Thank you for standing by, and welcome to the Tencent Holdings Limited 2020 Second Quarter and Interim Results Announcement Conference Call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Wendy Huang from Tencent. Please go ahead, Ms. Huang.

Thank you. Good evening. Welcome to our 2020 second quarter and interim results conference call. I’m Wendy Huang from Tencent IR team. 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 the general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited and 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 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 off with a short overview. President, Martin Lau and Chief Strategy Officer, James Mitchell, will provide a business overview. 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.

Okay. Thank you, Wendy. Good evening. Thanks, everyone, for joining us today. Since the beginning of this year, the COVID-19 pandemic has swept the world, disrupting our daily work and life routines. During this challenging time, we utilized our platforms and technologies to help users adapt to the new normal via online tools, to support enterprises in conducting digital upgrades, and to broadly contribute to economic recovery. And now I will highlight the result we achieved in the second quarter of 2020. Total revenue was RMB 115 billion, up 29% year-on-year and 6% quarter-on-quarter. Gross profit was RMB 53 billion, up 36% year-on-year and 1% quarter-on-quarter. Our non-IFRS operating profit was RMB 38 billion, up 38% year-on-year and 6% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB 30 billion, up 28% year-on-year and 11% quarter-on-quarter. Moving to our online platforms, in social, combined MAU of Weixin and WeChat increased 6% year-on-year to 1.21 billion. Just for those who may not be familiar with the distinction between Weixin and WeChat, they are two different products. Weixin is a chat tool that serves users in the mainland of China, whereas WeChat is a sister product which serves users outside of the mainland of China. In smart devices, MAU of QQ was 648 million. In games, we expand our leadership via expanded popularity of established franchise and success of new release in both China and international markets. In media, video and music subscriptions increased as we released top-tier content and added songs to the paid library. In FinTech, commercial payment transactions resumed growth and our wealth management platform expanded its aggregated customer assets. Leveraging our broad user base, we assisted SMEs digital upgrades and contributed to economic recovery. In cloud, we signed up a large contract in key verticals and captured opportunities in emerging sectors. In utilities, we maintain our industry leadership in mobile security, mobile browser and [ph] endless apps in China. I will invite Martin and James to discuss the business review.

Thank you, Pony, and good evening, and good morning to everybody on the call. For the second quarter of 2020, our total revenue grew 29% year-on-year. Value Added Services represented 57% of our total revenue, within which social networks was 23% and online games was 34%. Online Advertising was 16% of total revenue. FinTech and Business Services represented 26% of our total revenue. Moving into more granularity for Value Added Services, segment revenue was RMB 65 billion in the second quarter, up 35% year-on-year and 4% quarter-on-quarter. Within Value Added Services, social networks revenue was RMB 26.7 billion, increasing 29% year-on-year, mainly driven by more subscriptions for animated series and music as well as in-game item sales. The consolidation of HUYA contributed to both year-on-year and quarter-on-quarter revenue growth as well. Total VAS subscriptions increased 20% year-on-year to 203 million. Video subscriptions increased 18% year-on-year to 114 million, mainly due to the success of animated series and drama series such as The Land of Warriors Season 3 and a new season of Candle in the Tomb: The Lost Caverns. Music subscriptions rose 52% year-on-year to 47 million as we included more songs in the paid library. Online games revenue grew 40% year-on-year and 3% quarter-on-quarter to RMB 38.3 billion, driven by mainly smartphone games. Total smartphone games revenue increased 62% year-on-year to RMB 36 billion. The strong performance primarily flowed from our key titles in China and international markets and the release of deferred revenue generated in previous periods, including the COVID lockdown period. The growth also benefited from the low base of Peacekeeper Elite in the same quarter last year, which was launched in May 2019, and from the financial consolidation of Supercell, which happened October 2019. PC client games revenue decreased 7% year-on-year to RMB 10.9 billion due to soft DnF and CrossFire performance, offsetting increased revenue from League of Legends. Moving on to social networks, we released during the quarter update for Weixin to enhance features and functionalities for communication, content and services. On communication, users can virtually tap their friends via Tickle, which has enabled many creative expressions. The addition of live broadcast function in groups facilitate various vertical use cases such as online education. Daily messages grew both year-on-year and quarter-on-quarter. On content, we upgraded Official Accounts video publishing capabilities, strengthening our recommendation algorithm and released new content aggregation tools. These initiatives enabled more efficient content delivery and revitalized content consumption in the Official Accounts. As a result, Official Accounts page views increased year-on-year during the first half of 2020, rebounding after three years of consecutive declines. As for services, we launched a free and easy-to-use toolkit to help SMEs, especially long-tail merchants, build and operate Mini Stores, empowering them with functions such as order management, after-sales services and live broadcast. In QQ, we enriched features for users to stay together online while they are physically apart. Users can initiate online parties and play AI-empowered social games in video chat environment. To engage the expanding fan base for Anime, Comics, Games and Novel content, we rolled out customizable comic stickers within QQ chats and strengthened content offerings through popular ACGN-related Mini Programs. All these help us to make QQ continue to be front and center with the young users. For games, during the quarter, player activity in China normalized downwards versus the first quarter as users returns to offices. However, user time spent on smartphone games in China increased year-on-year, suggesting that the work-from-home period has structurally widened appeal of playing games. Internationally, our MAU increased significantly, as many users connected with their colleagues and classmates via online games during the stay-at-home period. Two new smartphone games and one new PC games also contributed to our international MAU growth. Our flagship titles maintained a high cadence of quality content updates, including new game modes, virtual items and graphics upgrades, specifically, Honour of Kings motivated users to play more matches with extra rewards which deepens user engagement during its annual Give Me Five festival. We also released high-quality skins for its well-known [ph] Three Kingdom Heroes (00:10:51). Peacekeeper Elite celebrated its first anniversary with new content and game modes to enhance the competitive game experience. In a crossover promotion in July, we launched appealing Tesla-branded car skins in the game which gained widespread popularity. For new releases, Supercell’s Brawl Stars in China was especially well received, as players enjoyed its easy-to-learn, yet competitive game play. It topped the iOS China Download Chart in June, extending Brawl Stars’ global leadership in the fast-paced 3v3 MOBA genre. In recent years, we have achieved significant success in game development with continued strength in several key structural factors which are critical for developing and operating highly successful games. Firstly, our homegrown and international flagship game studios have proven track record in creating category leading games, especially on smartphones. We established 17 longstanding franchises, which have each individually exceeded 10 million daily active users in their operating histories. Studios develop content with a high degree of autonomy, while leveraging Tencent’s publishing resources. Their capabilities in innovating attractive core game play, creating immersive storylines and releasing engaging updates are vital in sustaining long-term success. Secondly, our studios are early adopters of cutting-edge technologies. Tencent’s back-end infrastructure is designed to support a massive number of players concurrently. We deploy industry leading game engine and AI-empowered tools to shorten development lead time and provide unique game experiences. For example, we applied our proprietary technology in Honour of Kings WuKong AI challenge, which attracted over 50 million players to play against the AI. We constantly upgrade our anti-cheat system to foster fair competition which is crucial for game play and especially eSports tournaments. And we collaborate with external IP and nurture internal IPs to enrich content and enhance game longevity. We create popular narratives that tie into well-known literature, anime and famous characters such as Moonlight Blade, Naruto and Pokémon’s Pikachu. We expand own IP influence through cross-media adaptation, leveraging our large media platforms. Looking forward, we’re committed to investing in talent, technologies and IPs to strengthen our leadership in game development. Now, I’ll pass on to James.

