Tencent Holdings Ltd
HKEX:700
Earnings Call Analysis
Q4-2023 Analysis
Tencent Holdings Ltd
In 2023, the company honed its strategic focus, leading to notable advancements in its major offerings, doubling user time spent on Video Accounts, and increasing gross receipts on its Mini Games platform by 50% year-on-year. Major hit games in China grew from 6 to 8, coupled with international games contributing to 30% of the game revenue—a double-digit growth. With 117 million paid subscribers for Tencent Video and 107 million for Tencent Music, the company solidified its dominance in entertainment. The integration of improved AI models boosted ad targeting and revenue, while social value initiatives, including philanthropy and scientific research support, positioned the company as a conscious corporate citizen. Financially, the quarter saw a 7% year-over-year rise in total revenue to RMB 155 billion, with gross profit surging 25% to RMB 78 billion, and non-IFRS operating profit growing impressively by 35% year-on-year, although there was a 5% downtick quarter-on-quarter.
The company's commitment to a high-quality revenue growth model, which emphasizes improved gross profit and operating leverage, has outstripped previous revenue expansions. The consolidation of profits pivots on operational efficiency and effective marketing expenditure management, fueling organic growth. High user engagement and monetization from services like Video Accounts, Mini Games, and Weixin Search embody the company's lucrative expansion dynamics. Similarly, FinTech services reap benefits from a solid base in payment services while adhering to regulatory norms, facilitating additional high-margin products and services.
The gaming segment experienced varying success—while the domestic game revenue softened, the company is poised for an upturn in 2024, supported by newly optimized flagship games and prospective game launches like DnF Mobile, Honour of Fight, and One Piece Mobile. Innovations and upgrades in large language models, such as Tencent Hunyuan, signified technological progress, positioning the company for further growth with advancements in areas like logical reasoning and content production tools.
The company not only reinforces its competitive edge through strategic investments and innovation but also demonstrates a robust approach to enhancing shareholder value. It proposed a significant 42% year-on-year increase in its cash dividend to HKD 3.4 per share and signaled a twofold increase in buyback activity, showcasing strong financial health and a resilient commitment to rewarding its shareholders amid a competitive market landscape.
A strategic focus on operational efficiency and the generation of high-quality revenues manifested in an overall gross margin uplift to 50%. Each segment contributed to this uplift—value-added services rose to 53.7%, online advertising to 56.8%, and FinTech and Business Services to 43.9%. The deployment of AI in enterprise software products led to a doubling in revenue from WeCom, Tencent Meetings, and Tencent Docs. With astute reclassification measures to better reflect daily operations, non-IFRS operating profit rose by 35% year-over-year, and net margin increased significantly. Operating expenses were tightly managed, with marketing efforts supporting new content and R&D expenditures maintaining a steady year-on-year growth.
Impressive cash flow metrics, with an 89% year-on-year increase in free cash flow, signify the company's strong financial foundation. Share repurchase programs and the proposal for a significant annual dividend increase reflect confidence in the company's sustainable growth trajectory and commitment to delivering shareholder value. The strategic scaling of investments in essential areas such as servers and GPUs, combined with the augmentation of profits from core segments, paints a picture of a company judiciously steering its resources for long-term success.
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Good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2023 Fourth Quarter and Annual Results Announcement webinar. This is 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 this 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 will discuss strategy review. 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 Pony.
Thank you, Wendy. Good evening. Thank you, everyone, for joining us. In 2023, we sharpened our strategic focus and achieved substantial progress in our major products, following our high-quality revenue growth model. Notably, Video Accounts total user time spend more than double as we enrich our short video content ecosystem. Our Mini Games platform increased gross receipts by over 50% year-on-year. Our number of major hit games in China, achieving both high DAU and substantial monetization increased from 6 in 2022 to 8 in 2023. And international games achieved double-digit revenue growth and rose to 30% of games revenue. Tencent Video and Tencent Music extend their viewership with 117 million with and 107 million paid subscribers, respectively. WeCom and Tencent Meeting strengthening their enterprise software leadership and increased monetization. And we also achieved significant technology breakthroughs. Our Tencent Hunyuan foundation model is now among the top tier of large language model in China with a notable strength in advanced logical reasoning. Our upgrade advertising AI model enabled us to deliver better ad targeting and higher revenue. We invest further in sustainable social value initiatives. Our digital philanthropy platform helped with RMB 3.8 billion in public donations during 99 Giving Day campaign in 2023. Our New Cornerstone Investigator Program supported 104 scientists, contributing to fundamental science research. Looking at our financial numbers for the quarter. Total revenue was RMB 155 billion, up 7% year-on-year and stable quarter-on-quarter. Gross profit was RMB 78 billion, up 25% year-on-year and 1% quarter-on-quarter. Non-IFRS operating profit was rmb 49 billion up 35% year-on-year or down 5% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB 43 billion, up 44% year-on-year or down 5% quarter-on-quarter. Now I will hand over to Martin for the strategic review.
