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Tencent Technology News: On Wednesday (August 14), Tencent Holdings Limited announced its unaudited consolidated results for the second quarter ended June 30, 2024.

The financial report shows that Tencent's total revenue in the second quarter of 2024 was 161.1 billion yuan (US$22.6 billion), an increase of 8% from the second quarter of 2023 ("year-on-year"). Gross profit was 85.9 billion yuan (US$12.1 billion), an increase of 21% year-on-year.

A 2-minute quick look at Tencent's 2024 Q2 financial report: Platform + content strategy drives growth, and increased investment in AI technology

On a non-IFRS basis, excluding the impact of certain one-time and/or non-cash items, operating profit was RMB 58.4 billion (US$8.2 billion), an increase of 27% year-on-year; operating profit margin increased to 36% from 31% in the same period last year.

Chairman and CEO Ma Huateng said:"The results for the second quarter of 2024 demonstrate the strength of our platform and content integration strategy. Game revenues in our domestic market resumed growth and accelerated in international markets, thanks to increased user engagement in several evergreen games and the successful launch of several new games. Tencent Video achieved significant growth in viewers and paying members through its self-produced TV series adapted from Yuewen's IP. Looking ahead, we will continue to invest in platforms and technologies, including AI, to create new business value and better serve user needs."

After the financial report was released, Tencent Chairman and CEO Ma Huateng, President Martin Lau, Chief Strategy Officer James Mitchell, Chief Financial Officer Shohei Lo and other company executives attended the financial report conference call to interpret the financial report and answer questions from analysts.

The following is a summary of the Q&A portion of the conference call.

Question:

Could management please provide more details on your recent upgrades to your ad technology platform? Management mentioned that the upgraded technology platform will analyze user interests over a longer time frame. Does this mean that you are looking back at user historical usage habits over a longer period of time to form more precise targeting attributes and capture potential changes in user habits over the years? Perhaps you can share a little bit of detail? In addition, how does this upgraded ad platform attract higher ad spend and support the potential for future ad revenue growth?

answer:

Yes, it is. We have expanded our look back on behavior from months to years. The main benefit of this is a more comprehensive picture of user interests. On the other hand, we also look back more frequently at more recent user behavior signals, the main benefit of which is a more precise and timely understanding of the user's current commercial intent. Both looking back further and looking back more frequently at more recent data are beneficial, but for different reasons.

In terms of how to attract more advertising spending, by better understanding the user's interest graph and having a more precise understanding of their current commercial intent, we can increase click-through rates. Today in China and around the world, as your click-through rate increases, most advertisers will automatically allocate more advertising spending to you, because the higher your click-through rate, the more clicks you will get.

Question:

Given the State Council’s recent supportive opinions on the digital content industry, including games, will this change the company’s future allocation of R&D resources to help promote more consumption opportunities for entertainment-related content?

answer:

Obviously, these opinions are very supportive and encouraging to us and our content business, especially the relevant explanations around the gaming industry. Following the continued issuance of game licenses, this is another recognition and affirmation of the value of the industry. We believe this is very positive for the entire content industry.

Having said that, we have made very long-term strategic investments in the content industry. The nature of the content industry, whether it is games or TV series adapted from novels, is a very long-term industry. So if you look at the recent resurgence of our game business, and the success of TV series, they all stem from the investments we made many years ago. From this perspective, it is safe to say that as a major player in the content industry, even in turbulent times,We have also been making highly strategic, long-term investments in the content industry.That's why we are now able to reap the benefits of our investments. We are not short-term oriented and just react to a piece of news, but we have been investing very strategically as a major player, and we will continue to do so.

Question:

Regarding live streaming sales, we noticed that the GMV growth of live streaming sales of short video competitors slowed down significantly in the most recent quarter. Can management share the strategy of video account sales?

answer:

When it comes to the promotion of goods in our WeChat ecosystem, in addition to the promotion of goods through mini programs,In terms of live streaming sales, our growth this quarter remained very solid and the growth was very significant.So, compared with other short video platforms, we have not seen a slowdown in GMV growth. The main reason is that our GMV for selling goods is actually very small compared with theirs, so there is still a lot of room for growth.