Thank you, Martin. Turning to Online Advertising, overall, our ad revenue grew 13% year-on-year, which we believe was an above-market rate to RMB 18.6 billion. Sequentially, revenue grew 5%, a little bit slower than our normal second quarter seasonal upturn, because ad spent by the games and Internet services categories normalized downwards on less traffic during the second quarter after surging due to abnormally high traffic in the work-from-home period during the first quarter. However, we diversified our advertiser industry breadth, as categories such as e-commerce and education increased investment for their June 18 promotional campaigns and summer courses, and categories such as automobile and consumer electronics marketed more aggressively with us as consumption recovered. To reinforce our long-term competitiveness, we launched a new integrated ad platform, enabling advertisers to more efficiently place ads across all of our inventories, including our mobile ad network. This new platform should also increase bidding efficiency and provide smarter targeting for advertisers. For social and others advertising, Weixin properties, particularly Moments, saw rapid ad impressions growth, while our mobile advertising network experienced higher eCPMs, as video advertisements revenue contribution increased from a single-digit percentage a year-ago to over 40% in this quarter. We believe the Weixin ecosystem is redefining China online advertising by enabling advertisers to effectively channel online, social and offline traffic to their own private domains such as Official Accounts and Mini Programs, with the result that our advertisers are effectively investing in long-term and loyal customer relationships, not just purchasing one-time transactions. For media advertising, revenue declined year-on-year due to weak demand from brand advertisers and the delayed production and release of certain variety shows and drama series during the second quarter. However, subsequent to the quarter-end and helped by popular drama series Nothing But Thirty, Tencent Video’s traffic has materially improved, which we think testifies to the resilience of our long-form video platform. Looking at FinTech and Business Services, segment revenue was RMB 29.8 billion, up 30% year-on-year and up 13% quarter-on-quarter. Within FinTech services, revenue grew year-on-year and quarter-on-quarter, mainly driven by increasing user base and business scale, as consumption rebounded on people returning to their places of work. Our service ecosystem, including payment solutions and business management tools, provides offline merchants an efficient path to digitally upgrade themselves and to access customers and settle transactions via mobile phones. During the quarter, merchant demand for our payment solutions stepped up, especially from categories such as retail and restaurants. As a result, our commercial payment number of average daily transactions and value per transaction each increased year-on-year, rebounding robustly from the COVID-19 impact in the first quarter. For our wealth management business, aggregated customer assets and the number of active customers rose rapidly year-on-year, as more customers came to appreciate the convenience of managing their cash through our secure and well-curated platform. Within Business Services, revenue expanded both year-on-year and quarter-on-quarter, as cloud services consumption by Internet companies in the public sector increased. Although offline project deployment has not fully resumed its normal pace, reflecting the lingering impact from COVID-19, we have seen growing demand in industries, including financial services, the public sector, healthcare and education. We strengthened our back-end infrastructure capabilities by adopting more custom-made equipment, and we’re building and expanding more of our own hyperscale data centers. And I’ll now pass it to John.