Thank you, Pony. Good evening and good morning to everybody. During the course of 2023, we have established a high-quality revenue growth model, which will support our continued economic value creation. This, together with our increased focus on capital allocation discipline will further enhance shareholder value. Starting with our financial performance. We have seen a healthy increase in revenue since the first quarter of 2023 by increasing high-quality revenue streams and reducing low-quality ones. Importantly, our gross profit growth has consistently surpassed its revenue growth due to the margins of our incremental revenue being significantly higher than the 50% overall gross margins for the entire company. This incremental revenue is generated predominantly from our leading social and payment platforms, which have already been built and have their costs covered. We now consider gross profit growth as a key proxy and frankly, a better proxy than revenue growth for our organic growth given this shift in terms of the revenue mix. We further enhanced our operating profit growth from gross profit growth through operating leverage. First, we streamlined operations and prudently reduced aggressive marketing expenditures, we perceive these measures as a less recurring strategy; second, and more importantly, we're committed to operational efficiency and disciplined resource allocation, which includes thoughtful staff distribution and effective marketing expense management. This approach ensures a focused organization and a lean cost structure moving forward. In the next few slides, I will provide more details on the drivers for our earnings growth going forward. Weixin provides the first set of examples of how we nurtured high-quality revenue streams. The Weixin platform is delivering consistent growth in both DAU and daily time spent per user, new services within Weixin such as Video Accounts, Mini Games and Weixin Search contribute to greater engagement and overall platform health, while at the same time, generating additional revenue at very high margins, given they are offered on top of a relatively stable platform cost base. Going into each one of them. Firstly, for Video Accounts. Total user time spent more than doubled in 2023, driven by strong growth in DAU and time spent per user. Video Accounts advertising revenue has substantially increased, thanks to the increased traffic and improved ad targeting. Despite ad load was kept to a much lower levels than industry peers, which then offers a better user experience overall. Secondly, Mini Games experienced a 50% increase in gross receipts in 2023, benefiting from more DAU and higher revenue per user. The growth in gross receipts drove increase in high-margin platform fees for us. Weixin Mini Games are the clearly industry leader with Mini Games user retention rate and time spent per user, notably higher than in peer services as a result of Weixin's platform stickiness, well-developed ecosystems such as social sharing and notification and our game technology know-how. Thirdly, Weixin Search now achieved over 100 million DAU, up over 20% year-on-year and Weixin Search content QV grew over 30% year-on-year. Our search revenue grew multiple times year-on-year in 2023 as we ramp up monetization on this under monetized assets. In addition, our FinTech services provide a second set of examples of high-quality revenue streams. We've spent many years building a solid base for FinTech services in the form of our widely used payment services. With our straight adherence to regulatory requirements and with careful risk management. In recent months, we completed a comprehensive self-inspection and corresponding ratification process, upgrading our operational compliance capability. We also strengthened our payment ecosystem by improving user security, refining Mini program-based transaction tools and enhancing cross-border payment experience. On top of this solid base, we're providing additional products and services in collaboration with licensed financial institutions, which generates high incremental margins as these revenues are recorded on a net fee basis. In Wealth Management, we generated low tick rate of high-margin fee income from a large and growing pool of aggregated customer assets by offering customers high-quality products and superb convenience. The products are primarily low-risk money market funds and to a lesser extent, fixed income mutual funds. In Consumer Loans, our partnership with WeBank and other licensed banks facilitate us, distributing small-sized cash flows and installment payment services, and we kept the default rate low by applying stringent tech-enabled risk management procedures. For both Wealth Management and Consumer Loans, we offer a substantially better economics to consumers, partners and ourselves versus stand-alone FinTech businesses as we reduce customer acquisition costs and credit charges. Now moving on to games. Our Domestic Game business revenue has been softer during 2023, but we expect it to improve from the second quarter of 2024. The reason for slow growth in 2023 was that our two biggest games, Honour of Kings and Peacekeeper Elite have maintained their leading positions in terms of DAU, but monetization has temporarily stagnated, which caused us to take remedial actions. For Peacekeeper Elite, we identify the need for more creative monetization strategies and have revamped the leadership of its monetization team. We look forward to the game delivering more innovative and engaging experiences that would also help monetization. We're optimistic that our new monetization team can deliver on this front. So given its sister product, PUBG mobile's team has already delivered a notable rebound in its monetization internationally. For Honour of Kings, our monetization activities have been overly concentrated within this Chinese New Year period in 2023. We're rolling out a more evenly distributed monetization strategy in the year of 2024, which we'd expect to benefit year around revenue generation. Looking beyond these two games, Several of our recent releases have performed well in terms of DAU and are now converting that DAU success into monetization. The number of major hit games in China increased from 6 in '22 to 8 in '23. We define major hit games as games exceeding average quarterly DAU of 5 million for mobile and 2 million for PC and at the same time, generating over RMB 4 billion annual gross receipts. We view these thresholds as indicative of a major and enduring hit and games surpassing such DAU and revenue thresholds will contribute to long-term stability and growth of our game portfolio. Having a large and expanding portfolio of major hits illustrates our ability and continually developing new major hits and in operating multiple highly popular games at the same time. During the year, our new major titles are: one, Fight of the Golden Spatula. It has transitioned from a niche auto chess game to one of the most popular mobile games in domestic market, ranking top 5 by DAU and total time spent. Second, LoL Wild Rift now also ranks among the top 5 mobile games by total time spend and gross receipts in China. We expect to keep adding major hits to our portfolio in the course of this year. We're looking forward to releasing several major new games, which should also contribute to improving revenue trends through 2024. DnF Mobile is a key title for us, given the success and longevity of DnF PC and given general scarcity of successful action games on mobile. DnF Mobile has just completed a major closed beta test successfully. And given the positive results, we intend to launch the game in the second quarter of this year. Other high potential games on our portfolio for 2024 include Honour of Fight, Need for Speed Mobile and One Piece Mobile. In 2023, we also made notable progress in core technologies, especially those involving AI that will serve as our growth multiplier going forward. After deploying leading-edge technologies such as the mixture of experts MoE architecture, our foundation model, Tencent Hunyuan, is now achieving top-tier Chinese language performance among large language models in China and worldwide. The enhanced Hunyuan excels particularly in multiturn conversations, logical inference and numerical reasoning, areas which has been challenging for large language models. We have scaled the model up to the 1 trillion perimeter mark, leveraging the MoE architecture to enhance performance and reduce inference costs, and we are rapidly improving the model text to picture and text to video capabilities. We're increasingly integrating Hunyuan to provide co-pilot services from enterprise SaaS products, including Tencent Meeting and Tencent Docs. And we are also developing new gen AI tools for effective content production internally. More generally, deploying AI technology in our existing businesses have begun to deliver significant revenue benefits. This is most obvious in our advertising business, where our AI-powered ad tech platform is contributing to more accurate ad targeting, higher ad click-through rates and thus, faster advertising revenue growth rates. We're also seeing earlier stage business opportunities in providing AI services to Tencent Cloud customers. Finally, with this high-quality revenue growth model, we have resources to keep investing in our businesses while at the same time, returning more capital to our shareholders. Historically, we have continually paid cash dividends to our shareholders and periodically repurchased shares at times when we believe our share price was under valued, which is particularly true today. With a record high and growing profit and cash flow, we proposed to increase our upcoming cash dividend by 42% year-on-year to HKD 3.4 per share. And we intend to at least double our buyback activity year-on-year from HKD 49 billion in 2023 to at least HKD 100 billion in '24. We believe this commitment to return at least HKD 132 billion or USD 16.9 billion to shareholders during the year is well supported by our free cash flow, which was USD 24 billion for full year of '23, along with our gross cash position of USD 57 billion, and our investment portfolio of USD 126 billion. Now with that, I will pass to James to talk about our business review.
