Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2023 fourth quarter and annual results announcement webinar. This is Wendy Huang from the Tencent IR team. At this time, all participants are in a listen-only mode. After management’s presentation, there will be a question and answer session. For participants who dial in by phone, if you wish to ask a question, please press 5 on your telephone to raise your hand. If you are accessing from the Tencent meeting or WeMeet application, please click the Raise Hand button on the bottom left, and please be advised that today’s webinar is being recorded. Before we start the presentation, we will like to remind you that this 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 group’s financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website. Now let me introduce the management team on the webinar tonight. Our Chairman and CEO, Pony Ma will kick off with a short overview. President Martin Lau will discuss the strategy review, Chief Strategy Officer James Mitchell will provide a business review, and Chief Financial Officer John Lo will conclude with a financial discussion before we open the floor for questions. I will now pass it to Pony.

Thank you Wendy. Good evening. Thank you everyone for joining us. In 2023, we sharpened our strategic focus and achieved substantial progress in our major products following our high quality revenue growth model, notably video accounts total user time spent more than doubled as we enriched our short video content ecosystem. Our mini-cams platform increased gross receipts by over 50% year-on-year. Our number of major hit games in China achieving both high DAU and substantial monetization increased from six in 2022 to eight in 2023 and in connection with games achieved double digit revenue growth and rose to 30% of games revenue. Tencent Video and Tencent Music extended their leadership with 117 million and 107 million paid subscribers respectively. WeCom and Tencent meeting strengthened their enterprise software leadership and increased monetization, and we also achieved significant technology breakthroughs. Our Tencent Hunyuan foundation model is now among the top tier of large language models in China with notable strength in advanced logical reasoning. Our upgraded advertising AI model enables us to deliver better ad targeting and higher revenue. We invested further in sustainable social value initiatives. Our digital philanthropy platform helped raise RMB 3.8 billion in public donations during the 99 Giving Day campaign in 2023. Our new cornerstone investigator program supported 104 scientists contributing to fundamental science research. Looking at our financial numbers for the quarter, total revenue was RMB 155 billion, up 7% year-on-year and stable quarter-on-quarter. Gross profit was RMB 78 billion, up 25% year-on-year and 1% quarter-on-quarter. Non-IFRS operating profit was RMB 49 billion, up 35% year-on-year or down 5% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB 43 billion, up 44% year-on-year or down 5% quarter-on-quarter. Now I will hand over to Martin for the strategy review.