In addition, we have recently repositioned our live streaming sales to make it more like a WeChat sales system, and we will work with the ecosystem, not just based on video accounts and live streaming.We will build a product delivery ecosystem within WeChat, connecting to the entire WeChat ecosystem, and can still draw strength from video accounts and live broadcasts. At the same time, it will be connected to all products in the WeChat ecosystem, including official accounts, mini-programs, WeChat for Business, and all social and group activities in WeChat.

So we want to build an ecosystem in a very patient but systematic way that is different from just live streaming and more valuable to merchants and users. We also want to solve the problem that you see, which is that the GMV growth (live streaming) has slowed down significantly, because live streaming can grow very fast, but there is a natural ceiling. But if we can build the live streaming ecosystem within WeChat in a systematic way, using all the power within WeChat, then we hope to build a larger, more meaningful, and higher ceiling live streaming ecosystem.

In a way, this is somewhat similar to how we built mini programs. We have patiently built its ecosystem, and it doesn't seem to generate a lot of revenue at the moment, but when it really unleashes its power, the large amount of user engagement it generates will be very valuable to online and offline merchants and content creators, and then different areas including mini games will become important sources of revenue. So, this is how we develop WeChat shopping.

Question:

First, regarding general and administrative expenses, they increased by 8% year-on-year. Our headcount was basically flat year-on-year, so how much of the 8% increase was driven by one-time factors? Secondly, regarding taxes, the tax rate dropped significantly this quarter. How do we predict the effective tax rate for the next quarter?

answer:

Regarding general and administrative expenses, I will explain it in two parts. In the second quarter of 2024, R&D expenses increased by 8% year-on-year, and general and administrative expenses excluding R&D expenses also increased by about 8% to 9% year-on-year. In 2024, we expect R&D expenses based on IFRS to increase by a single-digit percentage, and general and administrative expenses excluding R&D expenses will also increase by a single-digit percentage. Therefore, based on the latest budget, we expect general and administrative expenses for the full year of 2024 to increase by a high single-digit percentage.

Regarding income taxes, we should look at non-IFRS earnings. The decrease in income taxes this quarter is due to the reversal of deferred tax assets of foreign subsidiaries in the second quarter of last year, which formed a higher base this year, which was (partially) offset by the increase in domestic income taxes. The effective tax rate based on non-IFRS in 2023 is 22%, and we expect the effective tax rate based on non-IFRS in 2024 to be in the range of 18%-20%.

Question:

My question is about profits. New high-margin revenue sources have driven strong profit beats in the past few quarters. Can management update us on these high-margin revenue sources? For example, how are their growth rates in the composition of revenue or gross profit? How much do they contribute to the gross profit growth rate? In addition, how do you view the room for further improvement in gross profit margins of key business segments in the future?

answer:

First question, about the impact of the shift in revenue composition to higher-margin revenue sources. We don't quantify their impact individually or in aggregate. But one way to look at the trend is that in the recent period, gross profit growth has been about twice the growth rate of revenue. There are two main reasons for this: the main reason is what you mentioned, the shift in revenue structure to higher-margin revenue sources. Second, it is our efficiency improvement and cost optimization initiatives.

These two factors together have resulted in profit growth being about twice as fast as revenue growth. Looking ahead, we do expect that at some point, some of the efficiency improvements and cost optimization initiatives will achieve the efficiency levels we are looking for. Therefore, the drivers of gross profit growth exceeding revenue growth will slow down. On the other hand, we believeThe shift in revenue mix toward higher-margin revenue sources will be a phenomenon that will continue for many years.So we think our gross profit will continue to grow faster than revenue, but it will probably be at a multiple of about 1x instead of 2x in the future.

