for media content and lease liabilities, in addition to subtracting payments for capital expenditure from the operating cash flow. Comparative figures have been restated accordingly. Net debt position was RMB5.7 billion, improved sequentially due to stronger operating cash flow, partially offset by payments for M&A initiatives. The fair value of our shareholdings in listed investee companies, excluding subsidiaries, was approximately RMB410 billion, that is about US$58 billion. Thank you.

Thanks John. We shall now open the floor for questions. Operator, we will take one main question and one follow-up question each time. Please invite your first question. Operator?

Thank you. Our first question comes from Gregory Zhao from Barclays. Please ask your question.

Hi, management. Thanks for taking my question and congratulations to the very strong quarter. So first, I have one big picture question is we know COVID-19 is gradually passing in China, so from your point of view, so what kind of structural changes COVID-19 brought to the industry and to Tencent, and also how shall we think about the changes to the user behaviors and your business strategies? So also a quick one about your overseas gaming business in Q2. So we saw Activision Blizzard and some other gaming company give very strong guidance for Q2, and we know the corona is still ongoing in the overseas market in Q2. Shall we expect Tencent to deliver stronger overseas gaming performance in Q2? Thank you.

Yes, thanks for your question. I think in terms of structural changes, the biggest structural change is really for businesses and organizations to realize that there needs to be an online presence. When everything is actually shut down physically and offline, then it's actually very important for the businesses and organizations to be able to have online access to their consumers and then to the users via Internet. So I think that's a big realization. I think everybody feels that it's coming, but having experience to COVID-19 lockdown means that, it's real and it's existential. So I think that will translate into many different fronts. For example, on retail, there will be more investment by the retail shops and brands to establish direct linkage with the consumers. And I think Mini Programs is really one key infrastructure for them to be able to do that. I think different government and municipal government and services would need to bring themselves online, and that would increase the overall investment in technology infrastructure and cloud investments on a longer-term basis. And in terms of specific segments, right, obviously there will be companies who need to build up remote working infrastructure and I think that would benefit tools that enable remote working. And obviously, Tencent Meeting, has grown its user significantly during this pandemic period. And in terms of verticals, I think online education is one area that would definitely benefit going forward, because I think a lot of students have been experienced with online education and the parents have also experienced that and that would drive the adoption of such a mode of education going forward. Online healthcare will be another area in which a lot of users would like to have access to more health-related information, and they're are getting used to having their disease diagnosed online both through AI or even connection with medical professionals. And the awareness of health would be much stronger going forward. And I think online healthcare would be one area that would grow significantly in the future. So I think these are all the structural changes, right, you know that COVID-19 brings to the overall society, as well as the mindset of businesses. I think a lot of the consumers' mindset is already very much on mobile internet, but the businesses - there is some sort of inertia for them to make changes. But having experienced COVID-19, I think the imperatives for change would be much stronger. And rest assured that there are a lot of investments that we have made in the past and we will be making even more for the future, which help us to take advantage and facilitate, and even lead these structural changes. So, on the gaming part, I'll ask James to answer.

Thank you for the question on the overseas game market, Gregory. So we believe that the game markets outside China, R&D is following a somewhat similar path to the market inside China. It has obviously a roughly two-month time lag given the later start of the stay-at-home periods in the rest of the world and the extent may not be as pronounced as in China. First of all, because in some regions, the lock-downs, the stay-at-home period is less pronounced than in China. And then secondly, because there may be some consumers who are concerned about unemployment risks, which may mitigate their in-games spending. But overall, there is an uplift in use of time spent on games. Going - I don’t want to be more granular, the games are seeing the biggest uplift are generally those that have longer session lengths, because people now have more time to play the longer session length games and also the games that are somewhat team based in nature, which I think reflects people realizing that, perhaps surprisingly it actually missed their work colleagues and they want to socialize with them, and one way of doing that is through games, through team-based games. Looking forward, of course, we expect and hope that the situation will normalize in the rest of the world as it has done in China. But taking a more - longer-term view, it's also worth observing that we are in the fortunate position of continuing to launch games globally during this period. And Martin mentioned Code: D- Blood and RPG that we launched in Japan. Riot has launched its Legends of Runeterra card game on mobile and PC in the last few days. And then as Martin also mentioned, Riot has launched Valorant which had an extremely positive reception from hardcore gamers on PC in the last month.

