Tencent: 2Q21 earnings minutes: There is a relevant framework for future supervision, and supervision will not affect the company's long-term business development

On August 19, 2021, Tencent released its second quarter financial report and subsequently held a financial report conference call.

The following is a summary of the Q&A session:

Q&A:

Q1: Are there more advertisers using mini programs now? How do you view long-term advertising revenue? What are Tencent’s views and measures on improving the mini program ecosystem?

A1: In the long run, many companies have started to use mini programs, which have further increased our advertising revenue. There are many very good mini programs in the WeChat environment, and mini programs can also generate a lot of growing advertising revenue. We expect further growth in Q2 and Q3. In addition, during the Olympic Games, our video account also had a lot of new revenue. Driven by these very important driving factors, I think advertising revenue will further increase in Q3 in the future, or it may decline due to regulatory factors.

Q2: In terms of Tencent using professional technology to provide public services and improve efficiency, we currently have software such as Tencent Meeting. What kind of supplementary services and software will there be in the future, and what opportunities will this bring?

A2: Our efficiency-enhancing software is not directly monetized at present. Many solutions rely on the deployment of enterprise-level users to open the door. In the US market, some of our products have successful commercial performance, such as Tencent Conference and Tencent Docs. Each has its own monetization model. We are currently developing more additional functions and software. These services will form certain business solutions, build a service system, and provide a "software + service" solution model to improve efficiency for users. These services will be committed to creating value, while providing customers with high efficiency, forming their commercial value.

Q3: Are there any changes in market regulation that need our attention? It is completely different from a few quarters ago. What is the impact?

A3: If we must give one point, it would be the double reduction policy. The training field has been greatly impacted, and advertising investment in this area has also been decreasing.

Q4: We understand that China's education and training industry has been greatly impacted by regulation. Has the company communicated with regulators about related businesses? For example, the introduction of the "double reduction policy"?

A4: Global Internet regulation is an irresistible trend. China's structured regulation in the Internet field is leading and strict worldwide. At present, China's Internet regulation is relatively loose, but it is tightening. Second, the government needs the healthy and orderly development of the Internet industry. We also welcome more regulation in the market in the future, because this can better improve our social value and regulate our behavior. Therefore, we will fully integrate and embrace this wave of new regulatory policies. Our operating philosophy and standards are: to create value for users. Considering the short-term uncertainty of these adjustments, there may be new policies in the future, but we believe we can handle it well. In terms of tax rate, the effective tax rate in the first half of 2021 is 11%, the same as in the first half of 2020. According to the Non-ifrs adjustment, the overall tax rate difference in 2021 is about 3%.

Q5: Will there be stricter regulation on games? For example, the length of time children and teenagers spend playing games under the age of 12 will be subject to stricter regulation.

A5: We have always paid attention to the use of games by teenagers, including time investment and recharge, and we have achieved certain results in this regard. In addition, we are also in close communication with regulators. From the perspective of the entire game industry, we are hoping to reach an agreement with regulators to build a mechanism that can regulate the total usage time of teenagers across different games. At present, we are trying to communicate further with the regulatory authorities on this matter. I believe that if this policy can be reached, then the regulation of games for teenagers will be more effective, and the accusations against the game industry will gradually fade.

Q6: Is there a specific time point for the opening of the ecosystem? What are its potential impacts? What opportunities will it bring?

A6: Tencent's ecosystem has always been open, focusing on helping small and medium-sized enterprises and helping them achieve further development. Tencent's ecosystem is fundamentally open, and users can copy and paste. For the ecosystem, taking WeChat as an example, the principle is to help the development and growth of small and medium-sized enterprises. Under this principle, many tool guides have been launched to achieve the vision of support. The platform has also been launched, but the process is complicated, there are many merchants, and the platform rules are important, which leads to complex problems, such as how to protect copyrights among many resources. Issues in this regard need our consideration and discussion. This is the focus and vision, and there are some problems that are not well solved at present. There are many merchant users, and we will treat it with caution.

Q7: What strategy do we adopt, especially for video accounts, such as the management of content on video accounts?

A7: So far, the video account has developed very healthily, including content and duration. The content of the Tokyo Olympics is also very popular. We pay more attention to the content ecology, including content quality, recommendation mechanism, etc. Regarding the monetization of video content, the current focus is not on monetization.

Q8: In the context of recent policies on the protection of underage players, will the company's development of new games stagnate or be delayed? Does the regulation of games mean fewer business opportunities?

A8: We have quantified the impact of the supervision of underage players, and it seems that it will have a certain impact. The company is currently developing games, which have been successful in China, Japan and other places. Therefore, in response to the uncertainty of the environment, we will make corresponding adjustments in the long and short term, and we also hope that players can exercise self-restraint as much as possible when playing games.

Q9: I noticed that Tencent has stricter measures for children under 12 years old and restricts their game consumption. Is this part of Tencent's corporate social responsibility strategy? In the long run, how will Tencent's corporate strategy change? What is the long-term financial impact of companies taking on more social responsibilities?

