The following is the summary of the 2022 Q3 earnings call for Tencent Holdings (HK)$, and the financial report interpretation can be found in "Tencent: WeChat Gold Mine is easy to make money".

Incremental Information from Management

1. Specific measures to reduce costs and increase efficiency:

(1) Close some non-core or repetitive businesses, such as online education, e-commerce, and game live broadcasting.

(2) Optimize poorly performing businesses, such as loss-making digital content services and unscaled social media products.

(3) Tighten marketing expenses, cut costs, especially in customer acquisition.

(4) Migrate all internal services in China to Tencent Cloud to improve productivity and cost efficiency.

(5) Optimize the staff team, control staff numbers, and thus control the growth of staff-related costs.

2. Video account advertising: Advertiser demand is strong, especially in fast-moving consumer goods. Video account advertising has brought us additional advertising revenue, even without considering video account revenue, overall WeChat advertising revenue has also increased year-on-year. Mini-program advertising has grown very rapidly.

We see many advertisers integrating our different advertising methods in the entire ecosystem. They have established very effective landing pages in the ecosystem, and when users watch content, they can click links to directly reach their login pages, and then better convert them into transaction volume.

3. Commercial payment: There is significant growth in the food and grocery, catering services, and transportation industries, with double-digit growth in Q3 year-on-year.

4. Cloud business: We have been reducing loss-making projects all along and focusing on self-operated products, so revenue has declined. Gross profit has achieved a significant year-on-year increase. Tencent's proprietary cloud enterprise edition can support users to integrate and deploy our public cloud products on their private cloud. Private cloud is also a public cloud, and we can meet the security and compliance needs of some customers.

We know that many customers do not want to use public clouds entirely, including bank and government customers, so they need to deploy hybrid clouds. On the one hand, data that can be made public is on the public cloud, and data that is very sensitive needs to be on the private cloud. In terms of private clouds, we can truly meet their needs and allow them to deploy private clouds internally, which are very secure and compliant. Their private and public clouds can be integrated to achieve a very complete cloud solution.

Public services such as hospitals and schools, or public sectors and organizations are increasingly using our core SaaS tools, thereby promoting their high-level cooperation and realizing various needs of applications such as remote education.

Analyst Q&A

1. Games

Q: Revenue growth in the domestic gaming sector has become insufficient. How will Tencent's gaming business return to a high-growth level? Wait for the protection policy for minors to be settled, edition number issuance or macroeconomic improvement? Q: Currently, there are two factors that pose challenges to the industry: strict measures to protect minors and difficulty obtaining game approvals. The overall macro environment is undergoing adjustments and will indeed affect business development. However, the company believes that industry regulation is necessary and will adjust its business to meet regulatory requirements.

The percentage of game revenue in the first few quarters of this year has performed well, with a strong cash flow foundation, but it remains to be seen and analyzed whether the overall income growth can be sustained, and the above two challenging factors need to be changed.

Looking ahead to the future, we hope that the game market can gradually improve and the company can develop more hit games according to the current strategy.

We expect more commercial game approvals to be issued in the short term, and on the other hand, we are not quite sure how the macroeconomic trends will change. Even if both factors change, our game revenue will undoubtedly grow again. But even if only one factor changes, we can still expect positive growth after digesting the impact of strict measures to protect minors.

Q: Against the background of strict game approval regulations, how to upgrade existing games to prolong the life cycle of popular games?

A: Adjust game development strategies to cope with the adverse effects of the domestic game market.

Specifically, resources will be focused on the most advantageous games to achieve greater returns.

For hit games, new gameplays will be developed to improve the player experience; more global game release plans will be made to focus more time and resources on upgrading and improving existing hit games. For example, due to the innovative PVE mode and qualifying mode in "CrossFire", "CrossFire" is still the leading first-person shooter game in China's PC game field. In this process, player experience will be given special consideration: what kind of gameplay do players want?

There will always be a solution to the game approval problem, and there will be more prepared games to be launched after game approvals are issued.

Q: At present, PC games seem to perform better in retaining existing players and attracting old players to return. What is the development plan for PC games? Will different departments be reorganized to provide updates for some older PC games and re-attract player interest?

A: Currently, there are many PC games in development. In the face of the resilient and elastic PC game market, the company hopes that hit games will emerge from the PC games that are currently in development. For example, "Valorant" has attracted a huge audience through its tournament broadcasting and has become an IP with annual revenue in the tens of billions.

Many studios we have acquired overseas in recent five years are developing PC games. If you take a look at today's Steam ranking, you will find that "Warhammer 40,000: Darktide", ranked second after the latest "Call of Duty", is made by our Swedish developer Fatshark, and the game has not even been released yet, but it has already ranked second in the Steam bestseller list. Our Chinese studios are usually more focused on mobile games. Even if they release a PC version, they usually prioritize mobile as the first platform and establish two-way connectivity between PC and mobile games. And our overseas studios, like Riot and Fatshark, prioritize PC platforms even more. Overall, the company will seize the current trend of PC games, develop more and better PC games, and improve existing games to attract more players. In addition, the company attaches great importance to the cultivation of game studios and establishes good partnerships with more studios to further promote the development of its gaming business.