Thank you, James. For the second quarter of 2020, total revenue was RMB 114.9 billion, up 29% year-on-year and 6% quarter-on-quarter. Gross profit was RMB 53.2 billion, up 36% year-on-year or 1% quarter-on-quarter. Net other gains was RMB 8.6 billion, more than double year-on-year and quarter-on-quarter. This mainly comprised non-IFRS adjustment items, including net gains on deemed disposal of certain investees in verticals such as e-commerce, live broadcast services and online games, as well as net fair value gains resulting from increased valuations of investees. Such gains were partly offset by impairment provisions for goodwill at China Literature and against certain investee companies. Operating profit was RMB 39.3 billion, up 43% year-on-year and 6% quarter-on-quarter. Net finance costs were at RMB 2 billion, stable year-on-year and up 19% quarter-on-quarter. The quarter-on-quarter increase was primarily due to the recognition of foreign exchange losses for the second quarter 2020 compared to a ForEx gain in the first quarter, partially offset by decreased interest expense due to refinancing exercise capturing the lower interest rate environment. Share of losses of associates and joint venture was RMB 295 million compared to share of profit for the same quarter last year. Sequentially, share of losses widened by 5%. The movement mainly reflected the impact of longer revenue deferral period and greater marketing spend at an associate game company. On a non-IFRS basis, we recorded share of profit of RMB 658 million for the second quarter 2020. Income tax expense was RMB 4.6 billion for quarter two 2020, and the effective tax rate was 12.3% this quarter. IFRS net profit attributable to equity holders was RMB 33.1 billion, up 37% year-on-year and 15% quarter-on-quarter. Diluted EPS was RMB 3.437, up 36% year-on-year and 15% quarter-on-quarter. Let me walk you through our non-IFRS financial numbers. For the second quarter, operating profit was RMB 37.6 billion, up 38% year-on-year and 6% quarter-on-quarter. Net profit after NCI was RMB 30.2 billion, up 28% year-on-year or 11% quarter-on-quarter. Diluted EPS was RMB 3.13, up 27% year-on-year and 11% quarter-on-quarter. Turning to segment gross margin. Gross margin for VAS was 53.7%, up 1.1 percentage point year-on-year or down 5.3 percentage points quarter-on-quarter. This sequential decrease was primarily due to, number one, greater revenue mix of lower-margin digital content services, including the live broadcast of HUYA and music streaming services; two, higher mix of lower-margins platform games versus PC games. Gross margin for Online Advertising was 51.4%, up 2.8 percentage points year-on-year or 2.2 percentage points quarter-on-quarter. The industry wide removal of cultural construction fees contributed to the year-on-year and quarter-on-quarter increase. Sequentially, the improvement was also driven by a greater proportion of advertising revenue derived from higher-margin Weixin Moments. Gross margin for FinTech and Business Services was 28.9%, up 4.9 percentage points year-on-year and stable quarter-on-quarter. The year-on-year increase mainly reflected improved margin contributed by wealth management and payment-related services. On operating expenses, selling and marketing expenses were at RMB 7.8 billion, up 64% year-on-year, or 10% quarter-on-quarter. Marketing spending increased year-on-year particularly on online games, Weishi, as well as cloud and business services. As a percentage of revenues, selling and marketing expenses increased to 6.8% from 5.3% in quarter two 2019. Sequentially, greater marketing spend was primarily driven by online games, cloud and business services, as well as the consolidation of HUYA. G&A expenses was RMB 16.5 billion, up 31% year-on-year and 17% quarter-on-quarter, mainly due to greater investment in R&D and staff costs. Within G&A, R&D expenses were RMB 9.9 billion, up 39% year-on-year and 23% quarter-on-quarter. G&A and R&D represented 14.4% and 8.6% of revenues, respectively. As at quarter-end, we had approximately 71,000 employees, up 26% year-on-year and 10% quarter-on-quarter. For the second quarter of 2020, gross margin was 46.3%, up 2.2 percentage points year-on-year or down 2.6 percentage points quarter-on-quarter. Year-on-year increase reflected improved gross margin across all three business segments. Sequentially, margin decrease mainly reflecting lower gross margin of VAS, as mentioned before. Non-IFRS operating margin was 32.8%, up 2.1 percentage points year-on-year, and largely stable quarter-on-quarter. Non-IFRS net margin was 27.2%, stable year-on-year, or up 1.3 percentage points quarter-on-quarter. Finally, I will share with you some key financial metrics for the quarter. Total CapEx was RMB 9.5 billion, an increase of 117% year-on-year or 54% quarter-on-quarter. Operating CapEx grew 120% year-on-year to RMB 8.3 billion, mainly due to advanced procurement of servers to augment business growth. Non-operating CapEx decreased 96% year-on-year to RMB 1.2 billion, primarily reflecting spending on [ph] plant and equipment (00:24:02) construction. At quarter-end, free cash flow was RMB 28.5 billion, up 127% year-on-year, or down 27% quarter-on-quarter. We recorded net cash position at RMB 7.2 billion, comparing to net debt of RMB 5.7 billion last quarter, which reflected a strong free cash flow generation and the consolidation of HUYA net cash balance, partially offset by payments for M&A initiatives. Fair value of our shareholdings in listed investee companies, excluding subsidiaries, was approximately RMB 726 billion or $103 billion as at the end of second quarter. In closing my remarks, I would like to mention that we have made a statutory announcement on the White House issuance of the executive order relating to WeChat. WeChat and Weixin are two separate products, with WeChat serving our international users. Based on our initial reading and subsequent press reports, the executive order is focused on WeChat in the United States and not our other businesses in the US. We are in the process of seeking further clarification from relevant parties in the US.