Thank you.

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

Thank you for taking my question and congratulations on your numbers. Hearing your commentary about how strong the quarter was and how you think the second quarter could see a reversal of that, could you just go through that fact about how much traffic is coming off and how quickly that's slowing down to the extent possible in the months of April and May? And just diving further into that question, if you look at advertising, how would advertising, for example, change or slowdown from the pace that we've seen in the month of - in the first quarter? And from - if you go back and look at the ad load increase that came through, that wasn't a full quarter increase, if I'm not wrong about it, so surely the second quarter and hereafter, you should see substantial strength in the first quarter play through into Q2 and the rest of the year. Is there something we're missing here?

Piyush, sorry, on the first question which business were you alluding to specifically?

I'm alluding to the overall business, the strength that you've seen in the first quarter on both advertising and gaming, and your commentary that you're likely to see this reverse into Q2 because your guidance sounds a little bit more conservative?

I mean for whatever benefit that came through in the first quarter, because people said they want more and thus have more time on the screen and spend more time on games and video and Internet services. We are seeing that normalizing basically five launched in April. It started to normalize in March, but pretty much normalized in April, and all normalized after May 1st holidays. So I think - that's sort of - the extent that you should think about. And in terms of advertising, I think, James probably will give you some color.

Yes, I mean, this might be reiterating what we said in the prepared remarks in which case I apologize. We'll try to go a little bit deeper or a little bit clearer in case it wasn't clear. So the three factors that we think will act as headwinds for the industry as we look forward beyond the first quarter. The first is that, in the first quarter, because of people staying at home, they spent more time online and more time results in more impressions, and particularly to the direct response to advertisers if there is more impressions than what else equaled out mechanically, buy more and spend more money with the industry as a whole. And so, our assumption is that going into the second quarter as people return to work and to school, the quantity of assailable impressions will normalize. Then second factor is that, if you look at how the direct response advertisers operate, then they have a certain customer lifetime value assumption based on historic ARPUs, based on historic churn rates, and so forth. And they will bid up the eCDM [ph] or eCPC that they're willing to pay to a customer acquisition costs that is derived from that customer lifetime value assumption. And in the very short-term, if that's a sudden shock, which was the case with the COVID-19, then they may not have time to fully update the customer lifetime value assumptions. But over the months as the situation stabilizes, then they may decide to review the customer lifetime value assumptions due to different assumptions about churn rate or different assumptions about retention rates or they may not, we don't know, but it's a risk. What we do know is a third factor, which is the certain online advertising properties in China, such as online video, then historically close to half of the advertising revenue in that industry came from multinationals. And what we've seen in the last few weeks is that half of the revenue that comes from local China-based companies has been fairly resilient. But the half of the revenue long-form video that comes from multinationals has experienced a substantial step down and a hypothesis is this reflects the fact that these multinationals have a global perspective, and to some extent, what they're seeing in the rest of the world affects how willing they are to spend money in every country including in China. So those are all headwinds that we think will affect the industry and what may affect us, and - you should bear in mind. But I think that it's important not to get that in the parts, that's why it's been in this sort of discussion around whether our advertising revenue growth was constrained by lack of advertiser demand because of the ROIs, audience viewer tracking or limited supply. And I think what you can see from these results is, when there is a surge in supply, even if it's a surge in supply for reasons outside our control and beyond our expectations, then our revenue experiences a corresponding uplift, because fundamentally our appetite delivers high returns.

Thank you.

Your next question comes from Han Joon Kim from Macquarie. Please ask your question.

Great, thank you for the chance to ask a question. I think you've mentioned about the structural changes that have been happening for the industry, but I wanted to kind of follow-up on that. I wanted to see how you guys are thinking about your business plan as well. So I suspect you guys started the year with certain frame in mind that the world has changed. So to the extent of things like CapEx, things about your business mix between consumer facing and enterprise facing, how do you think the contour of your business changes? How does your investment plans and your financial kind of expectations change alongside that? Thank you.