Question:

Another question about profit. We have seen significant growth in the net profit of associates and joint ventures both quarter-on-quarter and year-on-year, and a significant contribution to the company's adjusted profit. Can management help us understand what the driving factors are? Are the investee companies still generally in a trend of improving profits? Should we expect the project's contribution to profits to increase and continue to rise in the future?

answer:

Yes, in terms of share of net earnings of associates and joint ventures, under non-GAAP, it increased from 3.9 billion last year to 9.9 billion, due to contributions from associates like Pinduoduo, followed by Kuaishou and Epic. As this amount starts to grow from the second quarter of 2023 and further accelerates in the later quarters of 2023, we expect the year-on-year growth rate of this amount to be lower in the second half of this year due to the high base.

Question:

Regarding the game business. In sharp contrast to last year, this year we have seen a re-acceleration of growth in the domestic and international game markets. The company has proactively adjusted its existing evergreen games and launched new games. Supercell's revenue is also very impressive.

How are we planning ahead to smooth out the very high growth trends in terms of revenue so that investors can see sustained, multi-year gaming revenue growth? And from an overall portfolio perspective, how does management expect to manage and smooth out this very strong trend that we've observed recently?

answer:

We are not seeking to smooth the growth of our total gaming revenue. From a financial reporting perspective, our financial results smooth themselves because our revenue is deferred to the income statement over time, in some cases for several years. So there is a natural smoothing capability in that. But that is an accounting necessity, not a business choice on our part.

But regarding the underlying question behind your question, that is, we experienced a growth leap because of DNF Mobile, so how do we maintain the sustainability of this leap, I would like to make a few points. First of all, DNF Mobile is just one of the contributors, we have other revenue contributors. If you look at revenue from the domestic Chinese market alone, the contribution of the launch of Valorant to our year-on-year revenue growth is almost as much as the launch of DNF Mobile this quarter. So this (growth) is not just due to DNF Mobile.

Looking ahead, we have reinvigorated our two largest games, which delivered positive results this quarter and we expect to continue to deliver positive results. Subsequently, as these two large games become more platform-specific, new game modes launched on the platform, such as the evacuation-style shooter "Metro Mode", have further driven user and revenue growth.

We also have some recent evergreen games that are continuing to grow, such as League of Legends Mobile and Spatula Wars. We also have many games in the pipeline, and we are optimistic about them, whether it is Delta Action, Path of Exile 2 or One Piece Mobile, we believe they have the potential to become evergreen games in the future. This is how we think about how to drive the continued growth of the game business in the long term.

While we did have a good quarter and the momentum is pretty good, let's not lose sight of the fact that we've seen a very challenging business environment over the past few years. This is actually the nature of the gaming industry. First of all, it's becoming increasingly difficult to launch very successful new games nowadays because the quality of games and player expectations are very high. At the same time, the quality and brand value of existing games are very high. Therefore, if you want to launch a new game, you have to provide really good or very differentiated gameplay to attract users.

So we have to work really hard to come up with great new games. At the same time, we do think that existing franchises are becoming more and more sustainable. But having said that, in order to grow existing franchises, we also have to keep innovating to keep things fresh for users.

Overall, I think the gaming industry still has a lot of potential, but it is somewhat cyclical, because when there is not enough innovation, new supply or new stimulus, the industry seems to go into a downturn. And when there is a new wave of innovation, the gaming industry will suddenly expand rapidly, and we must continue to work hard to promote innovation. If we can do this, we can grow this business for a longer period of time. But we ourselves and investors need to realize thatThere is a certain degree of cyclicality in the gaming industry.In years when innovation is low, growth is slower. When innovation comes suddenly and at scale, growth is faster.

Question:

Question about the portfolio. As we discussed before, it is a self-sustaining portfolio. What are the possible exit methods we might take? For more mature assets, some may not be large enough to distribute, and some or some are not liquid enough to sell. What are our considerations for the sale method, and what new investment areas are we exploring?

answer:

If we look at the second quarter of this year, the amount of assets sold and exited far exceeded our total new investments. If we add the sales of assets and dividend income and fund distributions, this amount exceeds our new investment amount by more than 50%. Therefore, this portfolio is truly self-sustaining.

