Tencent Holdings Limited (OTCPK:TCEHY) Q3 2024 Earnings Conference Call November 13, 2024 7:00 AM ET

Company Participants

Wendy Huang - Investor Relations
Pony Ma - Chairman and Chief Executive Officer
Martin Lau - President
James Mitchell - Chief Strategy Officer
John Lo - Chief Financial Officer

Conference Call Participants

Kenneth Fong - UBS
Alicia Yap - Citibank
Ronald Keung - Goldman Sachs
Miranda Zhuang - Bank of America
Alex Yao - JPMorgan
Charlene Liu - HSBC
John Choi - Daiwa
Thomas Chong - Jefferies
Yang Bai - CICC
Jialong Shi - Nomura

Operator

Good day, and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2024 Third Quarter Results Announcement Webinar. I'm Wendy Huang from Tencent IR team. [Operator Instructions] And please be advised that today's webinar is being recorded.

Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent.

This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the 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 webinar tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview. President, Martin Lau, and Chief Strategy Officer, James Mitchell, will provide a business review. Chief Financial Officer, John Lo, will conclude with financial discussion before we open the floor for questions.

I will now pass it to for Pony.

Pony Ma

Thank you, Wendy. Good evening. Thank you, everyone, for joining us.

During the third quarter of 2024, we delivered robust revenue growth in our Games business. Underpinned by consistent performance of evergreen games globally and contribution from new games with evergreen potential.

We upgrade our e-commerce strategy around mini shops to create a unified and trustworthy transaction experience spanning the entire Weixin ecosystem. We are increasingly seeing a tangible benefit of deploying AI across our products and operations, including marketing services and cloud. And we'll continue investing in AI technology, tools and solutions that assist users and partners.

Looking at our financial numbers for the quarter. Total revenue was RMB 167 million up 8% year-on-year and 4% quarter-on-quarter. Gross profit was RMB 89 billion, up 16% year-on-year and 3% quarter-on-quarter. Non-IFRS operating profit was RMB 61 billion, up 19% quarter-on-quarter and 5% quarter-on-quarter.

Turning to our key services. For communications and social networks, combined MAU operation and WeChat grew year-on-year and quarter-on-quarter to 1.38 billion. Mobile MAU of QQ resumed year-on-year growth to 562 million. For digital content, we reinforce our leadership in music and long-form video streaming, where Tencent Music and Tencent Video grew subscriptions year-on-year.

For interactive entertainment, we successfully launched DnF mobile and Delta Force, both have potential to become evergreen titles. For cloud, we improved our traction in international markets, leveraging our competitive pricing and domain expertise in areas such as games and live streaming.

I will now hand over to Martin and James for business review.

Martin Lau

Thank you, Pony, and good morning, good evening to everybody.

For the third quarter of 2024, our total revenue was up 8% year-on-year. VAS represented 49% of our total revenue, within which social networks subsegment was 18%. Domestic games subsegment was 22% and international games was 9%. Marketing Services was 18% of total revenue, and FinTech and Business Services was 32% of our total revenue.

Moving on to gross profit. Our overall gross profit growth was 16% year-on-year in the third quarter, primarily driven by growth in high-margin revenue streams from domestic games, video accounts and Weixin Search.

Improved profitability of our cloud services also contributed to overall gross profit growth. By segment, VAS gross profit increased 13% year-on-year to RMB 48 billion, representing 53% of our total gross profit. Marketing Services gross profit increased 18% year-on-year to RMB 16 billion contributing 18% of total gross profit.

And FinTech and Business Services gross profit increased 19% year-on-year to RMB 25 billion, contributing 29% of total gross profit. For value-added services, the segment revenue was RMB 83 billion, up 9% year-on-year. Social networks revenue was up 4% year-on-year to RMB 31 billion, driven by increased revenue from music subscriptions, app-based game item sales and Mini Games platform service fees, which was offset partially by decreased revenue from music and games related live streaming services. Music subscription revenue increased 20% year-on-year, primarily driven by a 16% year-on-year growth in subscriptions to 119 million. TME enhanced recommendation algorithms and reached content offerings and upgraded audio quality during the period.

Long-form video subscription revenue increased 4% year-on-year. Video subscriptions grew 6% year-on-year to 116 million, benefiting from popular animated and drama series. Our exclusive drama series, She and Her Girls, became the highest rated domestic drama series industry-wide since 2015 per review aggregator site, Douban. Our domestic revenue, games revenues grew 14% year-on-year to RMB 37 billion, reflecting growth from Honour of Kings and Peacekeeper Elite as well as a record-setting performance from VALORANT and full quarter contribution of DnF Mobile.

International games revenue increased 9% year-on-year or 11% in constant currency terms to RMB 15 billion. The growth was driven by robust performance of PUBG Mobile and Brawl Stars. Revenue growth of international games substantially lagged gross receipt growth as improved retention rates for certain titles led to elongation of the revenue deferral period.

Now moving on to communications and social network. Within the segment on the key products, Mini Programs has emerged as an increasingly powerful platform for users to connect with merchants and content providers. Mini Programs facilitated over RMB 2 trillion of transaction GMV in the third quarter, benefiting from better coverage and solutions for use cases, including food ordering, electric vehicle charging and medical services.

On the content side, we enriched our content offering beyond Mini Games with increasingly popular Mini Dramas. Mini Shops now serves as our platform for indexed and standardized merchandise where merchants can operate store fronts similar to those in e-commerce marketplaces while leveraging Weixin social interactions, content services and payment capabilities.

For consumers, we enhanced the user interface for order tracking, extended return periods and provide express return services. For merchants, we lowered entry barriers with simplified onboarding exercises and enabled shoppable SKU level links across official accounts, Mini Programs, Weixin Search and video accounts. Recently, we introduced a standalone merchant-facing app for Mini Shops merchants to facilitate their store operation and management.