Thank you, Martin. For the fourth quarter of 2023, our total revenue was up 7% year-on-year. VAS represented 45% of our revenue, within which the social network subsegment was 18%, Domestic games was 18% and International games 9%. Online advertising was 19% of our revenue, and FinTech and Business Services represent 35%. For Value Added Services, segment revenue was CNY 69 billion in the fourth quarter, down 3% year-on-year. Social network revenue of CNY 28 billion was also down 2% year-on-year. Revenue from music-related and game-related live streaming services decreased by revenue from the Video Account streaming service subscriptions and Mini Games increased. Long-form subscription -- long-form video subscription revenue increased 1% year-on-year, driven by higher ARPU, while their video subscriptions declined slightly to 117 million. Our self-commissioned drama series, Blossoms Shanghai, ranked first wide views across all online platforms in China year-to-date, extended Tencent Video's audience lead within the online video industry. Music subscription revenue increased 45% year-on-year and 21% growth in subscription count and 20% growth in ARPU. Domestic Games revenue was down 3% year-on-year to CNY 27 billion. Recently released PC games, VALORANT and Lost Ark contributed to PC game revenue increasing, but were offset by decreased revenue from Honour of Kings and Peacekeeper Elite. International games revenue increased 1% year-on-year in renminbi terms or decreased [indiscernible] in constant currency terms to CNY 14 billion as Supercell was repositioning some of its games. PUBG MOBILE extended its revenue recovery and VALORANT maintained solid growth. In aggregate, our domestic plus international game subsegments reported revenue was down 2% year-on-year, although again, gross receipts were slightly up year-on-year. We expect our domestic and international game reported revenue to improve from the second quarter of 2024 onwards as revamps for big existing games such as Brawl Stars and Peacekeeper Elite have started to yield results and as we will be launching new games, including Dungeon & Fighter Mobile. Moving to Communications and Social Networks. The Weixin video accounts on the content consumption side, time spent increased over 80% year-on-year in the fourth quarter, driven partly by DAU and but mostly by time spent per user, benefiting from our enhanced content recommendation engine. On the content creation side, daily video uploads grew rapidly year-on-year. We provided targeted traffic support for creators in key categories, such as knowledge-based content lifestyle and music, which contributed to a sharp increase in the number of creators with over 10,000 followers and with more followers and better live streaming tools, the number of creators that directly generate revenue from their video accounts more than tripled year-on-year. For QQ, the number of active QQ channels grew at a double-digit rate quarter-on-quarter, and we launched a new version of QQ that features a refreshed user interface and enriched functionalities. Moving on to some domestic games highlights. The release of Set 10 drove Fight of the Golden Spatula to double its average DAU year-on-year in the fourth quarter to a new high. Arena Breakout increased its gross receipts in average DAU each by over 30% year-on-year driven by a new competitive PvE mode and upgraded Battle Pass and more appealing virtual items. And Arena Breakout is now the seventh biggest mobile game in China by total time spent. Naruto Mobile, an 8-year-old game developed by our MoreFun Studio achieved record high gross receipts and average DAU in January, benefiting from extensive content updates. We view the success of Naruto as a positive leading indicator for our upcoming One Piece game and also through MoreFun. We launched our party game Dream Stars in December. Party games aggregate a range of game modes, and we're still building out the number and variety of Dream Stars game modes to compete with the game modes featured in encumbered party games as well as releasing tools for players to create their own game modes. We view party games as a genre that will require sustained effort over a long period, but we're encouraged that Dream Stars ranked among the top 10 mobile games in China by DAU during the Chinese New Year. And we believe that Dream Stars is already the industry leader in party games measured by DAU within certain game modes, such as social deduction and tower defects. Among our international games, PUBG MOBILE increased its DAU and gross receipts year-on-year in the fourth quarter, benefiting from the introduction of the Frozen Kingdom theme mode and an innovative top-tier outfit with upgradable weapons. NIKKE released a new storyline and new characters, and encouraging NIKKE's average DAU reached a 2023 year high level in the fourth quarter. Supercell's 5-year-old game Brawl Stars achieved record high gross receipts in DAU in February 2024 due to enhancements to its friend invitation system, the introduction of a new 5v5 game mode and a complete redesign of its Battle Pass. Brawl Stars resurgence demonstrates the latent franchise value of our evergreen titles and the potential to unleash new growth. Moving to online advertising. Our ad revenue was CNY 30 billion in the fourth quarter, up 21% year-on-year, benefiting from upgrades to our ad-tech platform and more advertising revenue in Video Accounts. We generated increased ad revenue from all major categories, except automotive, with notable step-ups in revenue from Internet services, health care and consumer goods categories. We refined our ad targeting by utilizing more real-time data in the AI powering our ad tech, enabling us to match target users with more relevant ads in a more timely manner across both our owned and our ad network properties. Our Video Accounts ad revenue more than doubled year-on-year despite maintaining a very low ad load, due to increased video views and upgraded ad targeting. Weixin Search increased its revenue, several folds year-on-year in the quarter on growth in commercial queries and RPM. Summarizing FinTech and Business Services. Segment revenue was CNY 54 billion in the fourth quarter, up 15% year-on-year. FinTech's Services revenues sustained a team's year-on-year growth rate on increased commercial payment volume, Wealth Management fees and Consumer Loan fees. Gross profit grew faster then revenue due to a shift from social to commercial payments. Within commercial payments, daily active users and transactions per user both increased. We enhanced Mini program-based QR code and palm payment solutions, helping offline merchants boot repeat sales. For Business Services, revenue grew around 20% year-on-year in the fourth quarter, benefiting from higher cloud spending by industries such as retail and finance and increased technology service fees on Video Accounts, E-commerce transactions. Business Services gross profit more than quadrupled year-on-year due to those technology service fees as well as supply chain optimization initiatives. Among our enterprise Software-as-a-Service products, we deployed AI for real-time content comprehension in Tencent Meeting, deployed AI for prompt based document generation Tencent Docs and rolled out a paid customer acquisition tool for eCom. We deepened our enterprise SaaS penetration among domestic companies such as in Vevo as well as multinationals such as Novo Nordisk. As a result, our enterprise software revenue from WeCom, Tencent Meetings and Tencent Docs together more than doubled year-on-year. And I'll now pass to John.