Thank you, John. We shall now open the floor for questions. As the company is seeking clarification on the executive order, we will not be in a position to answer speculative or hypothetical questions. Let’s move to the Q&A about our second quarter results. Thank you for your understanding. Operator, we will take one main question and after one follow-up question each time. Please invite the first question.

We have the first questions comes from the line of John Choi from Daiwa. Please go ahead.

Good evening, and thank you for taking my question, and congratulation on a great quarter. My first question is on your mobile games. I think if you look at this quarter, management did mention that we’ve seen a decline sequentially in user time spent, but in terms of the revenue, it has done very well. I think flagship titles did very well this quarter. So, could management elaborate a bit more what has driven this? Is it more on the ARPU side or paying ratio? I guess some of the new promotions did help. And just a quick follow-up from here like judging from this, we do have some news on the recent delay on DnF mobile. So, what should we expect for the second half growth for mobile games? And just quickly if you could touch base on your overseas revenue contribution from your online game will be very helpful. Thank you.

John, thank you for the questions. So, I’ll try to catch all of them, but starting with the last one, the overseas contribution to games revenue was actually similar to the fourth quarter last year. We have a number of successful new games launched overseas, but as you know due to our relatively long amortization period, it’ll be a few quarters before those new games flow through from cash receipts into reported revenue. Then in terms of the growth in the mobile games business in the second quarter, we saw time spent normalizing downward to some extent versus the first quarter as people returning to work in China. However, on the positive side, we saw time spent still increasing year-on-year in China, as we think the audience for some of these games have structurally expanded and we can see that in the data. And we saw uplift in time spent as well as investment in our international games which was helpful. I’d also say that while it would be hard to sort of understate the transformative impact of the COVID disruption, the game industry continues to innovate and develop and grow in ways that will continue to yield benefits long after COVID. If you look, for example, at the quality of virtual items that we’re releasing now versus the quality of virtual items that were released 10 or 5 or even 2 years ago than – in the past, a virtual item might be a red pistol instead of a blue pistol. Today, if you look at the game Peacekeeper Elite, then users have the ability to actually customize their car into a Tesla and that’s proven extremely popular. And, of course, when you’re talking about customizing an entire car, rather than just customizing a pistol, that’s a different price point. Another example on the customization of guns itself is if you look at the game Valorant, there’s a customization option called the Elderflame, which basically transforms your guns into dragons and the dragons eat ammunition with their jaws and then spit out bullets in the form of flames, and it’s amazing to look at. And I think that 5 or 10 years ago, the technology didn’t really exist for people to customize their cars into Teslas and customize their guns into dragons. And, of course, these higher-technology virtual items come with higher price points and many players choose not to purchase those. But for the ones who do purchase them, I know they’re unlocking something that is actually really cool for themselves to enjoy, really interesting for other players to see, and helps fund the cost of continuing to make these games bigger and better going forward. Then finally, on your question about the DnF mobile delay and the impacts on the second half of this year, I think it’s important to bear in minds that our game business growth in any period is driven by a multitude of games. So, while, for example, Peacekeeper Elite monetization has suddenly helped mobile game revenue in the first half of the year, we also saw strong growth from Honour of Kings. We also saw successful new releases like Brawl Stars, and so on and so forth. And as we go through the rest of the year, we’ll continue to introduce more value-added virtual items within our existing games that we think will enjoy more resonance and we’ll continue to release a multitude of other games. So, while we expect to bring mobile DnF to market quite quickly, we think that, in reality, there’s a number of growth drivers for our mobile game business beyond any single title. Thank you.

Thank you. The next questions comes from the line of Han Joon Kim from Macquarie. Please go ahead.

Great. Thank you for the chance to ask a question. I’ll ask them one by one. The first one is really just a question about your M&A strategy and perhaps I’m reading this pattern wrong, but I think in the past we’ve kind of seen you guys take a minority stake and kind of take it – approach it from an ecosystem approach. I think more recently, I feel like we’ve been seeing things that, whether it’s [indiscernible] iQiyi and things like that. We’re trying to absorb them a little bit more. So, am I reading this pattern wrong? Or has there been a difference in kind of thought process about how we should be internalizing some of these assets that might be creating more synergies if we do internalize them? So, just kind of perspective on that will be great.