As Pony mentioned earlier, QQ mobile device MAU returned to year-on-year growth in the third quarter of 2024. Over the past few years, the QQ team has comprehensively upgraded the platform's back-end infrastructure and added and popularized new functionalities such as Tencent channels, resulting in this meaningful achievement.

So with that, I'll pass on to James.

James Mitchell

Thank you, Martin.

Moving to domestic games. Our flagship evergreen games achieved healthy gross results growth -- gross receipts growth as a result of proactive adjustments that we made earlier this year. Honour of Kings grew its gross receipts year-on-year in the third quarter, benefiting from a Chinese Valentine-themed event in collaboration with the Tencent Comics IP, Fox Spirit Matchmaker, as well as the top-tier martial arts-theme outfit. Peacekeeper Elite continued its recent rebound and grew gross receipts at a double-digit percentage rate year-on-year in the third quarter driven by items tied into the Neon Genesis Evangelion anime as an upgradable outfit inspired a Chinese ink-painting.

Among our other evergreen games, 8-year-old game, Naruto Mobile achieved a historical high of over 10 million quarterly average DAU. Naruto Mobile grew gross receipts robustly year-on-year, reflecting higher paying user penetration for season passes. VALORANT captured share in the reviving PC game market and was our largest PC game by gross receipts and revenue in the third quarter.

For the first time, a Chinese team, namely Edward Gaming, won the Global championships in the VALORANT Champions tournament attracting new players and boosting sales of e-sports themed items driving quarterly average DAU and gross receipts to record high levels.

We launched a pair of new games that are also demonstrating evergreen potential. DnF Mobile ranked second by gross receipts among all mobile games in the third quarter. While the fourth quarter will be a consolidation period for DnF mobile, we will release some major content update for Chinese New Year intended to further enhance user engagement and monetization.

Delta Force developed internally by Timi Studio represents the first time we have created a first-person action game for simultaneous release on mobile and PC as well as for domestic and international markets. We launched Delta Force in China in September, and the game is achieving good average user daily time spent and player retention rates with several million DAUs, will add a content-centric campaign mode and launched Delta Force in international markets in the coming months.

Among our international games, PUBG Mobile grew gross receipts by double-digit percentage year-on-year to a record high in the third quarter. Egyptian-themed outfits became one of the most popular costumes in the game and Lamborghini branded car costumes monetized well, too. Brawl Starts continues to rank among the top three mobile games by DAU across the industry and international markets.

Gross receipts grew several times year-on-year, driven by the limited time Mega Boxes event and an IP collaboration with SpongeBob Squarepants. For VALORANT, gross receipts increased over 30% year-on-year in the third quarter, benefiting from the launch of a console version and eSports themed weapon items. We extended VALORANT to PlayStation and Xbox in early August in North America, Europe, Japan and Brazil, expanding the game's user base.

Turning to our next revenue segment, which we have renamed from Online Advertising to Marketing Services to better represent the breadth of our promotional and marketing solutions. Our Marketing Services revenue grew 17% year-on-year. Strength in games and e-commerce categories outweighed weakness in real estate and food and beverage.

The Paris Olympics somewhat cushioned industry-wide weakness in brand ad revenue during the third quarter but this positive factor will be absent in the fourth quarter. We leveraged our foundation model, Tencent Hunyuan to facilitate tagging and categorization of content and ad materials. And we upgraded our machine learning platforms to deliver more accurate ad targeting.

By property, video accounts marketing services revenue increased over 60% year-on-year. As we systematically strengthen transaction capabilities in Weixin, advertisers increasingly utilize our marketing tools to boost their exposure and drive sales conversion. Mini Programs marketing services revenue grew robustly year-on-year as our Mini Games and Mini Dramas provided high-value rewarded video ad inventory and generated incremental closed-loop demand.

And for Weixin Search, we utilized large language model capabilities to facilitate understanding of complex queries and content, enhancing the relevance of search results. Commercial queries increased and click-through rate improved, and our search revenue more than doubled year-on-year.

Looking at FinTech and Business Services. Segment revenue was RMB 53 billion, up 2% year-on-year. FinTech services revenue in aggregate remained largely stable year-on-year, with a decrease in payment revenue offset by an increase in bulk management services revenue. The number of commercial payment transactions continue to increase at a healthy rate. but average value per transaction declined. For wealth management, both the number of users and aggregated customer assets increased year-on-year.

Turning to Business Services. Revenue grew year-on-year in the third quarter, benefiting from higher class services revenue and increased technology service fees generated from rising e-commerce transaction volumes. Business Services gross profit rose significantly year-on-year due to the increased contribution from higher-margin revenue streams as well as improved efficiency. Our cloud revenue from GPUs primarily used for AI grew swiftly year-on-year and now represents a teens percentage of our infrastructure as a services revenue.

We released Tencent Hunyuan Turbo, which utilizes a heterogeneous mixture of experts architecture, doubling our training and inference efficiency and halving inference cost versus its predecessor Hunyuan Pro. SuperCLUE ranked Hunyuan Turbo first for general capabilities among domestic peers.

Last week, we made the Hunyuan large model in the Hunyuan 3D generation models available on an open-source basis. Our international cloud revenue increased significantly year-on-year. We leveraged domain expertise in areas such as games and live streaming and competitive pricing to win international customers.

And with that, I'll pass to John for the financial review.

John Lo

Thank you, James.

For the third quarter of 2024, total revenue was RMB 167.2 billion, up 8% year-on-year. Gross profit was RMB 88.8 billion, up 16% year-on-year. Operating profit was RMB 53.3 billion, up 20% year-on-year. Interest income was RMB 4 billion, up 14% year-on-year, driven by growth in cash reserves.