Q: Why did the domestic game market decline against normal seasonality?

A: Looking back at the development of the gaming industry in recent years, its growth rate has not been uniform. In terms of seasonality, when the industry develops quickly, seasonality is not significant. However, the entire industry is currently stagnating.

Generally speaking, domestic revenues usually peak during the Spring Festival, and we will subsequently amortize the revenue into subsequent quarters. Some will be recorded in Q1, more will be recorded in Q2, some will enter Q3, and the rest will go until the end of the year. Therefore, in brief, when we look at Q3's gaming revenue, Q2's revenue numbers include more of the Spring Festival period's revenue, and due to the audit cycle, this portion of revenue is less recorded in the second half of the year.

Q: How can we better develop the business of video number information flow advertising?

A: The key is differentiation.

Video number-related advertising needs to consider the needs of different advertisers, and itself also has differentiated audiences. Advertisers like differentiated audiences, which can help them better reach different groups and more accurately target audiences.

The company will further focus on differentiation in video number-related advertising, allowing fast-moving consumer goods and high-end brands to reach their target audiences, thereby realizing higher value for video number advertising and generating premiums.

Q: With the growing brand awareness, what is the expected demand for brand advertising in the future?

A: Chinese online advertising is mainly based on pay-for-performance, with relatively few brand advertisements, but there are also such ads.

Pay-for-performance advertising refers to when advertisers hope to reach a certain audience on certain platforms, they will measure the platform's reach effect and pay based on performance. Advertisers are very concerned about sales indicators, and the company's mini-programs have already cultivated considerable commodity transaction traffic, providing more advertising space for advertisers through the current ecosystem. The company will consider how to better display ads based on the final effect that advertisers hope to achieve, using a more optimal approach. Brand advertising is then based on contract payment.

For advertisers, they are most concerned about conversion rates, that is, how effective the ad is in bringing about sales and transactions. We've already cultivated very considerable GMV in the mini-program, and the entire ecosystem also has a lot of products to support the different advertising needs of customers.

Q: How do advertisers allocate their budget on video number information flow advertising; has the rapid development of video number information flow advertising eroded the share of other types of advertising?

A: The company attaches great importance to the video number business and will continue to track its development. Currently, the trend of users spending more time on video number is obvious. As video number continues to develop rapidly and attracts more users, revenue will also grow. Now, video number business income is heading towards CNY 1 billion/quarter. In terms of advertiser budget allocation, advertisers will place ads on different short video platforms and consider whether to switch to Douyin's information flow ads. For the company, not only the value of Douyin for advertisers is considered, but also the supplement of Douyin to the entire ecosystem. Douyin is moving towards the goal of 1 billion income in the fourth quarter, and this growth will not affect the revenues from other advertising forms of the company. The company will build a more perfect ecosystem, rather than let different business forms in the ecosystem compete with each other. For example, in the WeChat ecosystem, WeChat Official Accounts and Douyin have achieved good synergies.

For Official Accounts, Douyin can establish private domains for businesses, integrate offline and online touchpoints, and display better ads in the entire ecosystem. Douyin's information flow ads can integrate different accounts in the ecosystem and bring more traffic to businesses.

Advertisers will analyze budget and returns very carefully, and the company hopes that they can get good returns from Douyin's information flow ads. At the same time, the company also hopes to get good returns on their investments, currently around 30%.

Q: How to better integrate Douyin's monetization with the entire Douyin ecosystem?

A: The WeChat and Douyin ecosystems are very healthy. We hope to have better cash flow generation capabilities, more users, attract more creators, and then attract more users, forming a virtuous cycle.

We currently don't think too much about monetization. In fact, monetization is very natural. Good monetization has no negative impact on the content ecosystem.

Currently, the company hopes to further promote the virtuous cycle between content creators and users. Currently, this virtuous cycle is growing very fast. The company hopes to have more traffic for distribution, so that more advertisers can reach different audiences through differentiated marketing. The company will further explore monetization opportunities in this area.

3. FinTech

Q: Commercial payment and FinTech business adjustment, progress, and latest strategy

A: In the current macro environment, the company hopes to have a financial holding company license. This requires a process, and needs to keep close communication with the regulatory authorities, understand and meet their needs. At the same time, the company also needs to make more internal adjustments.

This part of the business has little impact on costs, and there is no updated data at present. We will share it in real-time after updating.

The company hopes to better meet regulatory requirements, which has led to additional expenses. It is hoped that these expenses are all worthwhile. Judging from the current situation, it does bring better compliance levels, and the regulatory authorities are very satisfied with the current level of compliance. The company will continue to do this.

The macro environment faces many risks, and the company needs to make better decisions to manage these risks.

The payment service connects many offline merchants, many of which are small and medium-sized enterprises. We hope to provide them with the best digital operation support during the current economic downturn.