Thank you, James. Hello, everyone. For quarter 4 2023 and full year 2023, we have reclassified interest income from above to below the operating profit line. Additionally, investment-related gains and losses and donations, both previously included in other gains or losses net above operating line and now combined as net gains or losses from investment and others and presented below the operating profit line. The reclassification aims to better reflect the results of day-to-day operations, comparative figures have also been restated. For fourth quarter 2023, total revenue was CNY 155.2 billion, up 7% year-on-year. Gross profit was CNY 77.6 billion, up 25% year-on-year. Operating profit was CNY 41.4 billion, up 42% year-on-year. Net losses from investment and others were CNY 6.7 billion, primarily reflecting impairment provisions against certain investees. Interest income was CNY 3.9 billion, up 52% year-on-year driven by growth in cash reserves and improved use on term deposits. Finance costs were CNY 3.5 billion, down 3% year-on-year due to reduced ForEx losses partially offset by higher interest expenses. Share of profit of associates and JVs was CNY 2.4 billion versus loss of CNY 1.6 billion in the same period last year. On a non-IFRS basis, share profit increased to CNY 4.5 billion, up from profit of CNY 3.1 billion last year, driven by better profitability at certain domestic associates and a successful game released by an overseas studio investee. Income tax expense rose by 111% year-on-year to CNY 9.7 billion driven by operating profit growth and increased reporting tax provision. IFRS net profit attributable to equity holders was CNY 27 billion, down 75% year-on-year, primarily due to the CNY 106.6 billion gain from the deemed disposal of Meituan recognized in the same quarter last year. Diluted EPS was CNY 2.807, down 74% year-on-year. Now I'll share our non-IFRS financial figures. For quarter 4, operating profit was CNY 49.1 billion, up 35% year-on-year. Net profit attributable to equity holders was CNY 42.7 billion, up 44% year-on-year. Diluted EPS was CNY 4.443, up 46% year-on-year. Moving on to gross margins. For quarter 4, overall gross margin was 50%, up 7.4 percentage points year-on-year and by segment. Gross margin for value-added services was 53.7%, up 3.9 percentage points year-on-year. This was due to higher mix of high-margin Mini Games platform service fee and reduced contribution from low-margin music and games related livestreaming revenue, along with our cost control measures. Gross margin for online advertising increased to 56.8%, up 12.6 percentage points year-on-year. As Martin highlighted, our high-quality revenue streams, particularly Video Accounts ad revenue generated from our own traffic with platform costs already paid for, contributed to our incremental margins. Our efficiency efforts also led to margin improvement. Gross margin for FinTech and Business Services was 43.9%, up 10.3 percentage points year-on-year. This was driven by margin enhancement following our business restructuring, emerging high-quality revenues, including Video Accounts, e-commerce technology service fee, structural shift towards high-margin products within FinTech services and our efficiency initiatives. For quarter 4 operating expenses. Selling and Marketing expenses were CNY 11 billion, up 79% year-on-year, against a low base last year, driven by more spending on promotion advertising to support new content release. It represented 7.1% of revenues. R&D expenses were CNY 16.4 billion, up 3% year-on-year. G&A expenses, excluding R&D grew CNY 10.8 billion down 6% year-on-year due to lower [indiscernible] and optimized operating lease expenses At quarter end, we had approximately 105,000 employees, down 3% year-on-year or partly stable quarter-on-quarter. Operating and net margin ratios. For fourth quarter 2023, non-IFRS operating margin was 31.7%, up 6.6 percentage points year-on-year non-IFRS net margin was 28.2%, up 7.1 percentage points year-on-year. Next, I will highlight some key cash flow and balance sheet metrics. For quarter 4, total CapEx was CNY 7.5 billion, up 33% year-on-year. Within total CapEx, operating CapEx was CNY 6.7 billion, more than triple year-on-year, driven by increased investment in GPUs and servers. Nonoperating CapEx decreased by 78% year-on-year to CNY 0.8 billion. Free cash flow was CNY 34.2 billion for quarter 4, up 48% year-on-year. For full year 2023, as highlighted by Martin, our free cash flow was USD 24 billion or CNY 167 billion, up 89% year-on-year. Net cash position was CNY 54.7 billion, up 50% quarter-on-quarter, reflecting strong free cash flow generation, partly offset by cash outflows for share repurchases and strategic investments. To conclude, I'll discuss our share repurchase and annual dividend. For the full year of 2023, we repurchased 152 million shares with record total consideration of HKD 49 billion. As a result, our total issued shares after accounting for employee share options and [ BanHao ] issuance decreased by 0.9% year-on-year as at the end of 2023. The Weighted average number of shares for calculating our 2023 diluted EPS also decreased by 0.9% year. Subject to the shareholders' approval at the upcoming 2024 AGM, we are proposing an annual dividend of HKD 3.4 per share, reflecting a 42% increase from the previous year. This dividend will be payable to shareholders on the 31st of May 2024. Thank you.
Thank you, John. We shall now open the floor for questions. [Operator Instructions] So we will take the first question from Kenneth Fong from UBS.