Thank you Pony. Good evening and good morning to everybody. During the course of 2023, we have established a high quality revenue growth model which will support our continued economic value creation. This together with our increased focus on capital allocation discipline will further enhance shareholder value. Starting with our financial performance, we have seen a healthy increase in revenue since the first quarter of 2023 by increasing high quality revenue streams and reducing low quality ones. Importantly, our gross profit growth has consistently surpassed revenue growth due to the margins of our incremental revenue being significantly higher than the 50% overall gross margins for the entire company. This incremental revenue is generated predominantly from our leading social and payment platforms, which have already been built and had their costs covered. We now consider gross profit growth as a key proxy and, frankly, a better proxy than revenue growth for our organic growth given this shift in terms of the revenue mix. We further enhanced our operating profit growth from gross profit growth through operating leverage. First, we streamlined operations and prudently reduced aggressive marketing expenditures. We perceive these measures as a less recurring strategy. Second and more importantly, we are committed to operational efficiency and disciplined resource allocation, which includes thoughtful staff distribution and effective marketing expense management. This approach ensures a focused organization and a lean cost structure moving forward. In the next few slides, I will provide more details on the drivers for our earnings growth going forward. Weixin provides the first set of examples of how we nurtured high quality revenue streams. The Weixin platform is delivering consistent growth in both DAU and daily time spent per user. New services within Weixin, such as video accounts, mini-games and Weixin Search contribute to greater engagement and overall platform health while at the same time generating additional revenue at very high margins, given they are offered on top of a relatively stable platform cost base. Going into each one of them, firstly for video accounts, total user time spent more than doubled in 2023 driven by strong growth in DAU and time spent per user. Video accounts advertising revenue has substantially increased thanks to the increased traffic and improved ad targeting, despite ad load was kept to a much lower level than industry peers, which then offers a better user experience overall. Secondly, mini-games experienced a 50% increase in gross receipts in 2023, benefiting from more DAU and high revenue per user. The growth in gross receipts drove an increase in high margin platform fees for us. Weixin mini-games are the clear industry leader with mini-games user retention rate and time spent per user notably higher than in peer services as a result of Weixin’s platform stickiness, well developed ecosystem such as social sharing and notification, and our game knowledge and know-how. Thirdly, Weixin Search has now achieved over 100 million DAU, up over 20% year-on-year, and Weixin Search content QV grew over 30% year-on-year. Our search revenue grew multiple times year-on-year in 2023 as we ramped up monetization on this under-monetized asset. In addition, our fintech service provides a second set of examples of high quality revenue streams. We have spent many years building a solid base for fintech services in the form of our widely used payment services with our strict adherence to regulatory requirements and with careful risk management. In recent months, we completed a comprehensive self-inspection and corresponding ratification process, upgrading our operational compliance capability. We also strengthened our payment ecosystem by improving use of security, refining mini program-based transaction tools, and enhancing cross-border payment experience. On top of this solid base, we are providing additional products and services in collaboration with licensed financial institutions, which generated high incremental margins as these revenues are recorded on a net fee basis. In wealth management, we generate low take rates but higher margin fee income from a large and growing pool of aggregated customer assets by offering customers high quality products and superb convenience. The products are primarily low risk money market funds and, to a lesser extent, fixed income mutual funds. In consumer loans, our partners with WeBank and other licensed banks facilitate us distributing small sized cash loans and installment payment services, and we kept the default rate low by applying stringent tech-enabled risk management procedures. For both wealth management and consumer loans, we offer substantially better economics to consumers, partners and ourselves versus standalone fintech businesses as we reduce customer acquisition costs and credit charges. Now moving onto games, our domestic game business revenue has been soft during 2023, but we expect it to improve from the second quarter of 2024. The reason for slow growth in 2023 was that our two biggest games, Honour of Kings and Peacekeeper Elite, have maintained their leading positions in terms of DAU, but monetization has temporarily stagnated which caused us to take remedial actions. For Peacekeeper Elite, we identified the need for more creative monetization strategies and have revamped the leadership of its monetization team. We look forward to the game delivering more innovative and engaging experiences that will also help monetization. We’re optimistic that our new monetization team can deliver on this front given its sister product, PUBG Mobile has already delivered a notable rebound in its monetization internationally. For Honour of Kings, our monetization activities had been overly concentrated within the Chinese New Year period in 2023. We are rolling out a more evenly distributed monetization strategy in the year 2024, which we’d expect to benefit year-round revenue generation. Looking beyond these two games, several of our recent releases have performed well in terms of DAU and are now converting that DAU success into monetization. The number of major hit games in China increased from six in ’22 to eight in ’23. We define major hit games as games exceeding average quarterly DAU of 5 million for mobile and 2 million for PC, and at the same time generating over RMB 4 billion annual gross receipts. We view these thresholds as indicative of a major and enduring hit, and games surpassing such DAU and revenue thresholds will contribute to long term stability and growth of our game portfolio. Having a large and expanding portfolio of major hits illustrates our ability in continually developing new major hits and in operating model for highly popular games at the same time. During the year, our new major titles are: one, Fight of the Golden Spatula, it has transitioned from a niche auto chess game to one of the most popular mobile games in the domestic market, ranking top five by DAU and total time spent. Second, LOL Wild Rift now also ranks among the top five mobile games by total time spent and gross receipts in China. We expect to keep adding major hits through our portfolio in the course of this year. We’re looking forward to releasing several major new games which should also contribute to improving revenue trends through 2024. DnF mobile is a key title for us given the success and longevity of DnF PC and given a general scarcity of successful action games on mobile. DnF mobile has just completed a major closed beta test successfully and given the positive results, we intend to launch the game in the second quarter of this year. Other high potential games in our portfolio for 2024 include Honour of Fight, Need for Speed mobile, and One Piece mobile. In 2023, we also made notable progress in core technologies, especially those involving AI that will serve as our growth multiplier going forward. After deploying leading edge technologies such as the mixture of experts, or MoE architecture, our foundation model Tencent Hunyuan is now achieving top tier Chinese language performance among large language models in China and worldwide. The enhanced Hunyuan excels particularly in multi-turn conversations, logical inference, and numerical reasoning, areas which have been challenging for large language models. We have scaled the model up to the trillion parameter mark leveraging the MoE architecture to enhance performance and reducing [indiscernible] costs, and we are rapidly improving the model’s text-to-picture and text-to-video capabilities. We are increasingly integrating Hunyuan to provide copilot services for our enterprise SaaS products, including Tencent Meeting and Tencent Docs, and we are also developing new gen-AI tools for effective content production internally. More generally, deploying AI technology in our existing businesses has begun to deliver significant revenue benefits. This is most obvious in our advertising business where our AI-powered ad tech platform is contributing to more accurate ad targeting, higher ad click-through rates and thus faster advertising revenue growth rates. We also see earlier stage business opportunities from providing AI services to Tencent Cloud customers. Finally, with this high quality revenue growth model, we have resources to keep investing in our businesses while at the same time returning more capital to our shareholders. Historically, we have continually paid cash dividends to our shareholders and periodically repurchased shares at times when we believed our share price was undervalued, which is particularly true today. With our record high and growing profit and cash flow, we propose to increase our upcoming cash dividend by 42% year-on-year to HKD 3.4 per share, and we intend to at least double our buyback activity year-on-year from HKD 49 billion in 2023 to at least HKD 100 billion in ’24. We believe this commitment to return at least HKD 132 billion or US $16.9 billion to shareholders during the year is well supported by our free cash flow, which was US $24 billion for the full year of ’23, along with our gross cash position of US $57 billion and our investment portfolio of US $126 billion. Now with that, I will pass to James to talk about the business review.