Well, I think, I would say we have anticipated the structural change, and I think you - I have explained it, structural change was something that everybody sort of anticipated. I think there is an inertia, especially from the side of established businesses to say how much investment we're going to be making in order to make the change and if I want to make the change, it requires money, it requires people, it requires a change in my organization, and overhaul on my supply chain. There is a lot that needs to be changed. So there is an inertia. But then, I think you're going to this COVID-19 process, then everybody feels that they have to make the change, even though it's painful, it's costly, and it's going to be a bit challenging. So I think that's the structural change points. And as a result, I think we have not been experiencing any structural change in our framework on investment, because I think with the framework, the investment was already there. We were first to reorg our organization in the year of 2018 to establish our CSIG, cloud and industrial into that service group. So that basically set us up to embrace in China. And it's actually because of that then we were able to have Tencent Meeting launched right in the midst of COVID-19 and be able to establish itself to be the, by and far, Number One standalone video conferencing tool in China, right. So I think from that perspective, there is no structural change in our investment framework, but I think we're excited that we will be putting more investments into both the consumer internet, as well as the industrial internet in order to drive and embrace the expedited change.

Your next question comes from Jerry Liu from UBS. Please ask your question.

Hi, thanks guys. Yes, first just a follow-up on gaming. I appreciate the idea that as people return to work then they're spending less time in these games, but at the same time, we also heard comments about how we are excited about some upcoming games. So how do we reconcile those two things? Could some of these new games bring some upside to grossing this year or are some of these big games the kind where will take time to build the user base, so maybe we should have some patience with monetization? And then the second, just a question on cloud. I appreciate also that with cloud, as people were at home, a lot of the projects were delayed, but as people go back to work now, and I'm still hearing comments about some challenges from management. So I'm just wondering if this is just as people need some time to put these big projects together or do we see maybe some of the enterprises being a little bit cautious with CapEx or just some of these bigger budgets? Thanks.

I think on the game question then, you summarized the puts and takes very well and there's not a lot I would add to it. If you're looking for a synthesis of the two forces and where it nets out, then the reality is that we don't have a crystal ball and time will tell. But we wanted to be clear that on the one hand, we did have this an anticipated surge in - on user time spent, and to some extent, in consumption within some of our existing games and we will need to digest and stabilize after that for a little while. But on the other hand, I think that we're very pleased just as we had that Tencent Meeting launched just before the coronavirus broke out. So on the games side we have some big interesting exciting games that have already been released or about to be released. We think, to your point, those games may or may not take some time to feed through into monetization. It's already clear that's the critical reception to those games and the reception of the most demanding players within the card game genre or the competitive first [indiscernible] a genre have already been extremely positive which are leading indicators - positive leading indicators for the future, no matter how quickly the monetization flows through.

In terms of the cloud business, I think you have also pointed out at the right point, sort of which is, number one, as people return to work, then a lot of these projects which have been put into a halt would be restarted and it would actually take some time, right, for maybe the bidding process, maybe the negotiation of the contract, maybe sort of the implementation in order for it to enter into production and revenue-generating phase. And two is, I think from the enterprises perspective, I think there is a little bit of - I would see - coming back to the drawing board and revisiting the business plan for some of the businesses which saw their business impacted during the COVID-19. But I think the good thing is, I think, the Chinese economic activities have returned - rebounded quite nicely, right. So when that happens, then when these businesses start to see their business recover, then we feel that they would then be able to normalize their business plan. And at the same time, because they have gone through the COVID-19 shut down, their plans for the future in terms of digitization will probably be speeding up. So I think there will be a period where everybody needs to restart, and there will be a period of hesitation, but then we hope and we believe that over time the future digitization wave will start to…

Your next question comes from John Choi from Daiwa Capital Markets. Please ask your question.

Good evening, gentlemen, and thanks for taking my question. My question is on the FinTech services. It seems like you guys have done a pretty good job in terms of - on stabilizing the margins, but going forward, how should we think about the profitability given that, are we going to continue to be aggressive in their marketing or with the COVID-19 situation, how should we think about the cost control and how this will offset with the further diversified revenue stream? And just a quick follow-up on the Mini Programs. Management did mention 400 million daily active users. How has this really kind of reinforced our other parts of the ecosystem like payments for advertising during this period of time? Thank you.