Yeah, I think our M&A strategy has always been trying to invest in up-and-coming companies which have a great management, who have innovative products, and at the same time, they have synergies with our existing platforms. And that has served us very well in the past. And we are actually very much thinking along with this strategy. And if you look at the overall portfolio that we have, we now have more than 700 companies. And by and large, most of them, the vast majority of them are still existing in that mode, right? We are backing entrepreneurial teams to drive their companies forward, and at the same time, we try to figure out organic ways to work with them in a synergistic way. It just happens that when you have 700 companies, then some of the companies may actually get to a stage where the entrepreneurs, the management figure out maybe they want to seek a even tighter core operation with Tencent. In some cases, they may want to retire. In some cases, they actually want to enter into a new stage of working. In some cases, their products can actually be integrated as well as cooperating much more closely with our platforms. And that’s the time when we may consider changing a different way of working with them and moving them into a more consolidated portfolio. And so, this is not a change in our strategy. This is just within our strategy that would be at different life stages of the lifecycle of the companies. And in some cases, there’s another way for us to be working with these portfolio companies. And you’re just seeing some of them happening in the course of this year.

Got it. Got it. Thank you. That makes sense. My second question is, and I think you’ve partially touched upon this with the Official Accounts earlier, but there’s a lot going on in WeChat, whether it’s Moments or the short video or channel growing or whether it’s Mini Programs. So, within all of the agility that’s been going on within WeChat, do we see kind of any cannibalization between traffic? Or what kind of patterns do we see to the extent that can WeChat be encompassing all sorts of broader sets of behavior, whether it’s commerce, whether it’s advertising and all of that? Just kind of how we think through as we attach on incremental services, how that’s transferring into traffic and time spent across these services?

Yeah, I think this is a good question. And the way we look at WeChat and Weixin, particularly Weixin, right, it’s really from a user perspective, right, what are going to be useful for users. I think we’re not trying to sort of aggregate a lot of services just to increase the amount of user time. What we want to do is actually we want to build these services one by one, right, so that they actually can add value to solve some real life problems and add utility to our users. So, if you look at the history of Weixin, which has been quite long, we started off to be a communication platform, then we added Moments and then we have Official Accounts and then we have payment. And over time, we add one service after another. But it’s actually spread across a very long period of time. And every time we introduce a new service, it’s with a lot of caution and thought and testing, so that we want to make sure that it’s not a cluttered experience for the users and it actually helped to solve a particular user need in an elegant way. So, I think that’s the design approach and principle of Weixin, and we have always been following along with that. In a lot of cases, we actually try to actually send away the users, right, and not occupy them for too long a time. So, in the case of payment, for example, we don’t give them a lot of – all kinds of different experiences, right? We actually sort of try to get the payment done and then off they go, right? In a lot of search experiences, we actually sort of try to help the users find the content right away and then send them away to the content. So, a lot of these principles help us to make sure that while we actually are offering a lot of services within Weixin, the experience is not cluttering and it’s not confusing and it’s not self-cannibalizing for the users.

Thank you. The next questions comes from the line of Alex Yao from JPMorgan. Please go ahead.

Thank you, management, for taking my question. First question is regarding the runway of ad network business. So, compared to the WeChat ads, this is a less well-understood business. So, can you help us understand, for example, to what extent are the media sites in China already joining the ads network? What is the typical ads load in the network, the potential for pricing increase format transition from banner to video, et cetera, et cetera? To the extent that you can share any metrics, any direction will be helpful. And then my follow-up question is regarding the Shipinhao video account. Can you give us an update in terms of the traffic, time spent and your initial thoughts on the monetization strategy? Thank you.

Thank you, Alex. So, to start with the ad network question, and Martin will talk about Shipinhao. But on ad networks, I think it’s relatively easy to size the opportunity and that if you look at Internet advertising, the rest of the world’s been in a Google ad network, Facebook ad network, very substantial businesses representing a double-digit percentage of total online ad spend. And equally importantly that they enable a number of smaller-sized and medium-sized sites which wouldn’t be able to justify building out their own direct ad sales force to earning and generate revenue and fund themselves and create new content. And we think that that trend is also underway in China, and we see more and more of the media sites, for example, joining our ad network. So, we think that’s a win-win. In terms of the ad loads then, it’s obviously a function of the site owners’ decision making rather than a function of a Tencent-imposed directive. In terms of the pricing then, historically when ad network was predominantly a banner ad business, the typical ad pricing was correspondingly low, in the mid-single digits effective revenue per thousand impressions range. However, as we mentioned in the opening remarks, today over 40% of the revenue in ad networks is actually video format and there the pricing is substantially higher, closer to high-teens renminbi eCPM. So, as a result, the blended eCPM for ad networks in China is now moving up to high-single digits and low-double digits, which is once again good both for us, but also more so for the underlying property owner. So, ad network is an important business to us. It’s important financially. Ad network actually contributed more of year-on-year advertising revenue growth than Weixin Moments, for example. And it’s important as proof of our technology prowess, I think there’s a perception sometimes that Tencent’s strength as an advertising platform derives solely from the owned and operated properties and the traffic and engagement in the owned and operated properties. But, in reality, while those are very important, the fact that we’re extremely competitive and extremely fast growing in ad network is a proof point that there are ad technologies increasingly best-in-class as well.