Thank you Martin. For the fourth quarter of 2023, our total revenue was up 7% year-on-year. EAS represented 45% of our revenue, within which the social network sub-segment was 18%, domestic games was 18%, and international games 9%. Online advertising was 19% of our revenue and fintech and business services represented 35%. The value-added services segment revenue was RMB 69 billion in the fourth quarter, down 3% year-on-year. Social network revenue of RMB 28 billion was also down 3% year-on-year. Revenue from music-related and game-related livestreaming services decreased while revenue from the video accounts streaming service, music subscriptions and mini-games increased. Long form video subscription revenue increased 1% year-on-year, driven by higher ARPU, while their video subscriptions declined slightly to RMB 117 million. Our self-commissioned drama series, Blossoms Shanghai, ranks first by video views across all online platforms in China year-to-date, extending Tencent Video’s audience lead within the online video industry. Music subscription revenue increased 45% year-on-year on 21% growth in subscription count and 20% growth in ARPU. Domestic games revenue was down 3% year-on-year to RMB 27 billion. Recently released PC games, Valorant and Lost Ark contributed to PC game revenue increasing but were offset by decreased revenue from Honour of Kings and Peacekeeper Elite. International games revenue increased 1% year-on-year in RMB terms, or decreased 1% in constant currency terms to RMB 14 billion as Superstar was repositioning some of its games. PUBG mobile extended its revenue recovery and Valorant maintained solid growth. In aggregate, our domestic-plus international game sub-segment reported revenue was down 2% year-on-year, although game gross receipts were slightly up year-on-year. We expect our domestic and international game reported revenue to improve from the second quarter of 2024 onwards as rebounds within existing games, such as Brawl Stars and Peacekeeper Elite have started to yield results and as we will be launching new games, including Dungeon Fighter mobile. Moving to communications and social networks, for Weixin video accounts on the content consumption side, time spent increased over 80% year-on-year in the fourth quarter driven partly by DAU and mostly by time spent per user, benefiting from our enhanced content recommendation engine. On the content creation side, daily video uploads grew rapidly year-on-year. We provided targeted traffic support for creators in key categories such as knowledge base content, lifestyle and music, which contributed to a sharp increase in the number of creators with over 10,000 followers, and with more followers and better livestreaming tools, the number of creators that directly generate revenue from their video accounts more than tripled year-on-year. For QQ, the number of active QQ channels grew at a double-digit rate quarter on quarter, and we launched a new version of QQ that features a refreshed user interface and enriched functionalities. Moving onto some domestic games highlights, the release of Set 10 drove Fight of the Golden Spatula to double its average DAU year-on-year in the fourth quarter to a new high. Arena Breakout increased its gross receipts and average DAU each by over 30% year-on-year, driven by a new competitive PVE mode, an upgraded battle pass and more appealing virtual items, and Arena Breakout is now the seventh biggest mobile game in China by total time spent. Naruto mobile, an eight-year-old game developed by our More Fun Studio, achieved record high gross receipts and average DAU in January, benefiting from extensive content updates. We view the success of Naruto as a positive leading indicator for our upcoming One Piece game, also from More Fun. We launched our party game, Dream Stars in December. Party games aggregate a range of game modes, and we’re still building out the number and variety of Dream Stars games modes to compete with the games modes featured in incumbent party games, as well as releasing tools for players to create their own game modes. We vie party games as a genre that will require sustained effort over a long period, but we’re encourage that Dream Stars ranked among the top 10 mobile games in China by DAU during the Chinese New Year, and we believe that Dream Stars is already the industry leader in party games measured by DAU within certain game modes, such as social deduction and tower defense. Among our international games, PUBG mobile increased its DAU and gross receipts year-on-year in the fourth quarter, benefiting from the introduction of the Frozen Kingdom theme mode and an innovative top tier outfit with upgradable weapons. Nikke released a new storyline and new characters, and encouraging Nikke’s average DAU reached a 2023 year high level in the fourth quarter. Supercell’s five-year-old game, Brawl Stars achieved record high gross receipts and DAU in February 2024, due to enhancements to its friend invitation system, the introduction of a new 5v5 game mode, and a complete redesign of its battle pass. Brawl Stars’ resurgence demonstrates the latent franchise value of our evergreen titles and their potential to unleash new growth. Moving to online advertising, our ad revenue was RMB 30 billion in the fourth quarter, up 21% year-on-year, benefiting from upgrades to our ad tech platform and more advertising revenue and video accounts. We generated increased ad revenue from all major categories except automotive with notable step-ups in revenue from internet services, healthcare and consumer goods categories. We refined our ad targeting by utilizing more real-time data in the AI powering our ad tech, enabling us to match target users with more relevant ads in a more timely manner across both our owned and our ad network properties. Our video accounts ad revenue more than doubled year-on-year despite maintaining a very low ad load, due to increased video views and upgraded ad targeting. Weixin Search increased its revenue several-fold year-on-year in the quarter on growth on commercial queries and RPM. Summarizing fintech and business services, segment revenue was RMB 54 billion in the fourth quarter, up 15% year-on-year. Fintech services revenue sustained a teens year-on-year growth rate on increased commercial payment volume, wealth management fees and consumer loan fees. Gross profit grew faster than revenue due to a shift in social to commercial payments. Within commercial payments, daily active users and transactions per user both increased. We enhanced mini program-based QR code and palm payment solutions, helping offline merchants boot repeat sales. For business services, revenue grew around 20% year-on-year in the fourth quarter, benefiting from higher cloud spending by industries such as retail and finance, and increased technology service fees on video accounts’ ecommerce transactions. Business services gross profit more than quadrupled year-on-year due to those technology service fees, as well as supply chain optimization initiatives. Among our enterprise software-as-a-service products, we deployed AI for real-time content comprehension in Tencent Meeting, deployed AI for prompt-based document generation in Tencent Docs, and rolled out a paid customer acquisition tool for WeCom. We deepened our enterprise SaaS penetration among domestic companies such as Vivo, as well as multinationals such as Novo Nordisk. As a result, our enterprise software revenue in WeCom, Tencent Meetings and Tencent Docs together more than doubled year-on-year. I’ll now pass to John.