Finance costs were RMB 3.5 billion, up 27% year-on-year due to exchange loss this quarter compared to gains in the same period last year. Share profit of associates and JV was RMB 6 billion compared to RMB 2.1 billion in the same period last year.

On a non-IFRS basis, share of profit was RMB 8.5 billion, up from RMB 4.8 billion last year due to strong financial performances from several associates as a result of company-specific factors, including new content release and improved operating efficiencies.

Income tax expense declined by 19% year-on-year to RMB 8.9 billion, primarily due to higher withholding tax provision in the same quarter last year. Our domestic corporate income tax in the third quarter of 2024 increased year-on-year. On non-IFRS financial figures. Operating profit was RMB 61.3 billion, up 19% year-on-year. Net profit attributable to equity holders was RMB 59.8 billion, up 33% year-on-year.

The difference in year-on-year growth rates between operating profit and net profit was due to higher non-IFRS share of profits from associates and JV, which increased to RMB 8.5 billion this quarter from RMB 4.8 billion, same quarter last year as well as lower income tax due to previously mentioned high base impact. Diluted EPS was RMB 6.34 , up 36% year-on-year, outpacing non-IFRS net profit growth due to reduced share count from share buybacks. For the third quarter of 2024, our weighted average number of shares for calculating diluted EPS decreased by 2.5% year-on-year.

Moving on to gross margins. Overall gross margin was 53%, up four percentage points year-on-year. By segment, value-added services gross margin was 57%, up two percentage points year-on-year due to a higher mix of higher margin gain revenue margin improvement in music and long-form video businesses as well as low mix of low-margin live streaming revenue. Marketing Services gross margin increased to 53%, up one percentage points year-on-year primarily driven by growth in high-margin video accounts and Weixin share revenues.

FinTech and Business Services gross margin increased to 48%, up 7 percentage points year-on-year. This was driven by enhanced cost efficiency in our cloud businesses, revenue growth from wealth management services and e-commerce technology service fees and the improved monetization of WeCom and other business services.

On third quarter operating expenses, selling and marketing expenses were RMB 9.4 billion, up 19% year-on-year due to increased promotional efforts to support new games in domestic and international markets. Selling and marketing expenses represented 6% of revenues compared to 5% in the same quarter last year. R&D expenses were RMB 17.9 billion, up 9% year-on-year, driven by our investment in strategy areas including AI.

G&A expenses, excluding R&D were RMB 11.2 billion up 14% year-on-year due to higher staff costs, including costs associated with performance-based reward at certain overseas subsidiaries. At quarter end, we had approximately 109,000 employees, up about 3% year-on-year and also up 3% quarter-on-quarter as the third quarter is the annual college recruitment season. Non-IFRS operating margin was 37%, up three percentage points year-on-year, largely in line with gross margin expansion.

To conclude, I will highlight some key cash flow and balance sheet metrics. Operating CapEx was RMB 14.7 billion, up 122% year-on-year driven by investment in GPU service. Nonoperating CapEx was RMB 2.4 billion, up 74% year-on-year driven by CIP. As a result, new CapEx was RMB 17.1 billion, up 114% year-on-year. Free cash flow was RMB 58.5 billion, up 14% year-on-year primarily due to higher gross receipts from games.

On a Q-on-Q basis, free cash flow increased by 45%, driven by higher games receipts received and timing differences in the settlement of certain accounts payables. Net cash position was RMB 95.5 billion, up 33% year on-quarter, primarily driven by free cash flow generation partially offset by cash used for our share repurchases. Thank you.

Question-and-Answer Session

Wendy Huang

Thank you, John. We shall now open the floor for questions. Our first question comes from Kenneth Fong from UBS.

Kenneth Fong

Hi good evening management. Thank you for taking my question. I have two questions. First is on mobile games. This year, we have a few major hit in China gaming market. In mobile, we have our Q3 successful Dungeon and Fighter. In PC Black Myth Wukong, which we have an equity stake has been a big hit. In Mini Games, Whiteout Survival, we started as our top mini program, Mini Games and now being a top 10 grossing in China, after turning into an app-based game. So in light of that, can management share with us the implication, and insights for the industry? And how would these events, or major hit games actually shape, our game strategy going forward?

And my second question is on e-commerce. I noticed that we upgrade our - into our Weixin Mini Shop to enhance our e-commerce offering. Can management share more with us this initiative, including the positioning versus before? And how should we think about its potential? It is fair to say that we shouldn't think about this TAM from a live streaming e-commerce, but actually the whole e-commerce space has a much higher term. And how should we think about his role versus minimum program, which the GMV has hit RMB2 trillion last quarter? Thank you.

James Mitchell

Hi Kenneth, I'll take the question on games. So it is true to say and gratifying to say that in recent months, the success of in a certain games made in China worldwide, has become increasingly evident, whether that's a Black Myth Wukong or a Whiteout Survival, or the ongoing strength of PUBG Mobile. And I think that is a structural trend facilitated by the fact that the Chinese studios.

Are operating in a large home market that adopts new trends, such as virtual item business models such as mobile platform relatively quickly. Also, they benefit from a very substantial engineering workforce that means, they can allocate substantial headcount to games, both developing and operating games. And then the workforces are very willing to embrace new tools.

And this year, in Unreal Engine 5, which powers Black Myth Wukong, because there's been a particularly notable example of the benefit of utilizing these new technologies. So what does that mean for - in a Tencent strategy. We believe that whether internationally or domestically, the scarce resource in the industry is really evergreen games. And on the one hand, the ability to release new games that becomes hits, it is increasingly challenging.

On the other hand, for games that are hit then with the right investment in care, the opportunity to render them Evergreen, is more attractive than it's ever been before. And how do we turn that observation into a strategy. The strategy is to really play to different studio strengths. Within Tencent, we have a number of very capable proven studios. Many of them are particularly good at player-versus-player gameplay based games.