Now, in terms of the Shipinhao, the Weixin channels, I’ll make a few points. First of all, it actually flows from the Weixin design principle that I talk about earlier, which is it actually comes from user insights and also the content creation, community insights, right? We can see there’s a need for short-form video content and we know that there are a lot of content providers who actually want to leverage Weixin to provide their users, their own fans with a short video content. So, that’s sort of the starting point of Shipinhao. And I would say, logically, it can be considered as an extension of the Weixin Official Accounts. Only in this case, we’re actually changing the text and photo content into video content, and we’re encouraging existing Official Accounts content providers as well as new content providers to provide short video content and sign up fans within the Weixin ecosystem. Right now, I would say it’s still in beta test, so it’s too early to talk about any user numbers, metrics as well as even further into monetization. But I have to say, so far during the beta test, right, it looks like it’s well received by the users as well as the content production community.

Thank you. The next questions comes from the line of Alicia Yap from Citigroup. Please go ahead.

Hi. Good evening, management. Thanks for taking my questions and also congrats on the solid set of result. I have two quick questions. Number one is with the launch of the Mini Store and also you mentioned more established integration between the Mini Program and also Official Account, is there any chance that we could further broaden our Weixin advertising ecosystem with in-app pay-for-performance product or service such in the coming future? And the follow-up is on the cloud business. You mentioned [ph] on this – a few (00:43:36) of the major contracts signed. So, just roughly what is the sense of your cloud revenue that is coming from the project base, the customized service versus the more general infrastructure service revenue? Thank you.

In terms of the Mini Store, I think it is good addition to the overall Weixin Mini Program ecosystem in support of e-commerce and other retailers. I think overall, you know, as we continue to improve our set of tools for the retailers, for the e-commerce providers, then we believe that the Mini Program ecosystem will become even more prevalent to retailers, and the transaction ecosystem within Weixin would improve. And when that happens, then it’s definitely going to have a spillover effect into our advertising business, right, because then it will be much more economical and valuable for the retailers to put in advertising in our ecosystems, which should include Moments ads as well as ads in the Official Accounts. So, all these will have a synergistic impact on each other. In terms of cloud, I would say the project base is actually a very small percentage of our total revenue. By and large, it’s actually the recurring revenue from the cloud service itself.

Thank you. The next questions comes from the line of William Packer from Exane BNP Paribas. Please go ahead.

Hi, there. It’s Will Packer from Exane. Many thanks for taking my questions and congrats on the strong quarter. Understandably, there is significant uncertainty around the substantive content and enforcement of the WeChat order. So, stepping away from that, could you help us think about your revenue exposure to the US and US companies? What percentage of video games revenue is generated in the US? And what percentage of Online Advertising revenue in China is generated from US firms? That’s my first question. And just as follow-up, we’re now a little bit further on from the COVID crisis. Could you share some thoughts on the longer-lasting changes in consumer behavior and how they impact your business; for example, lasting shifts in gaming and online engagement, use of digital payments and cloud services? Thanks.

Thank you, Will. This is James. So, to answer your first question, the US represents less than 2% of our global revenue and within that, advertising in the US would be less than 1% of our total advertising revenue. Now, I think you were also asking about the percentage of our advertising revenue in China from US companies. And our understanding is that’s not kind of a relevant metric for the discussion at this point in time, because if you look at the executive orders from May 2019 and then more recently the executive order a couple of days ago, then they specify very clearly that they cover US jurisdiction. And, consequently, we don’t see an impact on companies advertising on our platform in China.

Right. I’ll answer your second question. But before that, just one point to add on James’ answer is that there is actually a lot of other advertisers, right? So, to some extent, once we have an advertising space and inventory, right, then basically there are a lot of advertisers who are betting for such a inventory ad space. So, as long as the ad space is there, I think the revenue is going to be there. So, that’s in addition to James’ answer. Now, in terms of post-COVID, right, I think, obviously, consumers have spent more time online. And after that, they, by and large, have gone back to work and have gone back to school in China. In the rest of the world, it’s not the same. It’s a much longer period. But even within the sort of that small period of time, I would say consumer behavior have changed to the extent that more online behavior has been embraced, and – be it online entertainment, online games, as well as online consumption, people are now more used to shopping for groceries online. And they probably sort are more accustomed to be shopping online through Mini Programs or by watching online broadcasts. And I think working online has also become more familiarized with the users, as well as for the youth, right? Getting educated online is actually more familiarized for them. So, these behaviors, I would say, would have implication for a number of different industries, including the online entertainment, the retail – not just e-commerce, but also all retailers, they need to think about how to serve their customers online. And education companies will need to think about how to embrace online education. And I would say for businesses, right, more and more businesses are now embracing an online collaboration type of working mode. It’s not to say they would be seeing all their employees working from home, right? I don’t think that is actually going to happen in China. But rather there’s going to be a much more conducive environment for people to be collaborating online. A lot of the times, some meetings which otherwise in the past have to be done in face-to-face now can be conducted online. Conferences can be conducted online and inter-company meetings can be conducted online. And as a result, it would actually capitalize a move of companies and enterprises into digitization. And I think that would be the biggest takeaway from COVID, right? We all know that consumers are already online. Now, they’re spending more time, yes. It’s a quantitative change, not qualitative change. But for businesses, right, when they now see their customers moving online, when they see their employees moving online, when they see other companies moving online, there’s going to be a much higher impetus for them to be digitized and move online. And this is essentially the digitized economy future that we’re embracing. And I think our services and, in particular, our cloud services and our SaaS services will be there to serve them in this large transition toward a digitized working mode.