Thank you James. Hello everyone. For quarter four 2023 and full year 2023, we have reclassified interest income from above to below the operating profit line. Additionally, investment related gains and losses and donations, both previously included in other gains or losses net above the operating line, are now combined as net gains or losses from investments and others and presented below the operating profit line. The reclassification aims to better reflect the results of day-to-day operations. Comparative figures have also been restated. For fourth quarter 2023, total revenue was RMB 155.2 million, up 7% year-on-year. Gross profit was RMB 77.6 billion, up 25% year-on-year. Operating profit was RMB 41.4 billion, up 42% year-on-year. Net losses from investments and others were RMB 6.7 billion, primarily reflecting payment provisions against certain investees. Interest income was RMB 3.9 billion, up 52% year-on-year driven by growth in cash reserves and improved yield on term deposits. Finance costs were RMB 3.5 billion, down 3% year-on-year due to reduced forex losses, partially offset by higher interest expenses. Share of profit of associates and JVs was RMB 2.4 billion versus a loss of RMB 1.6 billion in the same period last year. On a non-IFRS basis, share of profit increased to RMB 4.5 billion, up from profit of RMB 3.1 billion last year, driven by better profitability at certain domestic associates and a successful game release by an overseas video investee. Income tax expense rose by 111% year-on-year to RMB 9.7 billion, driven by operating profit growth and increased reporting tax position. IFRS net profit attributable to equity holders was RMB 27 billion, down 75% year-on-year primarily due to the RMB 106.6 billion gain from the disposal Meituan recognized in the same quarter last year. Diluted EPS was RMB 2.807, down 74% year-on-year. Now I’ll share our non-IFRS financial figures. For quarter four, operating profit was RMB 49.1 billion, up 35% year-on-year. Net profit attributable to equity holders was RMB 42.7 billion, up 44% year-on-year. Diluted EPS was RMB 4.443, up 46% year-on-year. Moving onto gross margins, for quarter four overall gross margin was 50%, up 7.4 percentage points year-on-year. By segment, gross margin for value-added services was 53.7%, up 3.9 percentage points year-on-year. This was due to higher mix of high margin mini-games, platform service fee, and reduced contribution from low margin music and games-related livestreaming revenue, along with our cost control measures. Gross margin for online advertising increased to 56.8%, up 12.6 percentage points year-on-year. As Martin highlighted, our high quality revenue streams, particularly video accounts ad revenue generated from our own traffic with platform costs already paid for, contributed to our incremental margins. Our efficiency efforts also led to margin improvement. Gross margin for fintech and business services was 43.9%, up 10.3 percentage points year-on-year. This was driven by margin enhancements following our business restructuring, emerging high quality revenues including video accounts, ecommerce, technology service fees, a structural shift towards high margin products within fintech services, and our efficiency initiatives. For quarter four operating expenses, selling and marketing expenses were RMB 11 billion, up 79% year-on-year against a low base last year, driven by more spending on promotion advertising to support new content releases. It represented 7.1% of revenues. R&D expenses were RMB 16.4 billion, up 3% year-on-year. G&A expenses excluding R&D were RMB 10.8 billion, down 6% year-on-year due to lower [indiscernible] and optimized operating lease expenses. At quarter end, we had approximately 105,000 employees, down 3% year-on-year or stable quarter-on-quarter. Let’s look at our operating and net margin ratios. For fourth quarter 2023, non-IFRS operating margin was 31.7%, up 6.6 percentage points year-on-year. Non-IFRS net margin was 28.2%, up 7.1 percentage points year-on-year. Next I will highlight some key cash flow and balance sheet metrics. For quarter four, total capex was RMB 7.5 billion, up 33% year-on-year. Within total capex, operating capex was RMB 6.7 billion, more than triple year-on-year driven by increased investment in GPUs and servers. Non-operating capex decreased by 78% year-on-year to RMB 0.8 billion. Free cash flow was RMB 34.2 billion for quarter four, up 42% year-on-year. For full year 2032, as highlighted by Martin, our free cash flow was US $24 billion or RMB 167 billion, up 89% year-on-year. Net cash position was RMB 54.7 billion, up 15% quarter-on-quarter, reflecting strong free cash flow generation partly offset by cash outflows for share repurchases and strategic investments. To conclude, I will discuss our share repurchase and annual dividend. For the full year of 2023, we repurchased 152 million shares with a total consideration of HKD 49 billion. As a result, our total issued shares after accounting for employee share options and one issuance decreased by 0.9% year-on-year as at the end of 2023. The weighted average number of shares for calculating our 2023 diluted EPS also decreased 0.9% year-on-year. Subject to shareholders’ approval at the upcoming 2024 AGM, we are proposing an annual dividend of HKD 3.4 per share, reflecting a 42% increase from the previous year. This dividend will be payable to shareholders on 31 May 2024. Thank you.

A - Wendy Huang: Thank you John. We shall now open the call for questions. If you are dialing in by phone, please press five to raise a question, then press six to un-mute yourself. If you’re accessing from Tencent Meeting or WeMeet application, please click the Raise Hand button at the bottom. We will take one main question and answer one follow-up question each time. We will take the first question from Kenneth Fong from UBS.

Hi, good evening management. Thanks for taking my question. My first question is for online games. As we highlight in our strategy for online games, we will work on enhancing the flagship titles, building emerging franchise games, and launch of new titles. Can management share with us the timing and when we should see it benefiting our overall online game growth? For the industry top down, we also see some gradual relaxation on the number of banhou [ph] being approved and also games with high commercial value, but at the same time, we also see some industry headwinds like lower player spend with more competition, so how should we think about the medium term growth for the online games ahead? I have a follow-up question for the livestreaming ecommerce. Last year, we made very meaningful progress and have stepped up hiring and building of our team for livestreaming ecommerce. Can management share with us some updates, like our current scale, the road map ahead, and how we are differentiating from our peers? Thank you.

Hi Kenneth. Perhaps I’ll answer the online game question. You identified a number of potential factors that could affect our growth, including banhou issuance, lower player spend, and I think more competition. In reality, we don’t think any of those are the key issue that we have been facing. We’ve received a decent number of banhou, certainly sufficient for our aspirations. Our games are generally much lower ARPU than the industry and therefore we haven’t seen, and we wouldn’t expect to see lower player spend as an external macro factor. Then continued competition is sort of an inevitability in an industry that’s still a high growth, high returns industry, so we believe that the key challenge for us is just getting our own house in order. We have three strategies that are underway now for getting our own house in order. One is revamping, changing the leadership for our existing games, and we did that with Brawl Stars and we’ve seen a very sharp upturn in Brawl Stars revenue reaching new records and becoming the biggest super sell game. We’ve done that--we’ve made changes with PUBG mobile, and that’s seen a big upturn, and more recently we’ve made changes with Peacekeeper Elite, so where we need to make changes, we’re now making those changes. Secondly, we have a number of games that over the last two to three years have aggregated very substantial user bases, and now we’re in the process of monetizing those games and you can see that relatively clearly with Fight for the Golden Spatula, with Wild Rift, with Arena Breakout, among others. Then thirdly, we have been focusing on bringing bigger budget games that iterate on prior successes to market, and you will see those coming through the rest of this year, including Dungeon and Fighter mobile, where as a result of a very successful internal test, we’ve actually accelerated the launch date to be in the second quarter of this year, over the next three months. As a result of the above, we believe that our game revenue would improve in the second quarter of this year onwards, and the extent of our success in those three strategies will determine the medium term growth rate. Thank you.

