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Executives

Catherine Chan - Investor Relations

Pony Ma - Chairman and CEO

Martin Lau - President

James Mitchell - Chief Strategy Officer

John Lo - Chief Financial Officer

Analysts

Chao Wang - Nomura

Eddie Leung - Merrill Lynch

Dick Wei - Credit Suisse

Timothy Chan - Morgan Stanley

Alex Yao - JPMorgan Chase Bank

Cynthia Meng - Jefferies

Chi Tsang - HSBC

Varun Ahuja - JPMorgan Hong Kong

Alicia Yap - Barclays

Elinor Leung - CLSA

Thomas Chong - BOCI

Tencent Holdings Ltd. (OTCPK:TCEHY) Q4 2013 Results Earnings Conference Call March 19, 2014 8:00 AM ET

Operator

Thank you for standing by. And welcome to the Tencent Holdings Limited 2013 Fourth Quarter and Annual Results Announcement Conference Call. At this time all the participants are in a listen-only mode. There will be a presentation followed by the question-and-answer session. (Operator Instructions)

I must advice you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan.

Catherine Chan

Thank you very much, Operator. Good evening. Welcome to our annual results conference call for 2013. I am Catherine Chan from the IR team of Tencent. Before we start the presentation, I would like to remind you that it includes forward-looking statements which are underlined by a number of risk and uncertainties and may not be realized in 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-GAAP financial measures that should be considered in addition to but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and our non-GAAP measures, please refer to our disclosure documents downloadable on www.tencent.com/ir.

Let me introduce the management team on the call tonight. We have our Chairman and CEO, Pony Ma; President, Martin Lau; Chief Strategy Officer, James Mitchell; and Chief Financial Officer, John Lo. Pony will kick off with a short overview, Martin will discuss strategic highlights, James will speak to business review and John will go through the financials before we take your questions.

I’ll turn the call over to Pony Ma.

Pony Ma

Yeah. Thank you. Good evening. Thank you for joining us. During 2013 we witness rapid penetration of smart phones in China, bringing us great opportunity to further deepen engagement with our users, when they are connected anywhere, anytime.

Now let me share with you our business achievements in 2013. In social, we have solidified our leadership in China and established our presence in international markets via WeChat. Moreover, we unlocked mobile monetization through games.

In online games we are the largest PC games platform hopefully, with the six games each surpassing 1 million PCU, leveraging our mobile social leadership and industry know-how we quickly build our mobile games platform to become the largest in China, with six games each surpassing 10 million DAU.

In online advertising we are the largest display advertising platform in China by revenue and we are well-positioned in performance advertising and new mobile advertising opportunities.

Last September, we entered into a strategic partnership with Sogou to expand our presence in search. In eCommerce we more than doubled principal GMV and regional expansion. Moving the way our recent strategic partnership with JD.com.

In 2014 we will continue to invest in our people, platforms and partnerships. We are stepping investment in digital content, mobile utilities and online payment, and exploring new opportunities in O2O and internet finance.

Turning to financial highlights, I will quickly run through the high-end number for you. For the fourth quarter of 2013, total revenue was RMB17 billion, up 40% year-on-year, 9% quarter-on-quarter. Value added services revenue was RMB12 billion, up 27% year-on-year and 3% quarter-on-quarter.

Online advertising revenue was RMB1.5 billion, up 58% year-on-year and 8% quarter-on-quarter. eCommerce transactions revenue was RMB3.3 billion, up 97% year-on-year and 41% quarter-on-quarter.

Non-GAAP operating profit was RMB5.3 billion, up 23% year-on-year and stable quarter-on-quarter. Non-GAAP net profit was RMB4.5 billion, up 11% year-on-year and 3% quarter-on-quarter.

For the full year of 2013, total revenue was RMB60 billion, up 38% from 2012. VAS revenue was RMB45 billion, up 26% year-on-year. Online advertising revenue was RMB5 billion, up 49% year-on-year. eCommerce transactions revenue was RMB9.8 billion, up 121% year-on-year. Non-GAAP operating profit was RMB21 billion, up 22% year-on-year. Non-GAAP net profit was RMB17 billion, up 19% year-on-year.