Yes, in terms of FinTech services, if you look at the changes through the lockdown - during the lockdown, offline transaction volume pretty much nosedived but it didn't really hurt our profitability. One is, the offline services were low margin, at the same time, there are a lot of marketing that's related to, getting the footprint out on the offline side. So when you have a lower transaction volume, we also didn't have as much marketing expenses, and that pretty much balance out each other. I think when the business returned to normal, right, then we will have pretty much the payment volume returning to the same level as last year's December level. And at the same time, I would say, we will be starting to conduct more marketing activities, too, right. So that we will be watching out each other pretty much. So this pretty much reinforces our pretty consistent message, which is especially on the offline payment side, it's helping us to build payment as an overall infrastructure. So we are not - we're not too much in a rush to create profit out of it, but instead it's important for us to build market share and to build user behavior as well as coverage of the merchants. In terms of the Mini Programs, I would say, if you look the Mini Programs, it is a very basic infrastructure for our ecosystem, right. The Mini Programs actually help us to establish a relationship with a lot of service providers and it also helps service providers to establish relationship with a lot of customers. And I think the ecosystem just gets stronger and stronger as we continue to build out the Mini Program infrastructure, and it was actually somewhat expedited during the COVID-19 pandemic as well. And we would see over time, I think it would actually help our payments, it would also help our advertising business. But it's not going to be an immediate direct impact, but very clearly when businesses are running more of their services and getting more of their revenue and serving more of their customers on Mini Programs, then they will be more incentivized to run ads on our overall platform in order to drive more traffic into the Mini Programs. And I think over time, it also helps us to build stronger relationship with these businesses so that we can get the cloud business better, and we also provide SaaS services to them, be it data analytics, be it helping them to acquire traffic and be it helping them to establish closer link with their customers.

Your next question comes from Alicia Yap from Citigroup. Please ask your question.

Hi. Good evening, management. Thanks for taking my questions, and also congrats on the strong set of results. I have a follow-up on the advertising. I think with retailers leveraging the Mini Programs, should we actually see over time the increase in the demand for online app opportunity within the Mini Program official account to help mitigate some of the headwinds that we see from the multinational that you mentioned? And also the insights ads you mentioned experiencing some recovering growth for the media ads. So is that implying media ads to also come out from the declining trend, especially with the easier year-over-year comp as we head into the second half? Quickly, any last thought on the rationale and synergies on the recent investment in Afterpay and the [indiscernible]? Thank you.

Well, the first part is - I think related to the question before which is Mini Programs benefit for advertising, and I will take that question, which is, I think it would definitely benefit advertising, but it would be more like over the longer term rather than shorter-term, because it's a little bit like an infrastructure that you would have the retailers if we're spending a lot of effort in terms of building their expertise on Mini Programs. And it's not just the Mini Program, but also finding ways to which they can drive traffic to the Mini Programs, right. In the past, a lot of them rely on offline stores, and then having people to add to the official accounts and then basically leave it at that. But during the COVID-19 lockdown, it looks like a lot of direct sales effort by the shopkeepers by leveraging the social network was actually very effective. They also started to leverage a live broadcast as a way to acquire customers. So a lot of these new ways to which they can acquire traffic and attract users, be it new users or existing users have been developed and that they need to start building these capabilities. And once these are built, then they could dedicate a portion of the corporate resources to start bringing people into transaction to Mini Programs, which is something that they own themselves, which is very attractive for them when they think about the overall omni-channel mix. And when that happens, then I think they would start thinking about, oh, we actually need to put in more advertising so that we can drive incremental traffic to Mini Programs. So I think it would take some time before we see the impact, but the structural migration towards Mini Program would definitely help our advertising going forward.

Alicia, on your question about media advertising then, I think you're asking about the second half of the year. We're already somewhat swimming against the tide by talking about current quarter conditions at a time when many companies are not guiding at all. So I'll restrict myself to just talking about the second quarter, because the second half is still some way away. But as far as the second quarter is concerned, for media advertising, then technically we still have a fairly difficult comparison period year-on-year. And more importantly, fundamentally, if you look at our video advertising revenue mix, while the in-feed is growing quickly and is an increasing proportion of the total, historically, the preponderance of our video advertising was the sponsorships and the 15 second spot ads. And as I mentioned in reply to an earlier question, a big double-digit chunk of that advertising comes from multinational brand advertisers who unfortunately are reviewing or reducing their spending globally. So therefore, you should expect the media advertising revenue to be under pressure in the second quarter of the year. Thanks.