In terms of the livestreaming and video accounts ecommerce, I think we have made very good progress in the course of 2023, but that’s only the beginning of nurturing of this exciting opportunity. In terms of GMV in the course of 2023, that’s grown a lot to more than 100 billion, but to put it in context, it’s still very small compared to the size of video accounts. It’s also a fraction of mini-programs ecommerce GMV, so in order for us to really capture the very big opportunity within this business, we have a number of strategies that’s ongoing. Number one, we want to really upgrade the management of the overall ecosystem, including improving the product quality control, improving the process through which we handle user complaints and user feedback, and overall we want to improve the shopping experience for the customers. Second is actually through better category management. We actually want to work through each one of the high potential product categories and make sure that we have high quality merchants and attractive products for the customers, and that actually requires very meticulous work, quite a bit of work force addition, and also have to be rolled out one by one. We also want to work on better tools for merchants and brands so that we can do business and look at their business analytics and help them to make pricing decisions better. There’s a whole set of merchant tools that we’re going to be adding. Overall, we also want to market this overall platform and the availability of these products to the consumers that’s on WeChat and that’s using video accounts, so that we can actually increase the awareness of our shopping experience within video accounts. Finally, we are looking to increase the integration between video accounts, shopping experience and infrastructure, and the mini programs that are already operated at scale by a lot of merchants, and we believe by doing a combination of the above, we can continue to grow the GMV of our video accounts ecommerce in a healthy way. It’s very important for us to build a very solid foundation for this platform at this point in time, so that we can actually usher in a very long and significant growth track for this business going forward.

Thank you. We will take the next question from William Packer from Exane BNP.

Hi management, thanks for taking my questions. Firstly, domestic gaming growth weakened during the 2021 - 2022 rectification period, and then last August, we talked to weaker Q2 trends reflecting seasonality and less commercial content. You’re again talking to a weak monetization at key games for Q4 and Q1. Should we think of these challenges as the new normal for evergreen domestic games? Does this reflect that these games are now ex-growth, so you therefore need to rely on new releases? Then my follow-up question is regarding regulation. The market was somewhat alarmed in Q4 regarding new draft rules for the video games industry which could curtail in-game monetization. Could you update us on latest developments there? When should we expect a new draft, how should we think about the potential impact on your business? Thanks very much.

Hi Will, so perhaps I’ll start on your first question. If you look at our commentary in Q2, what we reported in Q4 is actually sort of a consequence of the commentary in Q2, if you will, in that as you may know for our two biggest games, we have a roughly nine--we have a nine-month amortization period from gross receipts into reported revenue, and so we saw weak monetization, therefore weak gross in receipts from Q2 onwards last year. That impacts us most heavily in Q4, because in Q4 we lose the benefit of relatively strong gross in receipts from Q1, and as a result, that’s why if you look at the reported revenue for Q4, it was down year-on-year because of the lag effect of weak monetization in Q2 and Q3. But if you looked at the gross in receipts, the actual cash inflows, it was slightly up year-on-year in Q4, so what we saw in Q2 is the driver of what we saw in Q4, as opposed to being two sort of separate or contradictory phenomena. In terms of whether our big games are ex-growth, we clearly don’t think that’s the case. We are very active investors across the game industry, we can see that big games with longevity, with substantial user bases enjoy--they experience upswings and down-swings, but over the longer term they’re only becoming more powerful, whether you look at a Call of Duty or a Grand Theft Auto or a Fortnite. We certainly believe that that is the case in China, that longevity is an asset rather than a liability, just as it is in the luxury goods industry. No one would say a luxury goods brand with longevity is inferior to a newly emerged luxury goods brand. We can see it with our own games. We can see that PUBG mobile is now rebounding strongly, we can see that Brawl Stars and also actually the entire Supercell portfolio of games is rebounding strongly. We expect a number of our other games to also see substantial rebounds. Again, because of the time lag between cash inflows versus reported revenue, that will show up in our P&L from the second quarter, but we are already experiencing improvements in cash inflow, so that’s on the first question around where we are with games. Then maybe on the game regulation side--?

Yes, on the regulation, we actually don’t know when the new draft will be released or whether it will be released, but it’s no longer our concern because after the original draft was released, there was concern by the market, and I think the regulators have actually come out very explicitly in explaining that the purpose of the draft was actually to provide a healthy environment for growing the industry, rather than constraining the industry. Two is we’re actually very encouraged by the supportive measures that were unleashed after the initial concern was expressed by the market, including in the very beginning of this year, there is a single batch of domestic banhou which is more than 100, including there’s expedited approval of imported game licenses, and also our flagship mobile game, DnF mobile has been approved in that batch. Also, if you just look at what’s the focus of people’s concern, right, it’s about high ARPU games, and that’s really now relevant to us because our ARPU is actually on the very low end of the overall industry, so I think to be frank, it’s no longer one of our concerns anymore.

Thank you Martin. Next we will take a question from Alicia Yap from Citigroup.

