Tencent: The company's R&D expenditure is expected to increase by 7~9% year-on-year this year

The following is the main content of the analyst Q&A session of this conference call:

Citi analyst Alicia Yap:

Can management elaborate on the recent upgrades of the advertising technology platform?
In view of the State Council’s recent support for digital content including games, will it change the company’s R&D resource deployment and promote more entertainment-related content consumption opportunities?

James Michel:

Indeed, we are looking back at user behavior over the years, and the advantage is that we can form a more comprehensive analysis of user interests. On the other hand, we will also analyze users' recent behavior more frequently, hoping to have a more accurate and timely understanding of users' current business intentions, thereby increasing advertising click-through rates. The current situation globally is that when click-through rates increase, most advertisers automatically allocate more ad spend.

Liu Chiping:

These news definitely provide support to the company and the company's content business, and are very encouraging, especially in aspects related to the game industry. It is another recognition and affirmation of the value of the industry. In addition, there is also the continuous issuance of version numbers. We feel that it will definitely have a positive impact on the entire content industry. Tencent has made very long-term investments and strategic investments in the content industry. The content industry, whether it is games or TV series based on novels, is essentially an industry that values ​​long-term investment. Our recent game business has accelerated again, as well as our The success of TV series actually stems from our investment many years ago.

UBS analyst Kenneth Fong:

Regarding live streaming e-commerce, we noticed that in the latest quarter, the sales growth of competitors’ live streaming e-commerce on short video platforms has slowed down significantly. Could you please ask the management to talk about the company’s video? E-commerce strategy for account business?
In terms of accounting, it specifically involves two items. General and administrative expenses increased by 8% year-on-year. We know that the number of employees in the company is basically the same year-on-year. So how much of this 8% increase is one-time? Also on paying taxes, we should forecast the effective tax rate for the next two quarters because we saw it come down a lot this quarter.

Liu Chiping:

​​Regarding the e-commerce business in the WeChat ecosystem, in addition to mini-program e-commerce, the growth of our live broadcast e-commerce is still very stable this quarter. Compared with other short video platforms, our total merchandise transaction volume is No slowdown is seen on the growth front. The main reason is that compared with our competitors, our e-commerce transaction volume is actually very small and there is still a lot of room for growth.
Having said that, we have also recently repositioned our live streaming e-commerce business to make it more like WeChat e-commerce. In other words, the ecosystem we want to build is not only based on video accounts and live streaming channels, we want to build a new ecosystem on WeChat Establishing an e-commerce ecosystem within the company and connecting it to the entire WeChat ecosystem will still draw a lot of power from our official accounts, video accounts and live broadcast channels. But at the same time, it will be connected to all elements of the WeChat ecosystem, including official accounts, mini programs, corporate WeChat, and all social and group activities that occur within WeChat. We want to build an ecosystem in a very patient but systematic way. The system makes it different from simple live broadcast e-commerce and more valuable to merchants and users. We also very much hope to solve the problems that everyone has seen.

Luo Shuohan:

In terms of general and administrative expenses, I will divide it into two parts. In the second quarter, R&D expenses increased by 8% year-on-year, and general and administrative expenses other than R&D expenses increased by 8%-9% year-on-year. We expect the company's full-year R&D expenditures to grow by 7-9% year-on-year this year. General and administrative expenses other than R&D expenditures will also see single-digit year-on-year growth based on non-IFRS calculations. According to the latest forecast, the overall market will also achieve a year-on-year growth of 7-9%.
In terms of income tax, we should pay attention to the profit calculated on a non-IFRS basis. The decrease in income tax was due to the reversal of deferred income tax assets of overseas subsidiaries in the second quarter of last year, which provided a lower base for this year's year-on-year comparison. Of course, This was partially offset by an increase in domestic income taxes. The effective tax rate on a non-IFRS basis last year was 22%, and we expect the non-IFRS effective tax rate in 2024 to be between 18% and 20%.

BofA Securities analyst Miranda Zhuang:

The company’s new revenue has relatively high profit margins and has also driven strong profit growth in the past few quarters. Can the management please introduce us to this part of the revenue? Condition? For example, what is its share of revenue? What is the future growth trend? How much does it contribute to gross profit growth? Looking to the future, how do you see room for further growth in gross profit margins in key business units?
I also want to follow up on a question about profits. We have seen that the share of profits from associate companies and joint ventures has increased significantly quarter by quarter and year by year, and has contributed significantly to the company's adjusted profits. Can you please manage it? Can you please introduce its driving factors?

James Mitchell:

We will not do separate quantitative work on the high profit margins of some revenue and the changes in its proportion of overall revenue. However, one trend you can see is that in the most recent period , the company's gross profit growth rate is more than twice the revenue growth rate, there are two reasons for this situation. The main reason is the increase in the proportion of high-margin revenue you mentioned, and the secondary reason is the company's measures to improve efficiency, which are what we call cost management measures. These factors jointly promoted the growth rate of gross profit to exceed the operating rate. revenue growth more than doubled.

Luo Shuohan:

In terms of the profit share of associated companies, calculated according to U.S. Generally Accepted Accounting Principles (GAAP), it increased from 3.9 billion a year ago to 9.9 billion. This is the contribution from associated companies such as Pinduoduo, which is relatively large. Small contributions also come from companies like Kuaishou and Epic Games. The share of profits from associate companies will begin to rise in the second quarter of 2023, and will further accelerate in subsequent quarters of 2023. We expect year-on-year growth to slow in the second half of this year.

Goldman Sachs analyst Ronald Keung:

I want to ask two questions. One is about the game business. Compared with last year, there is a big contrast. This year we have seen that the company has begun to show signs of re-acceleration in both domestic and international games. Tencent has actively adjusted its existing evergreen games and launched new games. Supercell's earnings are also strong. For investors, how should we think about this accelerating growth trend, and can the company adjust appropriately to make it a sustainable gaming business growth for many years? From an overall portfolio perspective, how do we manage this strong trend that we've seen recently so that it can deliver continued growth?
The second question is about the investment portfolio. For more mature projects, what are the company’s possible divestment methods? What are the new investment areas we are working on?

James Mitchell:

Answer the second question first. If you look at the second quarter of this year, the company's divestment greatly exceeded the total new investment. Divestments plus dividends received, plus fund distributions received, are more than 50% higher than the capital we have deployed in new investments. So the portfolio is really self-sustaining in terms of our ability to do divestments.

James Mitchell:

Most of the value of our portfolio is in public companies, and many of them are in relatively large and highly liquid public securities. In the second quarter, we divested over $1 billion by selling shares in the market, and I think that trend can continue.

Chip Lau:

Just to add, we did really well in this quarter, but we cannot ignore the fact that over the past few years, we have experienced a very challenging business environment, which is also the game The nature of the business. First, it is increasingly difficult to launch highly successful new games these days because the quality of the games and player expectations are so high. At the same time, the quality and franchise value of existing games is very strong. Therefore, if you want to launch a new game, it must have very high quality or particularly differentiated gameplay to attract users. We need to work very hard to release good new games,

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