Your next question comes from Alex Yao from JPMorgan. Please ask your question.

Thank you, Management, for taking my question and congrats on a strong quarter. First question is regarding your broader digital entertainment strategy, based on our observation there seems to be a change in your broader digital entertainment strategy evidenced by the recent management change in China literature. Can you share with us your latest thoughts on, in terms of the broader digital entertainment strategy? And then secondly, I believe you guys in the past, discussed strategy to increase the payment monetization. Do you still plan to do such monetization increase given the COVID-19 outbreak? Thank you.

Well, in terms of the digital entertainment strategy, I think we have always been pretty consistent and we feel that we - digital entertainment is a very important part of our overall business and we have a number of different platforms. And if you look at the broad strategy right now, we have always been focused on high quality, high fidelity, IP oriented content. And if you look at that digital entertainment strategy, I think the key change over the past two years was actually sort of endorsement of short and mini videos and that's not really related to China Literature, but I think in the case of China Literature is really consistent with our overall strategy. And what - the management change there is really because of the fact that the founding team of China Literature have really started the entire literature platform business long, long time ago, radio and they have been acquired, and then they left and then they started again and then they acquired. They re-acquired the business that they sold. It had been a long time. So ultimately, they basically decided that they want to take a rest and that's why they passed on the bastion to people at Tencent. And that's why when we pick it up there is a transition, a very smooth transition. What we wanted to do is actually to continue to drive the core value of China Literature going forward. One is, to enhance the value of the writers work. We want to make sure that the value of the writers' work are respected and they would receive the monetization. And part of it is actually fighting piracy, part of it is actually helping them to get more users, and also helping that had IPs to get monetization through monetizing the IPs and extending IPs into ancillary areas such as animes or videos or games. And at the same time, we would want to explore fee reading model, but that would be only under the writers consent. And I think this model will be appealing to some writers, would not be appealing to some other writers. Especially for the up and coming writers I think the fee model supported by ads would be attractive model for them to get the initial audience, and get their writing skills up. But then we actually support as you can see, a lot of the business that we run, the video and music and games, we always have fee model to attract a lot of users, but then there will be a paid model. So I think - for China Literature, it is little bit the reverse. We only have the pay models. So if we have the fee model ad supported plus the pay model, I think it would actually be creating even more value for the writers. And we feel we can also have a much tighter integration between China Literature and our traffic platforms, and our video platform, and our games business, and that will be overall positive for the core value proposition of China Literature and that would create a lot of value for both the writers as well as the consumers.

I think on the second question about FinTech monetization, as you can see from this quarter's results, we have a number of different financial services within our ecosystem, including the core payments, including the wealth management business, including the lending business, including other emerging businesses, those various business lines have different margin profiles. And we're taking a long-term approach of progressively layering on incremental profit streams over time rather than feeling the need to do everything at once. Which means, when conditions are extremely benign, we're not going to grow at a hyper growth rate, but on the other hand, when conditions are challenging, as they were in the first quarter, we can actually sustain what we view as easy growth rate, and also sustain what we view as attractive margins.

Operator, in the interest of time, we will take three more questions.

Your next question comes from Eddie Leung from Bank of America. Please ask your question.

Hey, good evening guys. I have questions related somewhat to Mini Programs, but perhaps in a bigger scope about what you're seeing as a whole. We have been seeing development of regions within Weixin kind of supportive to e-commerce transactions, like live broadcasting, [indiscernible] et cetera. So I'm just curious on your thought of the potential of Weixin becoming more prevalent in the e-commerce industry chain going forward? And how would that potentially affect the positioning of Weixin versus some of your e-commerce partners? Thank you.