Hi, good evening. Can you hear me, management? Thanks for taking my questions. I have--my main question is on the AI power functionality. In addition to enhancing and powering the internal advertising targeting capability, what is your expectation of the AI power functionality to generate decent tractions of revenue from the external cloud and business-to-business customer near term, or should we actually expect any near term benefit more reflecting on the continued improvement on the advertiser ROI and also ecommerce merchant conversion rate? Second, a very quick follow-up is I understand the user profile for mini-games is quite different from the mobile APP game user, but just curious to see if there’s any profit shift or cannibalization of the time spend from the APP games to the mini-games that will also contribute to the slower growth of domestic game in the past few quarters. Thank you.

Yes, in terms of the AI short term benefit, I think the financial benefits should be much more indexed towards the advertising side, because if you think about the size of our advertising business as, call it RMB 100 billion a year, and if you can just have a 10% increase, that’s RMB 10 billion and mostly all profit, so that’s the scale of the benefits on the advertising side. Especially as we see continued growth of our advertising business and when we add in the video accounts ecommerce ecosystem, that just has a very long track of growth potential and also the low ad load right now within video accounts. On the other hand, if you look at the cloud and business services customers, then you are really facing a relatively nascent market. We still have to sell to these customers, and we spend a lot of time working with all the customers in different industries and trying to figure out what’s the best way of leveraging AI for their business, and then you have to go through a long sell cycle, and then at the same time it’s competitive because your competitors will actually come in and say they can also provide a similar service, and despite we believe we have a superior technology and product, it’s actually very cutthroat and your competitor may actually come in and say, oh, they’re going to cut prices even though there’s an inferior product. All these things, all the low margin, highly competitive and long sales cycle of 2B business would actually come into play in that side of the business, so when you compare the two sides of the equation, you can actually clearly see that ramping up advertising is actually going to be much more profitable in the short term. Of course, we will continue to do both and we believe that the value that we provide to our customers is not just measured in how much profit we make from them, but also in how much improvement we make to their business over the long run, and we believe as China moves into an economy which is much more focused on productivity and as the costs of--human costs, actually, you might increase it, right, so some of the dynamics of the U.S. market in having a more profitable business services business would actually come in, but that will take quite some time to realize.

And on your question about whether our mini-games are cannibalizing time spent or revenue generation for our app-based games, we’re very confident that our mini-games are not a tribe of cannibals. They’re a tribe of pioneers and explorers and developers of new territory, and I say that because from a time spent perspective, our app-based games have been performing fine and we can see the increased time spent for games, like Fight for the Golden Spatula, Arena Breakout were very substantial, and we’ve disclosed previously that only less than half of the mini-game MAU were also app-based game MAU. When we look at it from a user spend perspective, there’s an even starker illustration because only a teens percentage of the mini-game paying users are also app-based game paying users, and only a single digit percentage of the app-based game paying users are also mini-game paying users, so we don’t believe that there’s cannibalization taking place between mini-games and app-based games.

Thank you. We will take the next question from Ronald Keung from Goldman Sachs.

Thank you. Thank you Pony, Martin, James, John and Wendy. I have two questions. One is we’ve read about the shorter return, so combined with just regular dividends, buybacks, and we used to have some distribution [indiscernible], how should we view 2024, and maybe in the medium term, outside potential to a total annual shorter return, let’s say in dollar terms or in percentage of market cap, which one will you usually kind of assess more and how do we plan to report shareholders, maybe around the investment portfolio value? Then my second question is on video accounts ecommerce. Martin, you mentioned about the video accounts ecommerce and looking at combining with mini-program ecommerce. Is it fair to say we are eventually building a more open platform in transactions, not forcing every transaction through our own shop infrastructure, because mini-program is like more like a platform, so that would look more like Meta, which is a Facebook-style open platform building that ecommerce system, versus the very closed system in the short video platform? Thank you.

Hi Ronald. On the shareholder return question, we assess the total return dynamically. Now for the dividend and the buyback, we view those as more programmatic in nature versus the distributions are somewhat more opportunistic in nature, but overall with the intent of returning very substantial share of capital to shareholders during the course of this year. In terms of the role of the investment portfolio, actually over the last two years, the investment portfolio has returned substantially more capital to shareholders than it has absorbed, and even if you exclude the JV and Meituan distributions, the investment portfolio has been self-funding, meaning new investments that we’ve made have been funded by divestments or dividends or distributions from what we already own in the investment portfolio. Looking at 2024 at this point in time, our expectation is that the investment portfolio will be once again self-funding and therefore a source of cash, rather than a use of cash.

In terms of the video accounts ecommerce, I would say--I think that’s a good question, and we actually had a lot of discussion on that topic in the sense that what’s the architecture of the ecommerce activities that should be happening on the platform, given we have mini-program ecommerce, and that actually is a very significant platform already. I think our view is that going forward, we’ll have actually both open platform and closed platform, and they serve actually different purposes. Open platform is along the line of mini-programs, and these are actually much more suitable for brands which actually are well recognized. They actually have a very large self channel for promoting mini-programs, for example if they have a very large chain of offline stores, they can actually ask their customers to add the mini-programs and then shop online. At the same time, they need to have pretty strong brand recognition for the consumers to keep coming back to the mini-programs. But the shortcoming of the mini-program is that the merchants, basically it’s very hard for them to get new customers online, they can only rely on their own channels. But even with that, the mini-program ecommerce platform has actually grown to a very large size. Now on the other hand when we look at video accounts, livestreaming platform, the new platform is actually a closed platform in the sense that we actually want to be put in much more active management of the ecosystem, so that the shopping quality is actually very--much better than an open platform, especially for merchants which are not well known, because if these are smaller merchants, white label merchants, then we want to make sure that the products actually exceed a certain level so that it will create a good experience for the users. It also has the access to the video accounts traffic, so that they can actually acquire new customers. Now, over time we’re going to connect the open platform with the closed platform. We will provide a curated connection so that the open platform can actually benefit from the traffic of the video accounts while at the same time the small merchants can actually also benefit from their private domain when they actually start selling on our platform. When we curate the connection between the open platform mini-programs with video account shops, then I think we can actually get the best of both worlds and help different types of merchants to maximize their sales and maximize their exposure to consumers on the platform, while at the same time making sure that our user actually has a great shopping experience on our platforms, either on the open platform or the closed platform.