And they continue to double down on their strengths. In outside Tencent, there are studios that are particularly good at content-based story-driven games, such as Black Myth Wukong. There are studios that are particularly good at strategy games, such as Whiteout Survival. And for those studios, we seek to invest in them, which we have done with both to deepen and increase our investments in relationship with them sometimes to publish their games.

And so, we believe that, that strategy is the right strategy, leveraging both in-house studios, and our investments in partnerships with external studios, for each studio to focus on what it does best.

Martin Lau

So Kenneth on your second question, in terms of Weixin Mini shops, as we introduced in our prepared remarks, the purpose of the Weixin Mini shop is actually to create and develop, a unified and trustworthy e-commerce platform within Weixin. And this platform features a standardized and impacted merchandisers. And these products would become atomic data structure within Weixin, to represent product information.

And at the same time, the merchants are going to be verified, and subject to quality monitoring. So what does it mean, right? With this upgrade, what we believe is that the shopping experience for consumers would improve, as there is a better quality assurance on the products, and they also enjoy better shopping experience, such as order tracking express return, because now we know what kind of products have they bought and from with merchants that they have bought from - bought.

And for the merchants, they would actually enjoy better transaction support as we discussed. And more importantly and most importantly, access to new traffic and customers. This overall, any shop experience will be incorporated into the Weixin ecosystem. And as a result, it would actually enjoy new traffic streams, such as it will have magnified access, to our communication and social traffic, such as chat, group chat and moments as well, as our media properties such as official accounts, media programs, search, video accounts and over time, recommendation engine.

So the whole idea is that when we know what products are being sold by what merchants, then we are more comfortable in providing access to traffic to our consumers in the Weixin ecosystem. And that actually would create the flying wheel on the attraction for merchants. In terms of the potential, we are actually very excited about the long-term potential of this e-commerce ecosystem.

And the reference point, as you said, is like Mini Programs, right? So within Mini Programs, there are already a lot of transactions. When we mentioned about RMB2 trillion transaction, a lot of it is actually on services. So they are not really on physical merchandise. But even if you look at the physical merchandise, there is actually a pretty significant GMV already that merchants are selling to their customers.

But if you look at how these merchants are generating these transactions, right, they are primarily selling these products to customers, which they have already known, right? So when merchants have got their physical shops, and they would actually ask their customers to purchase through WeChat Pay. And with that, they would activate sometimes a Mini Program.

And from that point onward, if the customers actually want to revisit the store, they can actually go back to the Mini Program, and generate the transaction. But within these transactions, we actually don't know what's happening, what kind of products are being sold, and the merchants actually do not really have new ways, of getting access to new customers.

But if they feature the product within the Weixin Mini shops, right, then they can actually get access to all the traffic that, I mentioned within communication and social and within our media properties, including video accounts. So that's why we felt it's actually a better experience for merchants than the Mini Program infrastructure. And another case in point, I would point out is that if you look at video accounts, right, video - before video accounts was introduced as a standardized product format within Weixin.

What happened is there was already a lot of non-standardized short video being shared within the ecosystem of Weixin. But once video accounts was introduced, and once the video format was actually standardized with good traffic support then the video accounts traffic actually grew very significantly. And that's why we felt if we can actually provide a standardized, well-protected, trustworthy transaction environment within Weixin, then we can actually have a good potential of building our transaction volume.

Kenneth Fong

Thank you Martin and James and congrats on a strong quarter.

Wendy Huang

Thank you, Kenneth. Next question will be from Citibank's Alicia Yap.

Alicia Yap

Thank you, Wendy. Hi, good evening management. Thanks for taking my questions. Two questions. First is that related to Weixin search. You mentioned commercial queries and click-through rate grew year-over-year. Can management share some colors on, which industry advertisers started to utilize more of the commercial keyword to drive the traffic lead. And other than the so ISO [ph] feature within the Weixin app, is there any other entry point the advertiser can leverage on the search query. And also, will you ramp up the Gen AI chatbot, would that eventually embed with the commercial sponsor answer as well? Second question is related to international games. When you comment on elongating the deferred periods, is that only refer to certain big flagship titles that you have. Can you remind us the range of the deferred period for your international games? So -- and also judging from your comments about the decent gross receipt growth. It seems like international games revenue could see a more stable and more sustainable growth into next year or maybe the years after? Thank you.

James Mitchell

Thank you for the questions, Alicia. So on Weixin search then some of the larger advertisers are buying search keywords include our advertisers in financial services. Internet services, games, automobiles, local services, more recently luxury goods. In terms of other than the so ISO feature within Weixin, there are the entry points, then yes, we have multiple entry points, and we'll cultivate more whether that's within video accounts, Mini Programs elsewhere.

And some of those entry points are more in the nature of search boxes, some are more response triggers in response to actions that the users have undertaken. And for example, Martin was talking about the standardization of SKUs that Mini Shops provide. And one of the sort of opportunities going forward is that as we have standardized cards on each product, then a consumer transaction, a consumer interaction can trigger a feed of commerce relevant information, displaying those cards on after the other in response to consumer intent.

And that feed would then also be powered effectively by a search technology. In terms of whether YongBao will embed commercial search results, the answer is no. for the current time, we're focused on making YongBao be as appealing and attractive to users as it can be and we're not focused on premature monetization. So that's on Weixin search. Moving to the international games, was the elongation for certain big flagship titles, yes. What is the deferral period for international games.

We have disclosed in the past that the deferral periods for domestic games are typically six to nine months. And for international games, the deferral periods are either similar or longer and in some cases, substantially longer. And then in terms of the outlook, for international games revenue growth, we are indeed constructive on the outlook given the business trends we're seeing from the existing games, given the deferred revenue backlog that's built out in the last few quarters, from those existing games, and then given the potential upside from new game releases. Thank you.