In terms of our ability to sell off, exit, the majority of our portfolio value is in public companies, and a large portion of that is relatively large and liquid public securities. In the second quarter, we sold over a billion dollars of assets through selling shares in the market, and I think that trend can continue.

Question:

Regarding advertising, we achieved 19% growth in the second quarter, which seems to be more resilient than previously expected, especially considering that you pointed out the impact of the current environment on advertising prices. I would like to know what different measures we have taken in video accounts and other advertising formats? How do you view the changes in advertisers' behavior in the current environment? And how do we plan to resist macro fluctuations?

answer:

We didn’t make a huge change, we just continued to execute on our path. We are benefiting from deploying on GPU infrastructure.Neural NetworksArtificial intelligence to improve the click-through rate of our advertising inventory. We are benefiting from the change in the composition of advertising within WeChat, with more and more ads showing the characteristics of pan-internal circulation ads. You can see from large e-commerce platforms and short video services that, other things being equal, such ads tend to achieve higher CPMs and higher click-through rates than non-pan-internal circulation ads. Then, we have the potential to benefit from releasing more inventory, especially in video accounts. But in fact, in the first half of this year, we did not release incremental inventory, so the growth we experienced was more the effect of the first two factors.

Question:

The second question is about the progress of AI integration in our ecosystem. We have heard some exciting upgrades in the advertising field. I wonder if you have anything else to share, such as the progress of training large models, application exploration, opportunities, and how we plan to develop strategies to further improve usage efficiency.

answer:

On the AI ​​side, I would say that we view AI as a more complete suite, not just big models, but also neural networks, machine learning-based recommendation engines, which we use for content recommendations, video recommendations, and advertising and content targeting, which has achieved very good results.

Take Video Account as an example. By using AI, we are able to provide better content, which generates more user time.A significant portion of the growth in video account usage is driven by better targeting and recommendations, which in turn are driven by AI.At the same time, in terms of ad recommendations, if we can improve conversion rates by 10%, which is a modest improvement, then there will be a considerable increase in revenue. So I think these are areas where we are using AI to produce substantial and real business results.

Also, in the gaming space, we're using AI to bridge the gap between PvE and PvP. So when you have games that allow users to play against other players, but sometimes you want to create a game mode where you play against machines. In the past, machines were actually pretty dumb, and with AI, we can make the machine play the game like a real person, have it play at different skill levels, and make the user experience and gameplay very interesting. So I think these areas, while not big models, have very real results for our business.

On the large model side, the key for us is to improve the technology, and as we shared before, we have built aMoEThe architecture model is one of the top models in China. Compared with international models in Chinese language, I think we are in the leading position. We are deploying the big model in Yuanbao, which is an app we launched that allows users to interact with the big model in many ways.

One way is to enhance the search function, where users can ask questions and provide very direct answers based on the search results. We have promoted it to a large enough sample size to get user feedback. So far, the feedback has been quite positive. Of course, we have also received a lot of constructive feedback, and we are using this feedback to continuously improve our products and our models. Over time, when Yuanbao reaches a certain level of quality, we will increase promotion resources and try to attract more users to use this App.

When it reaches a better level of expertise, we can start to incorporate it into different parts of our ecosystem. We have a lot of scenarios where apps interact, which can be helped by our generative AI technology. When the quality of our products is good enough, we will integrate the tools into these application scenarios. At the same time, we will continue to improve the efficiency of the model to provide these products to users in a cost-effective way.

Question:

My first question is about DNF Mobile. Since its launch at the end of May, the game has had a strong debut. How do you view the sustainability of this game? I ask this because this is not a typical tactical e-sports game like Honor of Kings or Peace Elite, where we are very professional and have a lot of domain knowledge and successful execution experience. So, given the nature of the game category, what is our outlook on the strategy and sustainability of DNF Mobile?

answer:

For DNF Mobile, we are very optimistic about its sustainability. The first reason is that the DNF PC game has maintained a high level for 16 years, so we believe that we do have professionalism in operating such games. We have successfully operated the DNF PC game for 16 years, and now we have expanded it to a new platform.