My first question is for online game. As we highlight in our strategy for online games, we will work on enhancing the flagship titles, building emerging franchise game and launch of new titles. Can management share with us the timing and when we should see it benefiting our overall online game growth? And for the industry top down, we also see some gradual relaxation on the number of time how being approved and also gained with high commercial value. But while at the same time, we also see some industry headwinds, like lower player spends with more competition. So how should we think about the medium-term growth for the online game ahead? And I have a follow-up question is for the live streaming e-commerce. Last year, we made very meaningful progress and have stepped up hiring and building of our team for live streaming e-commerce. Can management share with us some update about our current scale, the road map ahead and how we are differentiating with our peers?
Hi Kenneth, perhaps I'll answer the online game question. So you identified a number of potential factors that could affect our growth, including BanHao issuance, lower player spend and I think more competition. In reality, we don't think any of those are the key issues that we have been facing. We've received a decent number of BanHao certainly sufficient for our aspirations. Our games are generally much lower ARPU than the industry, and therefore, we haven't seen and we wouldn't expect to see lower player spend as an external macro factor. And then continued competition is sort of an inevitability in an industry that's still in a high growth, high returns industry. So we believe that the key challenge for us is just getting our own house in order. And we have three strategies that are underway now for getting our own house in order. One is revamping, changing the leadership for our existing games and we did that with Brawl Stars, and we've seen a very sharp upturn in Brawl Stars' revenue reaching new records and becoming the biggest Supercell game. We've done that. We've made changes with PUBG MOBILE, and that's seen a big upturn. And more recently, we've made changes with Peacekeeper Elite. So where we need to make changes, we're now making those changes. Secondly, we have a number of games that over the last two to three years have aggregated very substantial user bases. And now we're in the process of monetizing those games, and you can see that relatively clearly with Fight of the Golden Spatula, with Wild Rift, with Arena Breakout among others. And then thirdly, we have been focusing on bringing bigger budget games that iterate on prior successes to market and you'll see those coming through the rest of this year, including Dungeon & Fighter Mobile, where as a result of a very successful internal test, we've actually accelerated the launch date to the end of second quarter of this year over the next three months. And so as a result of the above, we believe that our game revenue would improve in the second quarter of this year onwards. And the extent of our success in those three strategies will determine the medium-term growth rate.
And in terms of the live streaming Video Accounts e-commerce, I think we have made very good progress in the course of 2023, but that's only the beginning of nurturing of this exciting opportunity. In terms of GMV in the course of 2023, that's grown a lot to more than 100 billion. But to put it in context, it's still very small compared to the size of Video Accounts. And it's also a fraction of Mini programs, e-commerce GMV. So in order for us to really capture the very big opportunity within this business, we have a number of strategies that's ongoing.
Number one, we want to really upgrade the management of the overall ecosystem, including improving the product quality control, improving the process to which we handle user complaints and user feedback. And overall, we want to improve the shopping experience for the customers. Second is actually through better category management. We actually want to work through each one of the high potential product category and make sure that we have high-quality merchants and attractive products for the customers. And that actually requires very meticulous work quite a bit of workforce addition and also have to be rolled out one by one. We also want to work on better tools for merchants and brands so that they can do business and look at their business analytics and help them to make pricing decisions better. So there's a whole set of merchant tools that we're going to be adding. And overall, we also want to market this overall platform and the availability of these products to the consumers, that's on WeChat and that's in using Video Accounts so that we can actually increase the awareness of a [ trend ] of a shopping experience within Video Accounts. And finally, we are looking to increase the integration between Video Accounts shopping experience and infrastructure and the Mini programs that are already operated at scale by a lot of merchants. And we believe by doing a combination of the above, we can continue to grow the GMV of our Video Accounts e-commerce in a healthy way. And it's very important for us to build a very solid foundation for this platform at this point in time so that we can actually share in a very long and a significant growth track for this business going forward.
Thank you. We will take the next question from William Packer from Exane BNP.
Firstly, domestic gaming growth weakened during the 2021, '22 rectification period. And then in last August, you talked to weaker Q2 trends, reflecting seasonality and less commercial content. You're again talking to a weak monetization of key games for Q4 and Q1. Should we think of these challenges as the new normal for Evergreen domestic games? Does this for a fact that these games are now ex-growth so you, therefore, need to rely on their releases? And then my follow-up question is regarding regulation. The market was somewhat alarmed in Q4 regarding new draft rules for the video games industry, which could curtail in-game monetization. Could you update us on latest developments there? When should we expect a new draft? How should we think about the potential impact on your business?
I will, so perhaps I'll start on your first question. And if you look at our commentary in Q2, what we reported in Q4 is actually sort of a consequence of the commentary in Q2, if you will. But as you may know, for our two biggest games, we have roughly -- we have a 9-month amortization period from gross receipts into reported revenue. And so we saw weak monetization, therefore, weak grossing receipts from Q2 onwards last year. And that impacts us most heavily in Q4 because in Q4, we lose the benefit of relatively strong grossing receipts from Q1. And as a result, that's why if you look at the reported revenue for Q4, it was down year-on-year because of the lagged effect of weak monetization in Q2 and Q3. But if you look at the grossing receipts, the actual cash inflows, it was slightly up year-on-year in Q4. So what we saw in Q2 is that the driver of what we saw in Q4 as opposed to being to sort of separate or contradictory phenomena. And in terms of whether our big games are ex growth, we clearly don't think that's the case. We're very active investors across the game industry. We can see that in big games with longevity with substantial user bases, enjoy -- way -- they experience upswings and downswings, but over the longer term, they're only becoming more powerful, whether you look at a Call of Duty or Ground Theft Auto or a Fortnite and we certainly believe that, that is the case in China at the [indiscernible] asset rather than a liability just as it is in the luxury goods industry I don't want to say but luxury goods brand with longevity is inferior to a newly launched luxury goods brand, and we can see it with our own games.
We can see that PUBG MOBILE is now rebounding strongly. We can see that Brawl Stars and also actually the entire Supercell portfolio of games is rebounding strongly. We expect a number of our other games to also see substantial rebounds. So again, because of the time lag between cash inflows versus reported revenue, that will show up in our P&L from the second quarter, but we are already experiencing improvements in cash inflow. So that's on the first question around where we are with games. And then maybe on the game regulation side...