Intermittent lockdowns bring a lot of uncertainty, and it is hoped that certainty can be seen when the epidemic subsides. In the short term, coping with uncertainty, and in the medium and long term, achieving more organic growth. In the short term, the payment business is very important to the company, which can help the company cope with more unfavorable factors and achieve better performance. IV. Tencent Cloud

Q: Reasons and considerations for Tencent's recent joint venture with China Unicom, as well as the development plan for the cloud business.

A: Cooperation with China Unicom can enable the company to develop more CDN and multi-edge computing products, and combine the advantages of both parties to develop more products and serve a wider range of customers, helping them to better develop digitization.

Currently, the business plan is still being formulated, and short-term benefits are limited; the establishment of the joint venture itself is a milestone. The company has been looking for more cooperation opportunities to better utilize resources and technology, and cooperation with China Unicom can leverage bilateral advantages.

V. Capital Planning

Q: Current investment priorities.

A: The company comprehensively considers the business situation, with stakeholders as the core, to maximize shareholder interests.

At present, the global digital transformation is still in its early stages, and technological progress has brought many opportunities for the industry in which the company is located. The company will invest in enterprise services, games, short video content, etc.

Q: Capital allocation planning.

A: Capital allocation will consider investment priorities and not just short-term benefits. In any case, how to make cash allocation in the optimal state will be considered. With the passage of time, certain investments will be adjusted. This year has performed very well, and there is a high degree of stock feedback. Overall, the company will comprehensively consider how to optimize cash allocation, allocate funds, fully take care of all stakeholders, and maximize shareholder interests.

The company hopes to have a very strong cash flow production capacity. At present, capital liquidity is very good, organic growth has been achieved, and there is a lot of cash and liquid assets on hand, which can be used for capital allocation in a healthy manner.

Q: Reasons and considerations for adjusting holdings of Meituan and JD.com.

A: The company's overall investment strategy is very clear, and it does not necessarily mean reducing or giving up certain assets. The company generates 15 billion U.S. dollars in cash flow every year, and will further consider how to invest, such as investing in infrastructure and new products, and maximize shareholder and investor interests in the process.

Q: Reasons for increasing share repurchase efforts.

A: As a long-standing listed company, it will often repurchase stocks and hope to keep stock prices more stable.

Share buybacks are based on value, not just stock prices. When repurchasing shares, various factors will be comprehensively considered, such as whether shareholder and investor interests can be better maintained in the short term, and whether value can be created in the long term.

In specific circumstances, stock repurchases are the right decision.

VI. Cost Reduction and Efficiency Improvement

Q: Quantitative indicators for cost reduction and efficiency improvement.

A: In 3Q22, sales and general administrative expenses only increased by 11% year-on-year. When making business adjustments, we will consider whether more measures can be implemented.

VII. Macro Environment

Q: Will business development be better under the environment of relaxed regulation, and expectations for regulatory environment next year.

A: Although some regulations, such as protection of minors, have a significant impact on the business, the company fully supports regulation. Regulation is beneficial to the healthy development of the industry, and the company has always maintained good communication with regulators. On the latest developments, such as the top 20 reports mentioning further integration of the Internet and the real economy, promoting high-quality economic growth, this has released positive signals. The company believes that the regulatory environment will tend to be normalized and normalized, that is, the previous regulations will continue, and the intensity of regulations will be adjusted based on the development of the industry.

In terms of financial technology, more approvals have been obtained and more companies have established cooperation, such as accidental injury insurance companies.

In terms of games, the latest information in September shows that there will be more regulatory adjustments in the future.

In terms of investment and anti-monopoly, specific requirements have been issued by regulatory authorities, such as what requirements companies with what scale of revenue in 1-3 years need to meet.

In terms of enterprise services, there are still many uncertainties in the future environment, but because the company's enterprise service business has a very good foundation, it will not have a significant impact on total revenue.

Q: How to better integrate business development with the macro environment when gathering core business; will there be more visibility and predictability in advertising and enterprise services in the future?

A: Macroscopically, compared with Q1, the epidemic has improved in Q3, but the development of the epidemic is unstable, bringing many uncertain factors, and the overall economy is recovering. There were sporadic lockdowns at the beginning of Q4, which brought obvious uncertainties. More measures are needed in the short term to cope with uncertainties, but at least in the medium term, the economy is definitely improving. The current short-term uncertainty will last for at least half a year.

In terms of business services, the demand is very strong, hoping to provide people with work and life convenience, and bring more and better solutions and products to enterprises. Many services are closely related to infrastructure, and it is hoped that these services can be further coordinated with infrastructure. At present, external service growth is rapid, and profit margins are expanding, while service growth has slowed down. The company's profit margins are under pressure in the current competition, but the industry as a whole is developing rapidly, so the future prospects are still very good.

Risk Disclosure and Statement for this article: Dolphin Disclaimer and General Disclosure

Tencent: Video monetization is progressing smoothly, and game version number is expected to be issued soon (3Q22 conference call minutes)