Second, we can see that in the more than 60 days after the launch of DNF Mobile, its retention rate is very good. Of course, the retention rate will fluctuate over time, but in fact, the retention rate of a game in the first 30 days of its launch has always been a very good leading indicator to determine which games have the longest lifespan. Whether it is League of Legends or Cloud Top Game, or Peace Elite or King of Glory, what makes them stand out is not how many users downloaded the game in the first 30 days, nor how much revenue they generated, but the high retention rate shown by those users who have installed and started playing the game. We see that the retention rate of DNF Mobile is also very good.

Of course, because the development time of DNF Mobile is very long, the game content reserve will be very rich in the next two to three years, and will be released gradually. At the same time, in the next two to three years, Nexon and we will continue to develop the content for the next few years. But the difference of this game is that its development cycle is very long, and its subsequent content is also very rich, and these contents are ready, and we can release them at the right time.

Question:

The second question is about financial technology. The growth rate of financial technology business has been negatively affected by the slowdown in the consumption environment and the increase in consumer price sensitivity. For the transactions of related financial products on the WeChat platform, have you observed any changes in consumer behavior? If so, are these changes structural or cyclical?

answer:

Regarding the fintech business, if we look at different sub-businesses, the payment business is definitely closely related to consumption growth. As we can see from the official data, China's consumption growth is actually a bit weak, but we can also see that the transaction volume of our payment business continues to grow, and our commercial payment transaction volume continues to maintain a double-digit growth rate, but the average transaction amount has declined. This is exactly the opposite of the previous situation. For a long time in the past, the average transaction amount has maintained a fairly stable growth. Therefore, we believe that this clearly shows that consumers have a stronger sense of control over their consumption budgets.

For the credit business, we see that consumers want to borrow more money at this point in time, but our credit business-related income has decreased. This is because we actively control the loan amounts approved by us and WeBank because we hope to do a good job of risk management when the macro economy and consumption are weak.

On the other hand, revenue from wealth management services actually increased as many consumers chose to save more rather than spend during uncertain times.

These are the things that are happening in different products in fintech. We think these are more cyclical than structural because, to some extent, they are related to the weak consumption that is happening in the market as a whole. Based on this, we see that the government is actually launching very proactive policies to encourage consumption.

We believe that as these policies are rolled out, consumer sentiment and the overall economy will begin to shift at some point. Because as you can see from the performance of the wealth management business, it's not that users don't have money, they actually have money, they just choose to save it instead of spending it. If government policies can bring more confidence to consumers and start to revitalize various economic sectors, we believe that at some point in the future, consumer sentiment will shift, which will be beneficial to our fintech business.

Question:

Management mentioned that the quality and expectations of games will only get higher and higher, and the requirements will become more demanding. Can management discuss where we are in the 3A game investment cycle? Can you tell us about the latest progress, etc.?

answer:

I'm not sure there's a clear cycle in AAA game development. I think it's more of an ongoing trend, where the industry is only going to get bigger, and therefore the budgets associated with the top games are only going to get bigger. We need to play in this space, and that's what we're doing. So, as you know, we're constantly creating a lot of games. We expense these costs through the income statement, rather than assetizing them, so what you're seeing is basically the tracking of cash flow.