Moving on to our online platform. Total MAU for QQ was 808 million within which smart devices MAU was 426 million, up 74% year-on-year. After two years of hard work, QQ has transitionally expanded successfully into mobile first communications platform.

We think WeChat has a combined MAU of 355 million, up 121% year-on-year. Our user base expanded in China and international markets and user engagement determine following the launch of games several months ago.

For Qzone total MAU was $625 million which -- within which smart devices was MAU 416 million, up 63% year-on-year. Photo shooting using smart phones and photo sharing on Qzone is popular chat for the young and active in China.

Our online games platform further extends its leadership from PC client games to smart phones games. For our media platform we strengthening our lead in news -- by integrating news feed we applied in with the Mobile QQ and Weixin and by enhancing our latest app Tencent News.

We further engaged our Microblog service by integrating with our market leading platform video sharing app Weishi. Tencent Microblog has 119 million MAU. For our utility services, we continue to strengthen our presence in mobile security solution and mobile browser.

I will now pass on to Martin to discuss strategic highlights.

Martin Lau

Thank you, Pony, and hello, everybody. First of all, I would like to talk about our social platforms. Our social platforms are the cornerstones of success for Tencent. After two years of hard work we have successfully transitioned QQ from a PC based to a mobile first communication platform in China. It is now fully integrated with Qzone to form a unified communication and social networking platform.

On the other hand, Weixin is a mobile centric creation that switch across China since January 11th and its now starting also establishing global presence through its sister product WeChat. We now have 355 million MAU for Weixin and WeChat on the combined basis globally. Weixin offers an integrated sharing service through its in apt moments functionality.

Now QQ and Weixin are differentiated in the following ways. Firstly, QQ serves relatively young and entertainment-oriented users whereas Weixin appeals more to live caller users.

Secondly, QQ's business model builds on subscriptions through virtual services and privileges and games, whereas in addition to games, Weixin also explore offline to online our O2O opportunities in the longer run.

Thirdly, QQ connect users with an ecosystem of people and content through groups and open platform, whereas Weixin connects users with content and service providers through official accounts.

QQ and Weixin are also highly synergistic, as they cover the broadest spectrum of user segment in China and as they serve as a synchronized publishing and distribution platform for our content partners such as game developers. In addition, QQ and Weixin can each evolve quickly to response at the fast changing user preferences and needs thus increasing our overall resilience in the market.

Our social platforms are also designed to facilitate development of rich ecosystem of services, catering to diversified needs of our users. By integrating services of user’s choice, our social platform achieved higher user stickiness, while creating potential monetization opportunities.

The ecosystem of services in which most of them after (indiscernible) services would include games and digital content in which we have developed significant immigration expertise on PC. It also includes O2O and eCommerce services which are more ceded through the mobile platform and in which we are staring to build expertise.

Now how do it facilitate the growth of this mobile ecosystem, we do have a whole series of infrastructure features to do that. For example, our locking status helps users to access services of their choice easily. Our social graph helps word of mouth to propagate. Our payment system helps our partners to get paid. Our targeted marketing system helps to promotion of these services. And our CRM facility, the functionality helps them to stay in touch with our users. We believe these infrastructural features make our social platforms uniquely efficient to build the rich and buy those mobile intelligences.

Recently we have conducted several successful experiment in the area of O2O leveraging the unique advantages I mentioned earlier. This includes, first, Dididache, which is a taxi booking services. We ran a promotional campaign jointly with Didi that provide extensive uses and rebate with taxi drivers when users pay their taxi fair we receive payment. During the first month promotion, our users paid for a total of 21 in the last 58 cities in China.

Second, Tianhong, which distributes money market funds managed by leading asset management firms, since launch in late January, the Tianhong has accumulated AUM of over RMB60 billion. We gradually evolved Tianhong to become a platform that distributes a broader selection of high-quality wealth management products overtime.

Thirdly, Red Packets which enables users to distribute and collect lucky from their social graph during the Chinese New Year. Our users collected over 40 million Red Packets totaling approximately RMB400 million in the course of nine days during the Chinese New Year.

In addition to these O2O experiments, we have also strengthened our O2O presence through a significant investment in Dianping. In February, we invest to acquire approximately 20% of Dianping, which is a leading local life information and transaction platform.