Got it, thank you Martin and James.

Thank you. The next question comes from Robin Zhu from Bernstein.

Thank you management for taking my questions. I guess a couple of questions, please. One on AI - I mean, you guys have talked a lot about ads and fintech and so on. Gaming is commonly thought to be one of these areas where generative-AI could have quite a big impact potentially when it comes to game design, function, AI and PCs and so on. There’s been different views on how much is hype and how much is reality. I’d be curious on where you stand on how quickly you want to move on some of these areas. Then a follow-up, again on gaming, I think a couple of quarters ago you mentioned that there was a periodic slow-down in the productivity of triple-A game development. Just wanted to get your thoughts on where you are on that, the aspiration to do a new big title on the level of your top games every so often, every few years, aspiration to do console and PC beyond just the mobile ecosystem. Thank you.

I think in terms of the application of AI to games, like many things, the boundary between hype and reality is a function of how far forward one’s willing to look, and we’re willing to look very far forward. All of the areas you mentioned, such as AI-powered NPCs, such as AI-accelerated graphic content generation, graphical asset generation are areas that over the years to come, not over the months to come, we’ll benefit meaningfully from the deployment of AI. I think it’s also fair to say that the game industry has always been a mixture of, on the one hand, innovation around game play techniques, and on the other hand deployment of enhanced content, renewed content into existing game play. It’s reasonable to believe that AI will be most beneficial for the second of those activities, but one will continue to require very talented individuals and teams to focus on the first of those opportunities, which is the creation of innovative game play. Secondly in terms of a productivity related to triple-A game development, I think that for our international studios, there were some bumps due to COVID in the current game development cycle, and those are now largely behind us and so we believe that productivity is now on a more normal footing. Looking forward, we have a number of what we expect to be substantial hits in the pipeline, both domestically and internationally, and we’re doing some things the same as before and some things differently. On the differently side, we’re focusing on fewer bigger budget games. Typically, we’re seeking to make the biggest bets around games that either iterate on a successful IP such as the Honour of Kings fighting game, around the Honour of Kings IP, or games that are iterating around proven game play success within a niche and taking those to a more mass market. A stereotypical example would be moving the Dark Souls combat into Elden Ring. In our case, I mentioned earlier we have the learnings from games such as Naruto, that will be updated with state-of-the-art graphics and technology for games such as One Piece. In addition, on the marketing front, we now cooperate with a range of platforms, including Douyin, both in terms of user generated content marketing as well as in the paid advertising marketing, so overall we think those enhance our position, those changes enhance our position in the triple-A game releases and we look forward to the results. Thank you.

Thank you James.

Thank you. Our next question is from Charlene Liu from HSBC. Charlene, your line is open. We can hear you, go ahead.

Great, thank you so much. I have two questions. First is on fintech. Recently, Tenpay has lifted registered capital. I would like to find out a little bit more on how that may be used on consumer loans or perhaps overseas business, and how would that affect Tencent’s balance sheet, and whether the management can update us on the growth strategy on fintech [indiscernible] in 2024. That’s the first one. The second one would be related to AI development. Obviously we have seen developments in AI create new revenue streams and cost optimization for overseas internet platforms, and management has already discussed where some of the monetization opportunities lie. Can we better understand benefits which we have been able to reap on the cost front from AI adoption, and how much more upside we can expect to see from here and how long will it take for Tencent to realize these gains? Thank you.

In terms of the fintech side, Tenpay has been approved to increase the registered capital substantially, and the money is actually going to be moving from Tencent balance sheet to Tenpay balance sheet, so since Tenpay is actually a consolidated entity, so it’s not going to change our consolidated balance sheet, and I would say this capital increase is essentially a recognition of the increased size of Tenpay’s business and also a sign of approval for future development of the company, so we view it very positively. Now, in terms of our fintech strategy, I think the fintech strategy centers around the payment platform. We will continue to build out our payment platform and to improve its basic services and reliability as a platform that would support economic activities and consumption for the economy. We continue to roll out new functionalities and better functionalities, including improving the mini-programs payment ecosystem so that we not only provide a payment service at the spot for the merchants, we actually also help to establish a link between the merchants and the consumers, so that in the future the merchants and consumers can further interact, maybe the consumers can actually do repeat purchase, the merchants can do a future engagement with the consumers, and it can also provide aftersales service, so I think there’s a lot that we can do to improve the overall payment experience. We’ll provide more tools to SMEs so that SMEs can increasingly digitize their business and gain efficiency. We’ll roll out new payment technologies like palm payment, for example, in order to increase the convenience of the payment service, and we’ll also improve the payment experience for foreigners in China so that it can help to foster an even more vibrant tourism industry in China. If we continue to do that, the payment platform will continue to grow with the economy, to grow with consumption and grow with the cashless penetration in China. On top of that, we also felt that we can actually roll out value-added financial information services, such as wealth management, such as loan services, such as installment services that I actually described in the prepared remarks, and these are very high margin, high value-added services that we can offer alongside with licensed financial institutions. Overall, I think the philosophy for us to grow in the fintech business is that, one, we want to be fully compliant; two is that we want to make sure that we manage risk in the absolute high quality manner. We want to create more value than capturing value for merchants with consumers, and at the same time we want to work on constructive relationships with licensed financial institutions. If we can keep on doing all of these, then the fintech business will continue to thrive.