We are indeed investing in a lot of projects that we think will be high-quality games. As for how to define what are AAA games and what are more systems-based games, I think the line is becoming increasingly blurred. If you look at our game Delta Ops, which is in alpha testing on Steam and is very popular, one of the reasons is that in Delta Ops, there is a mode that is very cinematic, a classic AAA experience, based on the events of Black Hawk Down. There are two other modes that are more systems-based, namely the "extract shooting mode" and the "30v30 mode", which are perhaps more similar to some competitive PvP games. So, Delta Ops is an example of combining a cinematic AAA experience with a competitive PvP experience.

answer:

3A is more of a means than an end. So you can have a game that is driven by a game mode, or you can have a game that is driven by content, and 3A is probably more content-driven. For us, the goal is to build evergreen games that last for a long time, and gradually build these evergreen games that are big enough into platforms. Within the platform, you will have content driven by game modes, and you will also have game modes driven by content. So it will be intertwined throughout the game world. That's what we think is going to happen.

Of course, we see a huge opportunity in the future, which will take some time to develop, to incorporate more content-driven game experiences into our competitive games. We think that this could be a great opportunity for us to get our users excited about our competitive games. As AI develops, as I said before, we can actually blur the lines between PvP, which provides us with more opportunities.

Question:

We have seen that crossover literature or existing PC game IPs have played a very important role in driving the growth of long videos and mobile games. "Glory of the Kings World" is a highly anticipated work. How is its progress? Can management discuss other IPs with similar potential and able to drive more revenue in the digital content field?

answer:

We've talked about some of the IP-based games that we're excited about in this call and in the fourth quarter earnings call last year, so let me review them. You can also look at the games that we've had great success on the PC side, such as Valorant, which is now the largest PC game in China. Of course, we want to bring it to mobile, and it recently received an import game license. If you're interested, you can also pay attention to some of the interesting IPs produced by Yuewen and Tencent Animation, and think about whether these IPs are also suitable as the basis for games.

Question:

There has been some media speculation that (Tencent and) Chinese app store owners have had tensions over several items such as fees and external payment systems. This is similar to what we have seen in Europe and elsewhere. Can you help us think about the challenges and opportunities across the portfolio? For example, do you think the gross margin of the gaming business can be improved from reducing payment (channel fees)? Or on the contrary, should we be more cautious about the prospects in the WeChat ecosystem?

answer:

This is a pretty complex question, and my answer may or may not cover all the dimensions. But I will try to answer it. There is indeed a natural tension between the game industry or the digital content industry and the app stores, and the root cause of this is that the app stores charge a 30% fee for games and other forms of digital content, and the game industry sees this as a very heavy burden. Of course, the app stores will defend that they provide a beneficial ecosystem to support this digital content, but the game industry will also respond that if this ecosystem is beneficial to digital content, then it will also be beneficial to various other goods and services, so why should the financial burden of supporting this ecosystem fall disproportionately on the digital content providers instead of on other goods and services providers in the ecosystem? I think this is the big picture. You know, over time, whether it is for regulatory reasons or business reasons, the app store share has tended to decrease gradually.

As far as our position is concerned, just like DNF Mobile, you know, given the strength of this IP, given that we know the most passionate players will look for the game and download it from the URL, whether it is in the Android App Store or not, we decided to release this game mainly through internal channels rather than through the heavy-duty Android App Store channels. We are very happy with this decision, which is good for our bottom line, and we think the user experience is also good. But in the future we will also launch other games with different characteristics, and for some games that are building an audience from scratch, we look forward to continuing to work with app store operators. That's the situation in terms of new game releases.

I think your question also touches on some of the media reports about mini games on iOS. I think there are some misunderstandings about the nature of the current situation, which is that we are not currently commercializing mini games on iOS through in-app purchases. I think if commercialization can be achieved, it will not only be in the interests of us and Apple, but also in the interests of game developers and users. But we want to achieve this goal on terms that are economically sustainable and fair. This discussion is ongoing, and we hope that the discussion will have a positive outcome because it will be a win-win-win result. But if the discussion does not progress, then the current status quo will continue. If the discussion progresses, then it will bring incremental benefits to us, to game developers, and possibly to Apple, and it will definitely bring a better experience to Apple users.