I think, the Mini Programs, as I said before, is infrastructural too, and it actually helps all kinds of different services to connect themselves with consumers. And obviously, a big part of economic activity is actually in the form of retail and cellular products. So that's why Mini Programs does have an affinity for serving these retailers and people who have brands. Now, therefore, if we look at e-commerce in the U.S., for example, you can see e-commerce platforms accounts for a certain percentage of total e-commerce, but then more than 50% of the e-commerce activities actually happen with the brands going directly to the consumers. And that's very, very low in China. And we felt that it's a combination of the fact that a lot of brands in China are nascent brands. So it takes time for them to build up their brand franchise. But also there is a big part of it which is the lack of capabilities to move online. And to some extent, it's also harder in China to do that, because in the U.S., most of the sales - a lot of the sales is actually through websites, which are probably more traditional and easier to manage. But if you are actually doing it on mobile phones, it is probably more difficult. Especially if you want to develop a mobile app which sells a particular brand, it's going to be very, very difficult to get the consumer recognition and even remembrance. And that's where Mini Programs come into play and we actually want to help a lot of the brands and retailers to establish an online presence which they own, they control and they can actually get to directly connect to their users and they can also use to acquire new users online. So I think that's the reason why we are actually building up a lot of tools to facilitate that. Now in terms of how we feel about a lot of the investee companies which are also engaged in e-commerce platforms, we think that what we do here by building a stronger e-commerce ecosystem within WeChat is actually going to be synergistic to them, because if there are more users who are more used to buying products and services on WeChat, then the spillover effect will be bigger and people would also be buying from the e-commerce platform. So if they're buying from a particular brand, they will be going to the Mini Programs. If they say oh I want to go take a look at the category, then they will be going to the platforms that are working with us. And if the consumer habit is actually coming to WeChat and look for products, that would be good for everyone.

Your next question comes - all right. Your next question comes from Binnie Wong from HSBC. Please ask your question.

Good evening management. I would like to seek your thoughts here on payment and the overall margin. As Tencent competes more in the higher margin revenue streams like wealth management and lending, where our close competitor has the first mover advantage and also committed to also grow these streams of revenue, what is our competitive edge here to gain share? And presumably, as there's like savings in overseas marketing spend maybe this year, is it realistic to say the FinTech margins should improve this year overall? And if we think about on a group level, right, I think management highlighted near-term challenges in advertising and cloud, and then we'll keep on investment into cloud content and then might be mix shift to overseas games of lower margin? But yet there are some positive drivers in margins, say, expansion into higher margin payment revenue streams along with like, probably robust games revenue. Do you see the margins or the positive…

Hi Binnie. Thanks for your question. We will address these questions first. Thank you.

I think - we don't think in terms of the blended margin. So that's a very difficult question to answer, because that's not the way we think about our business, right. Our businesses are always thinking from business-by-business, product-by-product, how do we expand the product itself and if the product actually sort of can generate incremental users and value, and then over time there will be monetization and then there will be a margin. And the company - each business line as well as the company overall is actually aggregation of such drivers. So to some extent, we can't answer the question that you asked. But I will try to answer your question in relation to FinTech, and you probably sort of can get a sense of how we think about it. So in terms of the FinTech, I think there are a number of different business components in there. The first one is actually the payment platform. And even within the payment platform, there is a component which is online, there is a component which is offline, and I talked about the offline part being relatively infrastructure type of business, right. It doesn't really sort of generate a lot of - it's not run to generate profit per se, because we have very few margins there to start out with the monetization scheme and at the same time, we actually sort of putting out a lot of marketing and promotional costs, but that helps us to build the use case and get a lot of users and that would help us to monetize the online traffic and it also sustains a very strong wallet presence, so that it helps us to build our other FinTech businesses which you talk about which is wealth management and lending. And within wealth management and lending, I think the way that we think about these businesses are not that we want to grab market share. We want to build the scale. This is not the way we think about it. The way we think about it is actually, we want to build the best-in-class in terms of product capability, in terms of consumer value, in terms of risk management. And for example, in wealth management, it's very easy to say, oh, I just want to build scale, and as a result, I want to sell as many wealth management products as possible. And believe it or not, usually the wealth management products that sells the best is actually the most toxic. And if you go down that track, then we will not be fulfilling our promise to our users, right. So that's why I think the way we think about wealth management is like, how do we create a system in which we have a lot of user education, we have best product to our best knowledge, product selection processes. And we don't offer all the products, we only offer the products that we felt are high quality, and then we provide a lot of risk explanation to the users. And as a result, hopefully over time the users are not going to be all users in the world, but the users who are willing to learn, the users who want to understand the risk that they're buying, and eventually they can grow with the platform. These are the people that we want to serve. And ultimately it's a great wealth management platform. Likewise, on lending, you can actually sort of always lend a lot of money outside, but then whether you can collect is a very big question mark. And you can also say, oh, we just want to charge more interest so that we can cover on the cost. This is not the way we think about it. We actually want to be exposed to high quality risk and the credit - high quality credit, and as a result, we may not be expanding as much in scale, but we definitely sort of it has got the best credit in the market. And I think as we see in COVID-19, I know we - it's actually stress testing our FinTech services. And I think we have passed the stress test, and that's how we think about these businesses. It's a long-winded answer to your question, but I hope that you get a taste on how we think about our businesses.