On the AI question, the cost benefit, as you would expect, we are increasingly going to be deploying AI, including generative-AI in areas such as accelerating the creation of animated content, which is big business for Tencent Video and a profitable business for Tencent Video, in terms of new game content, as we’ve discussed earlier, potentially in terms of creating code in general. But the benefit will show up not in substantial cost reductions, it will show up in more rapid content creation and therefore more rapid monetization and revenue generation. Not to repeat the same point too many times, but the immediate benefit and the biggest benefit is really around the advertising revenue uplift. Martin gave the example of if we can improve click-through rates by 10%, then that’s RMB 10 billion in incremental revenue, probably RMB 8 billion in incremental gross and operating profit. In reality, you should view 10% as being in the nature of a floor, not a ceiling. Facebook has seen a substantially bigger improvement in click-through rates, and for some of our most important inventories, we’ve actually seen our click-through rates increase by 100% in the past 18 months, so when we’re thinking about where are the financial benefits of AI, then it’s advertising click-through rate, and therefore advertising revenue first and foremost, and that’s a very high flow through business for us. Thank you.

Thank you.

Thank you. We will take the next question from Alex Yao from JP Morgan.

Thank you management for taking my question. My first question is regarding the recent partnership with Douyin, which we believe had quite a bit ripple effect to the whole game livestreaming and gaming industry. What changes have you seen this partnership has brought to us? That’s the first one. Then the second one is on the path of video accounts monetization. Clearly I think the industry incumbent has demonstrated the short video monetization capability across advertising, ecommerce and the local services. What are your thoughts and strategy on video accounts making inroads into local services? Thank you.

Hi Alex, maybe I’ll answer the first question on marketing our games through additional channels, including Douyin. As I mentioned with regard to Robin’s question, we are doing that. We are providing more content that the users then virally share on short video platforms, including video accounts [indiscernible] Douyin and so forth, and we’re also investing in advertising our games more actively on short video services, so that’s on the game marketing side.

In terms of livestreaming ecommerce, I think we have discussed it in detail. I think it’s very, very synergistic with the video accounts with livestreaming, as well as with the advertising that sits within video accounts. If we can actually have a closed loop in terms of knowing what are the merchants, what are the products that were sold, what’s the user experience after the sales, then the ability for us to improve the conversion rate on a full chain basis is actually much stronger, so that’s why it’s very important for us to build out the ecommerce infrastructure and ecosystem in anticipation of supporting a very long and significant growth on our video accounts advertising business. Now on the other hand, I think that local services is actually not something that we focus on at this point in time. Local services from our perspective is actually much more of a provision of content, so along that line, we actually would consider working with our partner, some other partners, for example Meituan, who had been our close partner for a long time, to actually have them generate the content and we actually help them to promote the local services.

Thank you. In the interest of time, we will take the last question from James Lee from Mizuho.

Thanks for taking my question. Can you hear me?

Yes, we hear you.

Okay, great. Thanks for taking my questions. My question is on cloud and AI. On the cloud side, I think a competitor recently announced a pretty large scale price discount for their cloud offering. Just curious, what are you seeing in terms of enterprise demand, and probably most importantly price elasticity? On AI, how should we think about your positioning in large language models? Just curious what stage are you in now, can the model handle multiple modalities of data input and output, and just curious on that position at this point. Thanks.

Maybe I’ll start with cloud. For better or worse, the cloud industry is an industry where input prices are always falling, and so naturally the cloud service providers are always reducing the costs they pass onto their customers, so price cuts have always existed and will always be the trend within the cloud services industry for as long as Moore’s law continues to drive down the cost of compute. We don’t see a dramatic change in the competitive situation, just as we didn’t see a dramatic change when there was a round of high profile but low impact price cuts for SMBs a year ago. What does matter is, first of all, being cost competitive, and in order to be cost competitive, one needs scale which several companies in China are at similar scale, including us, and one needs supply chain optimization, and we have been very active on supply chain optimization the last several quarters. As we optimize the supply chain, we bring down our input costs faster and we can cut our output costs further as a result. Then the second factor that matters is the ability to up-sell from infrastructure into platforms such as our security platform, our real-time communications platform, our database platform, as well as up-sell into software as a service, including Tencent Meeting and WeCom and other enterprise SaaS products we’ve spoken about, so that’s really where we’re focused. It’s on delivering more value to our cloud customers by continually optimizing supply chain and by continually upgrading the depth and complexity of services that we can provide.

In terms of our Hunyuan model, I think--you know, actually I talked about it quite a bit in our prepared remarks. We believe Hunyuan actually is now performing at top tier in Chinese language among LLMs in China and worldwide, and we--and this belief is supported by the very comprehensive testing that we have done internally. From a technology perspective, this is a model that is leveraging the mixture of experts architecture that’s already scaled up to the trillion parameter mark, and also it’s exhibiting very good performance in multi-turn conversations, logical inference and numerical reasoning, some of the toughest areas to conquer in large language models. At this point in time, we are actually very focused on the text technology, because this is actually the fundamentals of the model. From text, we have built out text-to-picture, from text we have built out text-to-video capabilities, and the next important evolution is actually what we have seen with SORA, right? SORA has done an incredible job with text to a long video, and we--you know, this is something which we would be developing in the next turn. We continue to improve the text fundamental capability of Hunyuan. At the same time, we’ll be developing the text-to-video capability because we actually think that’s actually very relevant to our core business, which is content driven business in the area of short video, long video and games. That’s the area in which we’ll be developing and moving our Hunyuan into. If you look into the future, we felt Hunyuan will continue to be strong and stronger in the fundamental model capability, and at the same time it will be starting to develop better and better text to multimedia capability.

Thank you. We are now ending the webinar. Thank you all for joining our results today. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.tencent.com. A replay of this webinar will also be available shortly. Thank you, and see you next quarter.