Wendy Huang

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

Ronald Keung

Thank you. Thank you. Pony, Martin, James, John and Wendy. I have two questions. Kicking off with the macro kind of related question. With the shift in More pro-growth domestic policies in September, and while we also see a more complex geopolitical environment ahead, just how are we positioning our business and strategies in face of domestic, which is policy opportunities, while the international environment is still evolving. And specifically on consumption, I just want to expand on how are we seeing any latest trends on marketing services, payment indicators with the recent Singles Day. And you mentioned a decline in average order value per transaction for payment. So any thoughts on potential inflection points in terms of the ticket size trends that is important for consumption trends? Thank you.

Martin Lau

Okay. In terms of your first question, we do get encouraged by the recent policy by the Chinese government to stimulus - provide stimulus to the economy. And we felt this policy direction is very constructive. It's very timely, and the resolution is actually very strong. So that's why we are constructive on the longer-term economic outlook. We believe that the economic growth would eventually reaccelerate.

Although the timing may be uncertain, and especially, it would take some time for the measures to be implemented, and additional time for the measures to take effect. So how do we position ourselves? I would say we would continue to do the right things, right? If you look at what we have been doing in the past few years, we have gone through a cycle of regulatory scrutiny and that was domestic primarily.

But then I think that principle can also be applied globally, which is we continue to do things that make us very compliant to all rules and regulations, not just to the word, but also to the spirit. And in a lot of cases, when we understand what, are the intentions of the regulators, we are able to be proactive in making changes to our products, and in conducted communication so that we would be not only just, sort of passively compliant but also actively compliant, to rules and regulations around the world.

We continue to improve our products, and create user value. I think that's actually sort of very important for us. And in order to do that, we focus on the products and services that are meaningful. And instead of like spreading ourselves, very thinly across many different products. We want to make sure that we focus ourselves on the right products, and continue to create value for the users, as well as for our customers and for our partners.

And at the same time, I think in just conducting ourselves internally, right? We continue to enforce and build a culture of excellence, and also a culture of focusing on cost efficiency. So that we are strong on our own self-discipline and prevent ourselves from spending too much, and getting into a lack of focus. So I think when we do these right things, right, no matter whether there's good times and bad times in macroeconomic conditions, and whether there will be some fluctuations in terms of regulatory attention.

We can actually continue to grow our business, and develop business in a consistent way. Now in terms of just looking at the macroeconomic environment right now, what we have seen is that there is an uptick in October after the policy got announced in terms of transaction value. And that's actually against a backdrop of a gradual decrease of year-on-year growth rate through the - each month in the third quarter.

So if you look at the trend, it was like month-on-month, year-on-year growth rate has been declining through the third quarter, until we hit October and there's an uptick. So I think that's the latest trend that we see. We believe, going forward, the economic recovery would take some time. But over the long run, we do believe it would definitely be reaccelerating, because we felt there is a very strong resolution by the government to revive the economy.

And at the same time, there's actually positive structural factors in the economy including a very strong work ethics among workers in China, including a very deep engineering talent pool, including entrepreneurism among companies of all sizes, small, medium and large companies.

And also there is a vast and comprehensive supply chain in China, just to name a few. And that's why we felt over the longer run, right, we are optimistic about the economic revival in the macroeconomic environment.

Wendy Huang

Thank you. We will take the next question from Bank of America, Miranda. Miranda. Your line is open.

Miranda Zhuang

Thanks. Good evening management. So first question, I want to follow up on the Weixin e-commerce business. So management has explained the rationale and the benefits of the Mini Shops and is optimistic about the e-commerce business over the long-term. If we zoom in into the near term, wondering what will be the next steps, and time line for the leasing e-commerce business in the upcoming quarters. Can management share about your focus areas of priorities, and the strategy to ramp the business in the near term? Especially against the backdrop and development where seems that, the overall short video on live streaming e-commerce market, is slowing down and traditional e-commerce market still has been intense competition. So against all these like near-term environment, and how will the Weixin e-commerce grow the scale and gain share in the market? And my second question, can I check with the management. If there will be any color, about the recent open up and cooperation with Taobao. What kind of benefits are we seeing? And how should we think about any potential future collaborations? Thank you.

Martin Lau

So the short answer on the Mini Shop is that we will continue to improve the basic infrastructure, which is building this standardized and indexed and quality-assured transaction environment within Weixin. And there's actually a lot of functionalities that we need to build, right? And we - there's the infrastructure bid, there's actually the customer service and consumer experience needs to be improved, and there's also a lot of merchant tools that, we need to provide to merchants.

And once all this is done, then we will provide linkage of this infrastructure to the various traffic stores, right? If you look at the communication and social side, and on the media properties, we need to build a lot of these features and functionalities and product utilities. So I think that's essentially the focus. And what's the short-term target? I think the answer, is that we don't manage that from a short-term perspective. We felt if we can actually build all these products and features, and utilities then the growth would actually fall.

James Mitchell

Yes. So on the second question, so it's very early days, but we have seen good adoption of Weixin Pay within Taobao in October, and that's beneficial for us because that increases our overall e-commerce, TPV and therefore, revenue. And it's good news for Taobao because we believe that those customers, who are using Weixin Pay within Taobao, disproportionately customers who are new to Taobao and who are, therefore, particularly desirable customers.

So we think that this is something that will take a long period of time to fully play out, but we're very happy with the initial steps and success. And we also believe that as it, becomes easier for Weixin Pay users to transact within Taobao then over time, it would also become more desirable for Taobao to advertise within Weixin. Thank you.

Miranda Zhuang

Thanks management.

Wendy Huang

Thank you. We will take the next question from JPMorgan, Alex Yao.