Your last question comes from William Packer from Exane BNP. Please ask your question.

Hi, there. Thanks so much for taking my question, and congrats on the strong results. Firstly, you talked about video games consumption normalizing as people return to work, but you also talked about structurally expanding the long-term audience. Is there any color or KPIs you could help us on gaming engagement post lockdown for a better feel of those long-term changes? And then just a quick one on the advertising side, the color you've offered is helpful. Is there any underlying competitive shifts in the digital ad market share which we should be thinking about? Thank you.

Well, why don't I start with both of them and Martin or someone else may supplement. But I think on the video game question, and specifically the comments about the structural opportunity for video games, then, there are various entertainment formats, including radio, television, magazines, and so forth. And then there's interactive entertainment, which is what we call video games. We have an interactive entertainment group within Tencent. And the reason why I quote interactive entertainment is because to some extent, what we think of as video games are actually sort of a super set rather than a subset of entertainment activities, and there's all sorts of entertainment activities that were traditionally passive and linear in nature, which we think can be enriched as they become interactive and immersive in nature. And so, the earliest video games were effectively moving activities like Solitaire or chats online, but over time you see more team-based competitive social activities moving online. And I think that during this period, you see more and more people engaging with interactive entertainment on a broader product, meaning that, for example, people who historically watched physical sports events are now watching Formula 1 or Basketball going or other sports played in any sports format often by the Formula 1 drivers or the Basketball professional players, alongside watching games like League of Legends that have become powerful sports in their own right in the past couple of years. So that represents a structured expansion in the market. Another example would be that historically, that's a gigantic live entertainment business around music concerts. And unfortunately, those are not occurring at the moment, but what is happening if you play Fortnite is fairly regular now. Music concerts within Fortnite with Travis Scott, with Diplo [ph], with a number of other stars recently, and those are attracting gigantically. And so to some extent, the time people are spending in the music concerts in Fortnite or the time they're spending watching racing car drivers playing a Formula 1 video game is not replacing the time they were previously spending playing World of Warcraft. It's sort of supplementing that and expanding the breadth of the interactive entertainment into new - newer broader entertainment categories. So that's an example of structural expansion in a qualitative sense. And then in a quantitative sense, we have seen that for some of our games, particularly for the more team-based competitive games. The audience now is structurally larger than it was going into this situation. So the time spent per user is normalizing downward, because people are getting busier in China, in particular, but the number of people who have found these attractive forms of entertainment is broader than it was in the past. So that's on the video game question. With regards to the advertising question and the competitive landscape, I think our view is that, we've always been highly competitive within the China online advertising industry by virtue of our traffic, by virtue of the premium nature of some of our content. What's changed in the last year or so is really that we have enhanced our technology. And I think one of the best proof points for that is the very rapid growth, more than doubling in revenue year-on-year in our ad network business, because as you know, the ad network business is other people's inventory. It's not directly tied to whether Weixin has a white collar user base or whether we are running three or four hours per day in Weixin, it's tied to how competitive on a real time basis, our ads serving, our ads targeting is versus the other companies providing networks in the market. And so the fact that our ad network business was actually the biggest contributor to our ad revenue growth in recent months, I think it speaks to the fact or speaks to the reality that our ad tech capabilities are now more competitive than they're ever been.

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

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect your lines.