A9: The revenue contributed by these players under the age of 12 only accounts for about 0.3% of our game turnover, so the restrictions on them will not have much impact on us. In the long run, our profits are composed of different departments. We have many profitable businesses, and there will also be some loss-making areas. We hope to turn these loss-making areas into profits in the future. We believe that Tencent has formulated an overall strategy that is sustainable and profitable. In addition, the IFRS investment of billions of RMB will also bring us benefits.

Q10: What is the future regulatory direction?

A10: There is already a relevant framework. Because there are different regulatory entities, there are different regulatory requirements for different industries and sectors. There will be more regulatory requirements in the future, and we may indeed need to do more analysis. The company will continue to ensure that the business is fully compliant, and the supervision will not affect the company's long-term business construction. It will continue to work hard in the fields of SaaS, games and short videos. The short-term business results also show that the company is on the right direction.

Q11: The company's financial services business had a high growth rate in Q2. How much of this came from the cloud and how much from other aspects? What is the gross profit of cloud services?

A11: The cloud business is developing well. This market is growing every year because the growth rate of infrastructure development is very good, especially in cloud software and technical communications. The gross profit is growing every year. However, its monetization rate is low at present, and we hope to further increase the penetration rate of this part.

Q12: The changes in the management team in the first half of the year reflect Tencent’s focus on content. What is Tencent’s target strategy for content? Where is the focus of content investment? How is the development of Tencent Metaverse related content?

A12: It is correct to say that Tencent is paying more and more attention to content. We are also seizing opportunities to produce more upstream content, covering the fields of literature, film, animation and comics, and forming synergy on different platforms. The movie "You Are My Glory" released by our product Honor of Kings has been very popular, and has been widely discussed by different media, and the value of IP has emerged. In addition, we will also pay attention to a wider range of digital IP works, mobile games and other valuable and marketable products. This is a positive trend. We call it a content-centric solution and a platform-based work. Tencent has noticed the development opportunities centered on content and hopes to use it to promote its development in China.

Tencent is very interested in the Metaverse and believes it is a good opportunity. There are many ways to develop the Metaverse. The Metaverse has social attributes and can create more social networks. The use of the Metaverse is beneficial to most companies. The Metaverse has the opportunity to enter offline real assets and put them into the Metaverse process to achieve it. We are social network experts and leaders in the online gaming industry. We have confidence in the virtualization of real-world assets in the Metaverse.

Q13: Reinvestment plan, can you review the investment direction from last quarter to now? And the investment plan and adjustments for 2022?

A13: We generally do not provide guidance. We sent out some signals last quarter about the adjustment of reinvestment in short videos, games, and enterprise services. More importantly, it is to evaluate whether the reinvestment can be realized and promote the company's revenue growth, plus the growth of international business. Our games have the opportunity to transform for the first time and have entered the Japanese market. This is the right direction for the game industry. The DAU and browsing time of short videos have also expanded to a certain extent. In the next 2 or 6 quarters, we will pay more attention to business, enterprise-level software, video accounts, etc., to promote longer-term advertising revenue, which is a long-term plan, as well as optimization in international business.

Q14: Does the current supervision of data collection and user privacy affect the company’s advertising?

A14: When delivering targeted ads, we have very strict control over user data and privacy. We will supervise the use of user data, especially the strict supervision of advertising. This is very important to us, and we hope to pay more attention to the protection of user privacy in the process of localization.

Q15: When exploring overseas game opportunities and expanding overseas business, do we focus more on mobile games or PC games? I noticed that Tencent has cultivated some game studios in the United States. Can you provide more information in this regard?

A15: Looking at the global game market in the last quarter, in addition to mobile games, our PC games are also very successful. Last year, we invested three times the manpower and financial resources in the development of platform games, including mobile games, Xbox, PC, Switch, etc., which are all the game carriers we focus on. Our studio also pays attention to the game infrastructure. In terms of software development and game engines, we hope to achieve synchronous development of game engines, especially game studios outside of China. We hope to further promote work in this area.

Q16: In terms of long video supervision, will the supervision direction be strengthened or relaxed, such as reality shows, film and television dramas, etc.?

A16: Video has received much attention. In terms of content restrictions, more successful TV dramas will be launched, including reality shows. Some works have the expectation of monetization, and there will be more successful film and television products with monetization capabilities.

Q17: The dynamics of the international game market are changing rapidly. What plans do you have for the future in the game field? Will it be internal R&D or mergers and acquisitions? What was the contribution of the game business in the second quarter?

A17: Overseas games contributed 25%, a year-on-year increase of 37%. In China, QQ and WeChat are both very important platforms, including distribution and content composition, which are more content-driven. Future revenue points are in existing studios, and M&A activities to supplement the lack of technology to expand the growth of international game business. A large part of it is games developed in China, and some are from excellent foreign studios, such as Clash of Clans, as well as cross-brand internationally renowned cooperation, and products in the incubation stage.

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