Our partnership is synergistic in the following way. We provide our users with Dianping’s high-quality local merchant reviews and local views. We’ll help Dianping to increase user stickiness in Tier 1 and Tier 2 markets and also helped it to deepen its presence in other Tier 3, Tier 4 cities. We enabled Dianping merchants to manage customer relationships in their Official Accounts and complete transactions using Weixin Payment.

That also strengthened our presence in physical goods in commerce through partnership. In early March, we entered into a strategic partnership with JD.com, the largest managed physical goods eCom platform in China. We obtained approximately 15% new shares in JD.com and we’re subscribing additional 5% interest at the IPO.

Due to this transaction, JD has become a preferred partner in physical goods businesses. We’re transferring our marketplace in logistics personnel to JD to capture scale and geographic synergies. Immediately after the transaction, JD.com holds a 9.9% interest in Weixin and we expect JD to eventually exercise the co-option to acquire the remaining interests of Weixin.

We’ll support JD.com to grow by providing level 1 access planes in Weixin and Mobile QQ as well as additional traffic in advertising support. Leveraging JD.com’s enriched product selection, nationwide logistics network and after sales statistics, we can enhance end-to-end shopping experiences for our users.

But JD.com is one of the multiple transactions that we have done over the past six months in which we built strategic relationships with best-in-class vertical players at both investor as well as operations level. And the goal of these transactions are to improve user experiences for our users as well as unlocking business synergies.

Now, we invite James to talk about business review.

James Mitchell

Thank you, Martin and good morning everyone. During the fourth quarter, we achieved revenue growth of 48% year-on-year. Online games contributed 50% to our revenue, social networks 20%, eCommerce transaction 20% and advertising 9%. Excluding eCommerce transactions, our revenue grew 30% year-on-year in the fourth quarter.

For the full year, total revenue grew 38% year-on-year and excluding eCommerce transactions, total revenue grew 28% versus 2012, indicating we experienced slight revenue acceleration to the fourth quarter versus full year.

Starting its value added services, segment revenue was RMB12 billion for the fourth quarter, up 27% year-on-year and 3% quarter-on-quarter. Our online game revenue was RMB8.5 billion, up 35% year-on-year and 1% quarter-on-quarter. Monetization of our popular games and expanded pattern user base of new games and contributions from smart phone games drove the year-on-year revenue growth.

Sequentially, our game revenue was flat and some of our older titled slowed down partly due to seasonality which was offset by contributions for new games in smart phone games. Our social network’s revenue was RMB3.5 billion, up 11% year-on-year and 8% quarter-on-quarter. Drivers of the growth were smart phone games and items sales from open platforms. For the full year, VAS revenue was RMB45 billion, up 26%.

Taking a closer look at social network, we solidified our social leadership, deepened user engagement and unlocked mobile monetization during 2013. Obvious resort of our initiatives to enhance the QQ and Qzone mobile experiences, uses of smart phones and tablets grew to over 50% of the total QQ and Qzone user base.

During the course, we added voice calling functionality to Mobile QQ. Daily photo uploads from smart phone’s Qzone tripled year-on-year. Our Weixin and WeChat products expanded their user base globally. As Martin discussed, we’re building out (indiscernible) systems supported by Weixin Payment in China leveraging our user base in Weixin Network.

For WeChat, we’ll focus on increasing user engagement in key markets for targeted marketing and other campaigns. In terms of monetization, we recognized the full quarter contribution from the games on Mobile QQ and Weixin. These games generated total RMB 600 million in revenue which we share between our social network and online game reporting segments. Our subscription products continue to experience revenue pressure due to users shifting to smart phones.

Moving onto PC client games, we sustained clear leadership in the category leveraging our user behavior and site’s segmentation strategy and operational expertise. For advanced casual games, our combined PCU for the quarter was RMB17.1 million, up 30% year-on-year and our combined ACU was RMB6 million, up 36% year-on-year.

Measured by peak concurrent user, we ranked #1 in multiple game categories including first-person shooter, music, racing and battle arena games. League of Legends is now arguably the world’s most popular online game with 7.5 million peak concurrent users globally.

For massive multi-player online games, combined PCU for the quarter was 5.6 million, up 40% year-on-year and combined ACU was 2.5 million, up 19% year-on-year. Our recently released licensed world playing game, Blade and Soul is the first new massive multi-player online game surpassed million peak concurrent users in China since 2009.