Alex Yao

Hi, thank you guys for taking my question. My first question is about the newly launched game, Delta Force. Based on the IRS ranking the games monetization seem to be a little bit behind the curve despite of high use return and retention rates. Is the current situation more of a monetization timing strategy thing? Or is there a monetization design thing? And then the second question is regarding the payment revenue decline in this quarter. China retail space actually grew by low single digit in third quarter, but your payment revenue declined on a year-over-year basis. So the question is, is Tencent payment overly exposed to certain weak consumption categories? Thank you.

James Mitchell

Great. So on Delta Force, Delta Force is a PVP multiplayer game and historically and currently, when we release PVP multiplayer games, we do tend to sort of front-load the user engagement, the user additions and then progressively monetize over time. That said, the monetization on Delta Force is actually good, much better than for some of our existing large-scale PVP multiplayer games when they launched.

And the reason you don't see it in the data that you mentioned is because Delta Force is our first big game simultaneously launched on mobile and PC and four games that are simultaneously launched on mobile and PC, we can see from our investee companies, and we can see now with Delta Force that, while the majority of the users are on mobile the large majority of the revenue is generated on PC.

Which doesn't show up in the data sources you're looking at. But rest assured, Delta Force is actually monetizing quite well, and we're very happy with it both from a usage perspective, but also from a monetization perspective.

Martin Lau

In terms of our payment revenue, and the comparison to the China retail spend, I would say, I think the implied question is like is there any issue with our payment franchise? And I think the way we look at it is actually we are quite comfortable with our payment franchise. And the discrepancy is actually, due to two points in our view. One is we throughout this year, we have been eliminating lower quality and, in particular, sometimes loss-making transaction volume. And that actually sort of, has an impact on our overall payment volume.

And the second thing is actually, we - when we look at our payment coverage, right, it doesn't represent all the retail purchases in China. It's actually gravitated towards smaller ticket everyday items. And as a result, right, we are much more focused on the number of transactions rather than the transaction volume or the revenue when we assess our payment franchise. And when we look at that number, right, the number of transactions, it actually grew around 10% year-on-year, which gives us comfort that our payment franchise, is actually still very strong.

Wendy Huang

Thank you. We will move to the next question from HSBC, Charlene Liu.

Charlene Liu

Thanks Wendy and thank you management team for the opportunity. The first question I wanted to ask, is about sort of outlook on earnings growth, because we have seen close to two years, of really strong margin expansion come through. Does Tencent have a more normalized earnings growth rate that, the company targets in the medium term. Or alternatively, is there a certain ratio that Tencent seeks to achieve between top line, and earnings growth, say, for example, no GP growth at 1.5 times of top line, et cetera? Secondly, do we have an updated budget for 2025 share buyback? Is it fair to assume that Tencent would do at least, the absolute amount that Tencent did in 2024. And how is the management thinking about shareholder return more generally, is buyback still the preferred form versus disposal of investments, investees and dividend?

Martin Lau

I think the quick answer is we don't have a target for - we can't share the target for earnings growth, right? But overall, the direction is that we are going to see some revenue growth even, under a pretty challenging macroeconomic environment. And so that's something, we have achieved. And we hope we can actually continue. And among the revenue drivers, right, there are some drivers which are high quality.

And as a result, hopefully, we can actually see some additional leverage from revenue growth to gross profit growth. And then, we hope we can actually achieve some operating leverage, when we get from gross profit to operating profit. So that's sort of the model that we strive to achieve. But of course, given how dynamic the situation is, how complicated the business, there will be sort of quarter-to-quarter fluctuations in all these factors, right? But the general direction is as such.

Now in terms of the 2025 share buyback, we would share our view basically for 2025 at our year-end earnings announcement. So we don't - we're not in a position to share at this point in time. When we look at 2024, we set the target was actually RMB100 billion. So far, we have already done slightly more than RMB90 billion, and we believe would actually exceed the RMB100 billion target this year.

And when we look at next year, right, the underlying factor is that we do want to share shareholder value with our shareholders. And we are in a good position to return cash to our shareholders because our business is actually generating significant cash flow. And at the same time, we had a very large investment portfolio, which is essentially at least self-funded, it would not be drawing any capital from our operating cash flow. And at times, it may actually sort of provide additional return if we want to distribute stock or if we do big divestments.

And at the same time, if you look at CapEx, right, we believe we have a progressive CapEx plan, especially given that the development of a cloud business and the advent of AI, but at the same time, it's measured compared to a lot of the U.S. companies. So with these three factors in play that, we believe we'll be generating significant free cash flow next year that, we can engage in dividend and share buyback.

Charlene Liu

Thank you very much.

Wendy Huang

Thank you. We will take the next question from Daiwa, John Choi.

John Choi

Okay, thank you very much for taking my question and congratulations on a strong set of results. I have a question on AI. I think management mentioned that GPU-powered services accounts for teens for your IAS business. But can you kind of elaborate a bit more how do we foresee the AI-related revenue contribution for the business service going forward? And my second question is, could we have more color about your management strategy for monetizing by employing your Hunyuan element for different business lines and how we are able to see it? Thank you.

Martin Lau

Okay. Well, in terms of the tangible benefits of AI that, we have mentioned. I think that the most significant one right now, is actually around content recommendation and at targeting, because the AI in - the AI engine in those two use cases, are generating a significant amount of additional user time and at the same time, it's generating a higher incremental targeting rate, response rate for our apps.

And both of them actually are direct benefits to the business, and direct benefit to ad revenue. And both of the video accounts and our performance at revenue actually at scale. So if you add a certain percentage to that kind of number. It's significant. The IAS revenue is now in the teens generated by AI. But having said that, we think the amount of AI revenue is actually less than U.S. cloud companies.

And the main reason is because, number one, China doesn't really have an every big enterprise market. And if you look at the U.S., a lot of enterprises are actually sort of fitted in with AI and the - in testing out how AI can do for their business that, they're actually buying a lot of compute, which is not happening in China yet. There's a very big SaaS ecosystem in the U.S., which everybody is actually trying to add AI to their functionality, and thus charge the customers more.