Thank you. The next questions comes from the line of Jerry Liu from UBS. Please go ahead.

Hey. Thank you. Yeah, I have two questions as well. And the first one is back on mobile gaming. James, you mentioned earlier that you look at some of the virtual items we have today like Tesla cars or these dragon guns, they do really encourage more spending. I’m interested when you look at the international gamers, do you think over time they can spend close to the level of Chinese gamers in some of your high-quality mobile games? Thanks.

I think that what we see over time is that their behavior is increasingly kind of convergent rather than divergent, meaning that if you went back 10 years ago, then in the Western world, the dominant monetization model was consumers paying $50 for the software. And in China and Korea, the dominant model was consumers consuming games for free, and then for a certain sort of narrow genre of historical roleplaying games, paying large amounts of money for the magic swords and sorcerer’s bows and arrows and things. And over the last decade, what’s been happening is that in the West and in Japan, increasingly there’s been innovation around deploying virtual items in sports games, in shooter games, in modern-day games more generally, and at the same time, in China and Korea, we’ve seen increasing uptake of those more set of teen-based action games as well. And as games become more and more important and more and more part of the millennial consumer mind space, then you begin to see really powerful crossovers. So, I mentioned the crossover between Peacekeeper Elite and Tesla, but I think that Epic has done a phenomenal job with the crossovers with the DC and Marvel superhero characters. And once again, those are skins, but they also have game modes where the superheroes actually unlock their in-movie superpowers. So, what we see is that actually the willingness to purchase in-game items and the pricing of the in-game items on these modern-day shooter games, sports games and so forth can catch up with or even overtake the ancient history roleplaying games, which pioneers the virtual item model. So, that’s a really big change. It’s a change that I think is good for the game industry globally, and it’s particularly good for Tencent because we tend to be overrepresented toward team-based action games.

Thank you. The next questions comes from the line of Binnie Wong from HSBC. Please go ahead.

Good evening, management and IR team. Congratulations on a very strong quarter. I have two strategy related question. One is on the Mini Program. So, with the recent launch of the Mini Stores, right, you help long-tail merchants to build and operate the digital storefronts and, of course, all the way to after-sales customer service. Can you share with us what are the key categories of merchants that you have been seeing and it’s also been doing well? And also, second, is that based on your observation, how is Tencent solutions more compelling to other e-commerce platforms? And I’ll have a follow-up question. Thank you.

Well, I would say the Mini Stores have just been launched, so we don’t have a lot of figures to share yet. But this is a set of tools which are mostly helping the long-tail merchants, right? So, if you’re thinking about, oh, how it’s going to be compared to the other mini program tools companies which are providing these tools in the past, then they are actually very different, right? Those companies are primarily providing tools to larger merchants, especially the larger retailers, and it’s intended to be this way, so that we are differentiated from that, right? They are our good partners, and we continue to work with them to help the larger retailers who want to have much more customization to get their mini programs up and running. But at the same time, we know that there are a lot of long-tail merchants who actually also want to have a relatively standard set of tools, so that they can engage with their customers. And this is what the Mini Stores are intended for.

Thank you. The next questions comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.

Thank you for taking my question. I have a few questions on games. The first question is, when you launch or are at the cusp of a launch of a game like mobile DnF, how do you strategize the allocation of marketing dollars towards that? And how do you take into account the relative success of that game versus all of the other games to maximize overall revenue? That’s my first question. And second, related to the points you made earlier, Martin, about the strength of your game platform and how well it’s been growing, if you look at how successful you’ve been internationally, it does appear that there’s a lot more legroom there for how – and how much further you can grow. Would you hazard a guess of with technology, with IP game play and M&A, what sort of market shares we can expect, let’s say, three to five years down the line? Will it be anywhere near where you are in China at this point of time? Thank you.