Yes. On the regulation, we actually don't know when the new draft will be released or whether it will be released. But it's no longer our concern because one after the original draft was released, there's concern by the market, and I think the regulators have actually come out very explicitly in explaining that the purpose of the draft was actually to provide a healthy environment for growing the industry rather than constraining the industry. And two is we're actually very encouraged by the supportive measures that were unleashed after the initial concern was expressed by the market, including in the very beginning of this year, there is a single batch of domestic BanHao, which is more than 100, including there's an expedited approval of imported game license and also our flagship mobile game DnF Mobile has been approved in that batch. And also, if you just look at what's the focus of people's concern, right? It's about a high ARPU games, and that's really not relevant to us because our ARPU is actually on the very low end of the overall industry. So I think to be fair, it's no longer one of our concerns anymore.
Thank you, Martin. Next, we will take the question for Alicia Yap Citigroup.
Can you hear me? I have -- my main question is on the AI power functionality. So in addition to enhancing and powering the internal advertising targeting capability, what is your expectation of the AI power functionality to generate based on traction on revenue from the external cloud and business services customer near term? Or should we actually expect any near-term benefit more reflecting on the continued improvement on the advertiser ROI and also e-commerce conversion rate.
Second of very quick follow-up. And I understand the user profile for Mini Games is quite different from the mobile [ APP ] keen user, but just curious to see if there's any preference ship or cannibalization of the time spend from the [ APP ] games to the Mini Games that we also contribute to the slower growth of domestic game in the past few quarters.
Yes. In terms of the AI short-term benefits, I think financial benefits should be much more indexed towards the advertising side because if you think about the size of our advertising business as call it RMB 100 billion a year. And if you can just have a 10% increase, right, that's RMB 10 billion and mostly on profit, right? So that's the scale of the benefits on the advertising side and especially as we see continued growth of our advertising business and when we add in the Video Accounts e-commerce ecosystem, that just has a very long track of growth potential and also the low ad load right now within Video Accounts. But on the other hand, William if you look at the cloud and business services customers, then you are really facing a relatively nascent market. You still have to sell to these customers. And we spend a lot of time working with all the customers in different industries and trying to figure out what's the best way of leveraging AI for their business. And then you have to go through a long sales cycle. And then at the same time, it's competitive because your competitors will actually come in and say, "Oh, they can also provide a similar service." And despite we believe we have a superior technology and product, it's actually [ very cut-throat and your competitor may actually sort of come in and say they're going to cut prices, even though there's an inferior product. So all these things, all the low-margin, highly competitive and long sales cycle of the 2B business would actually come in to play in that side of the business. So when you compare the two sides of the equation, you can actually clearly see that ramping up advertising is actually going to be much more profitable from the short term. Of course, we'll continue to do both, right? And we believe that the value that we provide to our customers are not just measured in how much profit we make from them, but also in how much improvement that we make to their business over the long run. And we believe as China move into an economy, which is much more focused on productivity and as the cost of -- human cost actually sort of might keep increasing, right? So some of the dynamics of the U.S. market in having a more profitable business services business would actually come in, but that would take quite some time to realize.
And on your question about whether our Mini Games are cannibalizing time spent or revenue generation for our app-based games. We're very confident that our Mini Games are not a tribe with cannibals. They're sort of tribe of pioneers and explorers and developers of new territory. And I say that because from a time spent perspective, our app-based games have been performing fine, and you can see the increased time spent for games like Fight for the Golden Spatula, Arena Breakout while rephrase substantial. And we've disclosed previously that only less than half of the Mini Game MAU or also app base game MAU. When we look at it from a user spend perspective, there's an even starker illustration because only a teens percentage of the Mini Game paying users are also app-based game paying users and only a single-digit percentage of the app-based game paying users are also Mini Game paying users. So we don't believe that there's cannibalization taking place between Mini Games and app-based games.
Thank you. We will take the next question from Ronald Keung from Goldman Sachs.
I have two questions. One is we've read about the shareholder returns. So compared with just regular dividends, buybacks and we used to have some distribution in specie, how should we view 2024 and maybe in the medium term upside potential to a total annual kind of shareholder return, let's say, in dollar terms or in percentage of market cap, which one will we usually kind of assess more and how do we plan to reward shareholders maybe around the investment portfolio value? And then my second question is on Video Accounts e-commerce. Martin, you mentioned about the Video Accounts e-commerce looking -- combining with Mini Program e-commerce. Is it fair to say we are eventually building a more open platform in transactions, not forcing every transaction through our own kind of shop infrastructure because Mini Program is more like a platform. So that -- would that look more like Meta, which is like a Facebook style open platform, building that e-commerce system versus the very close system in the short form video platforms.
Hi Ronald, so on the shareholder return question, we assess the total return dynamically. Now for the dividends and the buyback those are more sort of problematic in nature versus the distributions somewhat more opportunistic in nature, but overall, with the intention of return very substantial share capital to shareholders during the course of this year. In terms of the role of the investment portfolio, then actually, over the last two years, the investment portfolio has returned substantially more capital to shareholders than it has absorbed. And even if you exclude the JD and then Meituan distributions, the investment portfolio has been self-funding. I mean, the new investments that we've made have been funded by divestments or dividends or distributions from what we already own in the investment portfolio. And looking at 2024, at this point in time, our expectation is that the investment portfolio will be, once again, self-funding and therefore, a source of cash rather than a use of cash.