Question:

Question about the cloud business. In the prepared remarks, we talked about AI-related revenue from high-performance computing infrastructure and model library services, as well as AI solutions for enterprises. But I want to go a little deeper into our cloud revenue and how we think about the contribution from AI in the future?

answer:

Regarding the first question, obviously for the large cloud service providers in the United States, leasing GPU resources to other companies with AI needs has become a very big business. In China, the same trend is also evident, but to a slightly lesser extent. This is because China does not have a large number of well-funded startups trying to build large language models on their own like in the United States. In China, there are a lot of small companies, but their capital scale is $1 billion, $2 billion, rather than some of the large VC-funded startups in the United States that have received $10 billion or $90 billion in capital in this field.

At the same time, this is also a somewhat challenging economic environment. Nevertheless, we have seen that in our cloud services, customer demand for renting GPU resources to meet their AI business is growing very rapidly. The growth rate is very fast, but part of the reason for the speed is a low base; another part is that although the demand for renting GPU resources in cloud services is incremental, part of it replaces the existing demand for renting CPUs through the cloud. Therefore, although the GPU-related business is doing well, the CPU-related business is relatively stable; because the incremental demand is for GPUs, not CPUs.

Question:

The second question is about capital return. Given the uncertainty of the current macro environment, will you consider expanding our share repurchase program?

answer:

Regarding share repurchases, we are currently executing the share repurchase plan we promised previously. No updates at this time.

Question:

Management mentioned that it expects DNF Mobile to be the next evergreen hit. How should we view the longevity and scale of DNF Mobile on a sustainable basis relative to the evergreen games Honor of Kings and Game for Peace, in terms of DAU or revenue potential?

answer:

Regarding comparing DNF Mobile to the two biggest games in history and other games on the market, as a narrative rather than system-driven game, one would naturally assume that DNF Mobile’s daily active user base would be lower than system-based games like Honor of Kings or Game for Peace.

On the other hand, as a narrative rather than (gameplay) system driven game, one would think that DNF Mobile would have a higher ARPU than (gameplay) system driven games. In addition, since DNF Mobile is built on a 16-year history, especially since many people played DNF PC when they were in college 16 years ago and are now working and fairly affluent but only have time to play games on their phones, these users also have stronger spending power than games that appeal to a 20-something user base. Therefore, the game's stronger narrative and more mature audience are conducive to higher ARPU.

If you compare DNF Mobile to other narrative games in the Chinese market, the user base and DAU numbers are much larger. The game actually has a large audience that likes narrative experiences. Given the characteristics of the game and the high retention I mentioned earlier, we believe this will continue. While the ARPU is higher than our largest (gameplay) system-driven games, it is lower than many narrative games in China. We believe its monetization is fair and sustainable, especially given the audience characteristics of DNF Mobile.

answer:

For our games, they are basically large DAU, long interaction time games, and relatively low consumption per unit time. Therefore, we think this is quite resilient in the overall macro environment. If there is any problem, it may appear in the games with low DAU and high ARPU, which are not necessarily Tencent's games. You may use these games as a reference.

Overall, we believe that part of the gaming industry is actually affected by the macro environment, but given the low spending per unit time, we may still have some room and will not be affected too much.

The more important driver is innovation, as I have emphasized many times before. Therefore, when the gaming industry continues to innovate, even if the macro environment is challenging, we believe the market will still expand.

Question:

Management indicated that we have started to see some negative impact on payments. What are the recent trends? Are we seeing a stabilization trend or is the situation getting worse? Also, we noticed that gaming and advertising seem to be resilient in this macro environment. How long do we think the current resilience in gaming and advertising can last?

answer:

On the macro side, I would say that what we see is consistent with the official consumption data, which is a slowdown in the second quarter compared to the first quarter, which is the current trend. We believe that as the government introduces more proactive and more expansionary policies, over time, given the resilience of the entire industry and the entrepreneurial environment in China, we should see a recovery in the economy and consumer consumption, and that's what we believe. But it's not a question of "if", but a question of "when". We still need to wait for a while to see when the stimulus policies will start to take effect.