Well, in terms of looking at a particular title and how much marketing budget we’re going to put in, I think the way we look at it is we look at how big the addressable market is, how big the opportunity is, how big an IP and the potential user base is. And then we put enough dollars, right, to reach those customers. And, of course, because we have our own platform advantage, so typically the amount of money that we spend is actually less than otherwise a stand-alone game company will be spending. But we’ll be spending enough dollars so that we can actually achieve the maximum success for a particular title. I think in your question, you also somewhat think about maybe a success of a game actually into the success of another game, I think we don’t look at it that way. I think each game has its own appeal to the customers, and we don’t think games tend to cannibalize too much with each other, right? And it’s a very large market out there with a lot of different titles. So, each title should be given enough marketing dollars to maximize its own success. In terms of international, I think we’re definitely very focused on developing a long-term strategy to capture the opportunities in an international market. And in a way, I think China is a more developed market for mobile gaming compared to other markets. And as a result, we felt that the expertise and experience we develop in China can actually help us to capture opportunities around the world. I cannot give you a guess of the market share. We’ll try to do our best. But in China, we do have Weixin and QQ as platforms. So, I think the franchise that we have is actually stronger out in the world. We would not be having such a strong franchise, so I think that is a reality that we have to recognize. But at the same time, I think in the gaming industry is about talent, it’s about game development capabilities, about technology. And we have these core competencies to help us to develop better and better games and also work with partners around the world, so that we can bring games that are exciting to the users. And hopefully through that, we can actually capture some of the opportunities in the gaming market internationally. We do not believe it’s just a zero-sum game, right? The market actually has got a lot of opportunities for growth as well, so we are operating in an expanding market and we’re excited about that.

Thank you. The next questions comes from the line of Gary Yu from Morgan Stanley. Please go ahead.

Thank you the opportunity to ask question and congratulation on a strong set of results. I have two related questions regarding international strategy. Given the rising geopolitically those tensions, how do you think it will change our international strategy differently? Do we intend to kind of limit our overseas exposure to the less sensitive gaming market, or we have more kind of ambition to tap into global opportunities? And a follow-up related question is, do we expect some of our competitors redirecting the focus and resources back to China as they also scale down the kind of global exposure? And how should we tackle that? Thanks.

In terms of the international markets, right, we do have a long-term strategic goal of developing an international presence, and we are actually very patient about it. We emphasize it’s long term, right? And so far, we have made a good progress around certain verticals such as games, but we also anticipate there will be challenges and obstacles, but we believe that all along the way, right, the way we develop our international strategy is by focusing on a number of principles. The first one is we focus a lot on users and user experience and products, and that will include protecting the privacy as well as the security of data for our users. And second one is we operate strictly in compliance with the laws and regulations in each one of country that we operate. And thirdly, we actually rely on a lot of win-win partners, right? A lot of cases, we actually work with local partners in each one of the countries that we have a presence in, and we strive to create a win-win partnership with them. We respect their entrepreneurism. We respect their independence, but at the same time we can actually bring in our expertise to help them to be more successful. And we believe these principles, right, would actually serve us well over the long run. There may be countries which may be challenging at one time or another, but overall we believe it’s a very large international market. And there are a lot of countries, a lot of companies, a lot of products that we can be successful in if we are patient and if we continue to stick to these principles. Now, in terms of your second question, I think to some extent, it’s actually highly speculative. But what you should have some – you should have some comfort is that no matter what the competitive dynamics are, Tencent continues to focus a lot on improving our own capabilities as well as improving our product, user experience and value proposition for our users, regardless of the competitive dynamics. So, we are already working very hard and we’ll continue to work very hard to focus on these factors, which I think are much more intrinsic to the long-term success of the company rather than what other companies would do.

Thank you. We will be taking the last questions is from the line of Eddie Leung from Bank of America. Please go ahead.

Good evening, guys. Two questions. The first one is about your FinTech and Business Services segment. Could you elaborate on the relative importance of the few factors behind the improving gross margin trend of the segment and what could be the outlook for that? And then secondly, regarding the integrated advertising platform for advertisers, obviously, you guys mentioned that it would help the efficiency for the advertisers. But do we expect any potential influence on their spending or budget going forward? Thank you.

So, on FinTech right now, I think – well, part of it, if you compare year-on-year, is actually the fact that we actually start collecting some of the interest back from the deposit with central bank. And I would say the fact that marketing expenses come down into a more rational level also helps. This is as part of the competitive dynamics becoming less cutthroat. And thirdly is the fact that as we continue to develop the other non-payment FinTech products, right, so be it our loan products or the wealth management products, these are products which actually generates profit. And as the scale of these products go up, then the margin profile actually improves. So, with the advertising, I will pass it to James.

Yeah, with the integrated ad platform, then naturally we would hope that with more attractive, more powerful, more simplified ad purchasing and tracking and performance solutions, then we would inherently increase our share of advertiser activity and budgets. And I think that if you look globally, there are many other Internet companies that moved from sort of lacking to leading ad tech positions and as they did so, captured progressively larger shares of ad spend. Now, of course, there should be some sort of upper limit on how much ad spend one can capture, no matter how excellent one’s technology is. But for us, I think that upper limit is still rather far away because our share of time spent in China Internet is around 40%, while our share of advertising spend in China Internet is under 14%. So, I think that there’s a very long growth runway for us as we continue to enhance our ad tech through solutions like the new integrated ad platform to deliver long-term, but sustained market share gains.

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

That does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2020 second quarter and interim results announcement conference call. You may now disconnect.