And that SaaS ecosystem is not really that vibrant in China. And thirdly, there are also fewer AI start-ups in China, which are actually buying a lot of compute. So as a result, the AI revenue in China on the cloud side, is somewhat sort of at scale for us, but I think it will not be exploding like in the U.S. And in terms of how AI would continue to propagate, through our different products and services, right now, I think I talk about the immediate scalable benefit, is actually on the content recommendation and ad side.

At the same time, it's actually a productivity tool that everybody is using on a frequent basis, for example, our Copilot is being used by our engineers across the board on a very frequent basis, and it's actually generating efficiency gains for our business. And different businesses, a lot of our products are actually testing our Hunyuan, and trying to incorporate AI into the - either the production process, right.

So that they would gain efficiency or in the user experience use case so that it can actually make their user experience better. So I would say, right now, we are seeing more and more adoption among all our different products and services. It would take probably a few more quarters, for us to see some real use cases at scale. And at that time, we'll actually provide an update to all of you.

Wendy Huang

Thank you. We will take the next question from Thomas Chong from Jefferies.

Thomas Chong

Thanks management for taking my questions. My first question is back to the gaming business. I think recently, if we look into Southeast Asia, as well as the domestic market or even globally, we're actually seeing a shooting games, experience strong growth. And we also see PC is also experiencing a very good growth momentum. So I'm just wondering on a game preference-based perspective, are we actually seeing gamers are increasingly shifting to shooting games? And for domestic market, given the market is very big already. Should we expect that might be, kind of cannibalization among different games in our portfolio? And my second question is relating to our FinTech business. We have talked about wealth management, is experiencing a positive growth. I just want to get some color, with regard to our strategies in wealth management versus lending. Given that I think other fintech companies, are also talking about macro headwinds on the credit business. Should we expect our strategy, is focused on wealth management going forward? And lastly, it's more about our investees, any thoughts about unlocking the values of our investees, for our free cash flow is very strong enough in returning value to shareholders? Thank you.

James Mitchell

Hi Thomas, so on your first question around first-person shooter, first-person action games. We absolutely see that younger users in China disproportionately favor first-person action games versus older users. And there are certain first-person action games such as VALORANT and now Delta Force that are proving particularly appealing to that sort of 18 to 25-year-old age cohort. And we think that's a structural trend. And if you look at Western game markets, then first-person action is the sort of the super dominant genre.

It's equivalent to drama series being a super dominant form of TV program within drama series, you have costume drama series, you have road maps, you have police procedural. And each of them is as big, or bigger than many standalone genres of TV programming such as documentaries. And so in the same way with our video games, first-person action is the dominant genre in the West, and it is the dominant genre now with younger players in China.

And over time, it will become the dominant genre for the China market as a whole, which is good for us because we are disproportionately successful in first-person action games. Now as to whether new first-person action games like Delta Force, are cannibalizing existing games, then the answer is no. And I think that, that is because just as with drama series, you wouldn't expect a historical costume drama series to cannibalize a modern day suspense drama series, or police procedural drama series because there's so much difference between them in terms of user tastes.

So with the first person action games, there are differences within the genre that are too big for any single game to transcend. So one important and technical difference, is long time to kill games versus short time to kill games. Another important technical difference, is hero based games versus class-based games. Another one is tactical games versus chaotic games another one, which is more obvious is realistic graphics versus cartoony graphics.

And so while we have a multitude of successful first-person action games within Tencent in China, including Peacekeeper Elite, VALORANT, Delta Force, CrossFire, Call of Duty Mobile, Arena Breakout. They actually each occupy a unique niche along those axes that I just outlined. And that is why when we launch new first-person action games, we don't see the cannibalization that one might expect to see just, as if we launch a new costume drama series on Tencent Video, it doesn't cannibalize a police procedural, or a modern day contemporary drama series the way that one might expect it to.

Martin Lau

In terms of the payments and the wealth management service and lending, right, I would say the wealth management strength in the recent quarter is actually mostly driven by money market funds. And to some extent, this is countercyclical, right. When people spend, then they actually stable and when people don't spend, they actually save more. So that's sort of our countercyclical to some extent.

But overall, right, and there is a cyclical part, but there's also structural part, which is, over time, we actually want to gradually convert more and more people into buying not just money market funds, but also longer-term equity-based lines. And ETFs. So we are in the process of building those products and providing the conversion mechanism for people who have equity -- who have money market funds with us, right, to adopt additional investment products within our wealth management service.

Now with respect to lending, it's true that we are getting more cautious recently in terms, of lending in order to control the credit exposure. I think overall, our credit exposure is still very well managed and/or very conservative, because we have always taken a conservative approach, and we selectively pick the better credit to lend to, and we have been all along the way controlling the scale, of our lending pretty proactively.

But given the macroeconomic cycle right now, we are more cautious when the macroeconomic conditions improve, then we can actually be a little bit more aggressive in expanding our lending again. So it's kind of dynamic according, to where the economic conditions are.

James Mitchell

And in terms of divestments, we do actively divest from our portfolio. We have been particularly actively divesting in the last couple of months as various markets have rallied aggressively. On rare situations, you can sort of track that through filings that we have to make, but most of the divestments that we conduct don't require filings. And the purpose of the divestments is to recycle capital.

Whether that be for new investments or for funding share buybacks or simply for increasing our ammunition for activity in the future, which you can see in the shape of the net cash position, having progressively improved through this year, despite the buybacks and dividends that we have done.

Wendy Huang

Thank you. We will take the next question from CICC, Bai Yang.

Yang Bai

Thank you, management for taking my question. My question is about the game business. The IAG has made some internal adjustments could management share more details and the reason, about this adjustment and how do these adjustments, related to the overall trends in the gaming market and Tencent's current business situation?