In terms of the Video Accounts, e-commerce, I would say -- I think that's a good question Ronald. And we actually had a lot of discussion on that topic in the sense that what's the architecture of the e-commerce activities that should be happening on the platform, given we have Mini Program e-commerce, and that actually is a very significant platform already. And I think our view is that going forward, we have actually both open platform, close platform, and they serve actually different purposes. Open platform is along the line of Mini Programs. And these are actually much more suitable for brands, which actually are well recognized. They actually have a very large self-channel for promoting Mini Programs. For example, if they have a very large chain of off-line stores, they can actually ask their customers to add the Mini Programs and then shop and online. And at the same time, they need to have pretty strong brand recognition for the consumers to keep coming back to the Mini Programs. But the short coming of the Mini Program is that the merchants, it's very hard for them to get new customers online. They can only rely on their own channels. But even with that, the Mini Programs e-commerce platform has actually grown to a very large size. Now on the other hand, when we look at Video Accounts, live streaming platform at the new platform is actually a close platform in the sense that we actually want to put in much more active management of the ecosystem so that the shopping quality is actually very much better than an open platform, especially for merchants, which are not well known, right? Because if these are smaller merchants, white [ local ] merchants, then we want to make sure that the products actually exceed a certain level so that it would create a good experience for the users. And it also have the access to the Video Accounts traffic so that it can actually acquire new customers. Now over time, we're going to connect the open platform with the closed platform. We provide a curated connection so that the open platform can actually benefit from the traffic of the Video Accounts. While at the same time, the small merchants can actually also benefit from their private domain when they actually start selling on our platform. So when we curate the connection between the open platform Mini Programs with Video Account shops, then I think we can actually get the best of the both worlds and help different types of merchants to maximize their sales and maximize their exposure to consumers on the platform, while at the same time, making sure that our users actually has a great shopping experience on our platforms, either on the open platform and a closed platform.
The next question comes from Robin Zhu from Bernstein.
I guess a couple of questions, please. One on AI. I mean, there's been -- you guys have talked a lot about ads and FinTech and so on. Gaming is commonly thought to be one of these areas where generative AI could have quite a big impact potentially when it comes to game design production, AI in PCs and so on. There's different views on how much is hype and how much is reality, be curious where you stand on how quickly you want to move on some of these areas?
And then a follow-up again on gaming is I think a couple of quarters ago, you mentioned that there was a period of kind of slowdown in the productivity of AAA game development. Just wanted to get your thoughts on where you are on that. The aspiration to do kind of a new big title on the level of your top games every -- so often every few years, aspiration to do console and PC beyond just the mobile ecosystem.
I think in terms of the application of AI to games, then like many things, the boundary between hype and reality is a function of how far forward one is willing to look and we're willing to look very far forward. And all of the areas you mentioned, such as AI-powered in PCs, such as AI accelerated graphical content generation, graphical asset generation are areas that over for years to come, not over the months to come will benefit meaningfully from the deployment of AI. And I think it's also fair to say that the game industry has always been a mixture of, on the one hand, innovation around gamplay techniques. And on the other hand, deployment of enhanced content -- renewed content into existing gameplay. And it's reasonable to believe that AI will be most beneficial for the second of those activities. But one will continue to require very talented individuals and teams due to focus on the first of those opportunities, which is the creation of innovative game play. Secondly, in terms of productivity related to AAA game development, then I think that for our international studios, there was some bumps due to COVID in the current game development cycle and those are now largely behind us. And so we believe that in a productivity, it's now on a more normal footing. And looking forward, we have a number of what we expect to be substantial hits in the pipeline, both domestically and internationally. And we're doing some things the same as before and some things differently. On the different lease side, we're focusing on fewer bigger budget gains. Typically, we're seeking to make the biggest bets around games to either iterate on a successful IP such as the Honour of Kings fighting game around the Honour of Kings IP or games that are iterating around proven gameplay success within a niche and taking those to a more mass market. And so a stereotypical example would be moving the dark salts combat in Elden ring. In our case, I mentioned earlier, we have the learnings from game such as [indiscernible] that will be updated with state-of-the-art graphics and technology for game such as One Piece. In addition, on the marketing front, we now cooperate with a range of platforms, including [ Dolan ] both in terms of the user-generated content marketing as well as in the paid advertising marketing. So overall, we think those enhance our position, those changes enhance our position in a AAA game releases, and we look forward to the results.
Thank you. Next question from Charlene Liu from HSBC. Yes, we can hear you.
I have two questions. First is on FinTech. Recently, Tenpay has lifted registered capital. I would like to find out a little bit more on how that may be used on consumer loans or perhaps overseas business? And how would that affect Tencent's balance sheet and whether the management can update us on the growth strategy on FinTech segment in 2024. So that's the first one. The second one would be related to AI developments. Obviously, we have seen developments in AI created new revenue streams and cost optimization for overseas internet platform the management has already discussed where some of the monetization opportunities lie. Can we better understand benefits which we have been able to reap on the cost front from AI adoption and how much more upside we can expect to see from here? And how long will it take for Tencent to realize these gains?
In terms of FinTech side, so Tenpay has been approved to increase the registered capital substantially and the money is actually going to be moving from Tencent balance sheet to Tampa balance sheet. So since Tenpay is actually a consolidated entity, so it's not going to change our consolidated balance sheet. And I would say this capital increase is essentially a recognition of the increased size of Tenpay's business and also a sign of approval for future development of the company. So we view it very positively. Now in terms of our FinTech strategy. I think the FinTech strategy centered around the payment platform. We will continue to build out our payment platform and to improve its basic services, reliability as a platform that would support economic activities and consumption for the economy. We continue to roll out new functionalities and better functionalities, including improving the Mini Programs payment ecosystem so that we not only provide a payment service at the spot for the merchants, right? We actually also help to establish a link between the merchants and the consumers so that in the future, the more consumers can further interact maybe the consumers can actually do repeat purchase to merchants and can do future engagement with the consumers, and it can also provide after sales service. So I think there's a lot that we can do to improve the overall payment experience. We'll provide more tools to SMEs so that SMEs can increasingly digitize their business and to gain efficiency. We've rolled out new payment technologies like Palm payment, for example, in order to increase the convenience of the payment service. And we'll also improve the payment experience for foreigners in China, right, so that it can help to foster an even more vibrant tourism industry in China. So without -- if we continue to do that, right, the payment platform will continue to grow its economy to grow with consumption and grow with the cashless penetration in China. So on top of that, we also felt that we can actually roll out value-added financial information services, such as Wealth Management, such as loan service, such as installment service that I actually described in the prepared remarks. And these are very high margin, high value-added services that we can offer alongside with the license to financial institutions. Overall, I think the philosophy for us to grow in the FinTech business is that one is we want to be fully compliant. Two is that we want to make sure that we manage risk in an absolute high-quality manner. We want to create more value than capturing value for merchants, for consumers. And at the same time, we want to work on constructive relationships with licensed financial institutions. And you can keep on doing all of these, right, then the FinTech business will continue to thrive.
On the AI question and the cost benefit. Then as you would expect, we are increasingly going to be deploying AI, including generative AI in areas such as accelerating the creation of animated content, which is a big business for Tencent Video and a profitable business for Tencent Video in terms of game content, as we discussed earlier, potentially in terms of creating code in general. But the benefit will show up, not in the substantial cost reductions. It will show up in more rapid content creation, and therefore, more rapid monetization and revenue generation. And not to repeat the same point too many times, but the immediate benefit and the biggest benefit is really around the advertising revenue uplift. Martin gave the example of if we can improve click-through rates by 10%, then that's CNY 10 billion in incremental revenue, probably CNY 8 billion in incremental gross operating profit. In reality, you should view 10% as being in the nature of a floor, not a ceiling. Facebook has seen a substantially bigger improvements in click-through rates for some of our most important inventories, we've actually seen our click-through rates increase by 100% in the past 18 months. So when we're thinking about where the financial benefits of AI, then it's advertising, click-through rates and therefore, advertisement revenue first and foremost, and that's a very high flow-through business for us.
Thank you. We will take the next question fromAlex C. Yao from JPMorgan.
Thank you management for taking my question. My first question is regarding the recent partnership with Douyin, which we believe had quite a bit ripple effect to the whole game, live streaming and gaming industry. What are the changes have you seen this partnership has brought to us, so that's the first one. And then the second one is on the path of Video Account monetization. Clearly, I think the industry incumbent has demonstrated the short video monetization capability across advertising, e-commerce and local services. What are your thoughts and strategy on Video Account making inroads into local services?
Hi Alex, so maybe I'll answer the first question on marketing our games through additional channels, including Douyin. So as I mentioned, with regard to Robin's question, we are doing that. We're providing more content that the users then virally share on short video platforms, including Video Accounts, Douyin and so forth. And we're also investing in advertising our games more actively on short video services. So that's on the game marketing side.
Well, in terms of live streaming e-commerce, I think we have discussed it in details. And I think it's very, very synergistic with the Video Accounts with live streaming as well as with the advertising that sits within Video Accounts. And if we can actually have a close loop in terms of knowing who are the merchants, what are the products that were sold, what the user experience after the sales, then the ability for us to improve the conversion rate on a full chain basis is actually much stronger. So that's why it's very important for us to build out the e-commerce infrastructure and ecosystem in anticipation of supporting a very long and significant growth on our Video Accounts advertising business. Now on the other hand, I think the local service is actually not something that we are focused on at this point in time. Local services from our perspective is actually much more of a provide provision of content. So along that line, we actually would consider working with our partner, some other partners for example, Meituan, who have been our close partner for a long time to actually help them generate the content and we actually help them to promote the local services.
Thank you. In the interest of time, we will take the last question from James Lee from Mizuho.
My question is on cloud and AI. On the cloud side, I think a competitor recently announced a pretty large scale price discount for their cloud offering. So just curious what are you seeing in terms of enterprise demand and probably most importantly, price elasticity. Now on AI, how should we think about your positioning in large language model? Just curious like what stage are you in now? Can the model handle multiple modalities later input and output? And just curious on position at this point.
Maybe I'll start with cloud. So the -- for better or worse, the cloud industry is an industry where input prices are always falling. And so naturally, the cloud service providers are always reducing the costs they pass on to their customers. So price cuts have always existed and will always be the trend within the cloud services industry for as long as Moore's Law continues to drive down the cost of compute and, we don't see a dramatic change in the competitive situation just as we didn't see a dramatic change when there was a round of high profile, but no impact to price cuts for SMBs a year ago. What does matter is, first of all, being cost competitive and in order to be cost competitive, one needs scale, which several companies in China are at similar scale, including us, and one needs supply chain optimization. And we've been very active on supply chain optimization in the last several quarters. And as we optimize the supply chain, we bring down our input costs faster and we can cut our output costs further as a result. And then the second factor that matters is the ability to upsell from infrastructure into platforms such as our security platform, our real-time communications platform, our database platform as well as upsell into Software as a Service, including Tencent Meeting and WeCom and other enterprise SaaS products we've spoken about. So that's really where we're focused. It's on delivering more value to our cloud customers by continually optimizing supply chain and by continually upgrading the depth and complexity of services that we can provide.
In terms of our Hunyuan model, I think we have actually about it quite a bit in our prepared remarks. We believe Hunyuan actually is now performing at the top tier in Chinese language among LLMs in China and worldwide. And we -- this belief is supported by the very comprehensive testing that we have done internally. And from a technology perspective, this is a model that is leveraging the mixture of experts architecture. That's already scaled up to the 1 trillion perimeter mark. And also, it's exhibiting a very good performance in multiturn conversations, logical inference and numerical reasoning, some of the toughest areas to conquer in large language models. And at this point in time, we are actually very focused on the text technology because this is actually the fundamentals of the model. And from text, we have built out text to picture from text, we build out text to video capabilities. And the next important evolution is actually what we have seen with Sora, right? Sora has done an incredible job with text to a long video, and we -- this is something which we would be developing in the next turn. When we continue to improve the text fundamental capability of Hunyuan, at the same time, we'll be developing the text to video capability because we actually think that this is actually very relevant to our core business, which is a content-driven business in the area of short video, long video and games. And that's the area in which we'll be developing and moving our Hunyuan into. So if you look into the future, we felt Hunyuan continue to be stronger and stronger in the fundamental model capability and at the same time, you'll be starting to develop better and better text to multimedia capability.
Thank you. We are now ending the webinar. Thank you all for joining our results today. If you wish to check out our press release and our financial information, please visit the IR section of our company website at www.tencent.com. The replay of this webinar will also be available shortly. Thank you and see you next quarter.