Martin Lau

Well, if I'm correct in looking at what you're referring to, right, there are some recent media coverage on the adjustments. And then frankly, the adjustments were basically adjustments that we have already made quite some time ago. So these are adjustments that we've made to Honour of Kings team, which happened last year -- late last year and the adjustments that we have made to the Peacekeeper Elite team, which happened earlier this year.

And we have actually talked about these adjustments quite a few times on our earnings call. And when you look at the adjustments, they have been actually quite productive in the sense that both Honour of Kings and in particular, Peacekeeper Elite had actually registered good growth in this year. And the logic is really around our overall strategy on evergreen titles, right? So there is - yes, I think I believe that games have a life cycles and sometimes if the games are not performing well, then there's nothing you can do about it.

We do not believe that's the case. We believe that no one game has reached a certain scale and has become eligible for becoming an evergreen title and especially when a game has a very large user base. Then it's not about the game itself. It's about sort of the team and the ideas behind the development and the ideas behind the operations. And community management. So that's why we make changes when games are not performing well.

And when we see a team that has run out of ideas, then we have to make some adjustments in order to restore the creativity, restore the activity, restore the innovation to the games. And when those adjustments are done, right, then the games get back to its evergreen status and get back into a growth mode. And -- so I think that's essentially what it is. And in terms of sort of going forward, we continue to be focused on sustaining and growing our evergreen titles as well as creating new games that has potential to become evergreen titles.

And that means we will have to be much more focused on the games that we create, instead of creating many games, we create fewer games. And at the same time, we have to put behind each game a very strong positioning, very strong genre, very strong gameplay and a large production force and high production value so that we can exceed the expectation of the gamers.

And become category-leading in the gaming market in order for us to really give the games a potential, to become evergreen title. And I think Delta Force is actually a good demonstration of that focus, and we'll have more of such high potential evergreen titles coming to the market in the future.

Yang Bai

Thank you.

Wendy Huang

Thank you. We will take the last question from Nomura, Shi Jialong.

Jialong Shi

Good evening. Thanks management for taking my question and congratulations on a very solid quarter. So I have two questions. The first question is about the advertising business. Tencent advertising, Tencent ad business has performed much better than industry peers this year. Video account has been a driver for your overall app business among other drivers. So just wondering how should we think of the outlook, for your ad business? If we take a look at the two bigger short video peers of your video account, both of them generate a very big chunk, of ad revenue from e-commerce brands and merchants. So just wondering if it is fair to say e-commerce sector, will also be instrumental to fully unleash the potential of your video account ads? My second question regards the collaboration between WeChat and Taobao. What were the factors that have led to the collaboration? Are we going to see more collaborations, of this kind between Tencent, and other Internet platforms such as granting access, to our retail content for external search engine? Thank you.

James Mitchell

Thank you for the question. I'll take the advertising one. So in terms of the drivers for 2025, the overall macro environment would obviously be important accelerator or decelerator or neutral force for the aggregate advertising market. And that in turn will be a function primarily of consumer confidence. And consumer spending behavior.

Now within that overall environment, our relative performance will be a function of.

First of all, our advertising technology and our ability to utilize GPUs, utilize neural networks to continue boosting click-through rates from the current very low levels to higher levels that mechanically translates into more revenue. And then secondly, our deployment of specific inventories, in particular, video accounts, in particular, Weixin Search.

And with video accounts, we did moderately increase the ad load during the course of the third quarter, which contributed to the 60% plus year-on-year growth that we have disclosed, but the advertising load is still dramatically lower than those of peers in the low single-digit range. Going forward, we believe that we can continue to outgrow the industry as we take the ad load higher, without needing the e-commerce initiative to contribute.

Once the ad load reaches, let's say, two-third of where our peers are currently at, which with our peers in the mid-teens would be around 10% ad load versus the 3% or 4% we're at today, then I think it is fair to infer that being able to really tap into close loop, e-commerce, advertising, will be increasingly important. But as we look at our growth runway, that situation is still years away. And so, we will continue to outgrow the overall ad market.

But for a number of years, based on ad tech enhancements based on improving ad load in video account based on growth of Weixin Search. And then in order to sustain that market share gain beyond that point, it will be increasingly beneficial if we have cracked the code on closed-loop e-commerce activity with the Mini Stores that Martin talked about earlier.

Martin Lau

In terms of the cooperation with Taobao and I think the obvious thing is that it's actually beneficial to the users because it's convenient for them to click. And there's actually a benefit to us, because we can actually have bigger exposure of use case of our payment service. And it's also beneficial to our partner Taobao, which can allow them to convert their new users with high conversion rate and get more new users.

But the less obvious is actually how much work that actually had gone into making that happen, because the key thing is actually there's a lot of designs, and agreement that we need to do in order to make sure that the user experience, is actually well protected so that, for example, there's not going to be a lot of spending of our users, right? When you have merchants can share all kinds of different products. And there's incentive to create a lot of spending, then that's a problem.

So we actually need to design for that, and also sort of get our counterparty to agree to policing that. And for example, on compliance, right, we actually need to make sure that all the merchants are actually gone through a proper onboarding process in order, to be compliant. And that's something, which require work from our side, and our counterparty in order to make it to work.

And I think in the past, all these very complicated designs are very difficult to execute. But with the new environment with a more collaborative, and open environment of the different platforms, right? These hard work has been done. And as such, we can actually have these collaborations.

So when we look at other collaborations, I think, we'll be very open-minded. But the bottom line is that, it has to make sense and be very good and safe for our users, and for our content partners in order for these collaborations to be done.

Wendy Huang

Thank you. We are now ending the call. Thank you all for joining our results webinar. 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. The replay of this webinar will also be available soon. Thank you and see you next quarter.