Smart phone games represents new growth opportunity for us. Since the launch of the game centers on mobile QQ and Weixin last August that broadens our game user base, deepened game user engagement and widen our selection. Currently we have over 100 million unique daily active users playing games on mobile QQ and Weixin and six of these games, each exceeded 10 million daily active users.

We’ve redesigned our app store, myapp.com or Ying Yong Bao into an open platform and distribution held for long-tail games. Our peak daily up/downloads quadrupled over the last 12 months, reaching 64 million daily downloads earlier this year.

Turning to online advertising. Segment revenue was RMB1.5 billion, up 58% year-on-year and up 8% quarter-on-quarter. As you may recall, we deconsolidated the search revenue in mid September following the merger of our search business at Sogou. Executing search, our advertising revenue grew 82% year-on-year and 15% quarter-on-quarter, within which our brand advertising revenue was RMB900 million, up 65% year-on-year and 12% quarter-on-quarter, driven by increases in impression volume and pricing on our video platform in quarter.

Our performance advertising revenue was RMB600 million, up 118% year-on-year and up 21% quarter-on-quarter. For the full year, advertising revenue was RMB5 billion, up 49% year-on-year.

Digging into brand advertising, our top five advertising categories included online services, ultimate deals, food and beverage, consumer electronics and real estate. Our video brand advertising revenue more than doubled year-on-year as we increased pre-rollouts and achieved better sales volumes.

For mobile brand advertising, we developed new ad formats that we believe will not impact user experience. For example, we’re experimenting (indiscernible) page in Tencent News app and in the Weixin news plugin and pre-rollouts for our Tencent Video app.

Looking to 2014, we’ll invest aggressively in content to build market share for our video platform. For example, we’ve got the exclusive rights to broadcast Voice of China Season 3.

The performance display advertising, our Guangdong platform saw a mix shift bigger advertisers during the fourth quarter due to eCommerce promotions which enhance the cost of revenue per click.

In terms of mobile performance advertising, we are currently testing news feed outs on Mobile Qzone and testing ads at the bottom of the page on Weixin Official Accounts. Finally, our eCommerce business segment revenue was RMB3.3 billion, up 97% year-on-year and 41% quarter-on-quarter.

The principal components to the strong year-on-year growth across product categories and increased sales sequentially due to the promotional periods in November and December. Our agency revenue commission fees increased due to higher transaction volume. For the full year, eCommerce transaction revenue was RMB9.8 billion, up 121%.

And with that, I’ll hand over to John.

John Lo

Thanks James. Hello everybody. For the fourth quarter of 2013, our total revenue was RMB17 billion, up 40% year-on-year and 9% quarter-on-quarter. Operating product was RMB4.8 billion RMB, up 28% year-on-year and down 1% quarter-on-quarter.

Net other gains was RMB405 million mainly comprised of disposal gains for our investor companies and government subsidies. Income tax expenses was RMB808 million, down 15% quarter-on-quarter, due to a decrease in withholding tax recognition and tax reversal resulted from the qualification of tax exemption of a subsidiary.

Effective tax rate for the quarter was 17%. Net profit attributable to shareholders was RMB3.9 billion, up 13% year-on-year and 1% quarter-on-quarter. For the full year of 2013, total revenue was RMB60.4 billion, an increase of 38% from 2012. Operating profit was RMB19.2 billion, an increase of 24% year-on-year. Profit attributable to shareholders was RMB15.5 billion, an increase of 22% year-on-year.

On non-GAAP basis, operating profit for the fourth quarter was RMB5.3 billion, up 23% year-on-year and [6%] (ph) quarter-on-quarter. Net profit attributable to shareholders was RMB4.5 billion, up 11% year-on-year and 3% quarter-on-quarter. Operating margin was 31% down 5 percentage points year-on-year and 3 percentage points quarter-on-quarter. Net margin was about 27% down 7 percentage points year-on-year and 1 percentage point quarter-on-quarter.

For the full year of 2013, non-GAAP operating profit was RMB20.8 billion, up 22% year-on-year. Non-GAAP operating margin was 34%, down 5 percentage points from last year. Non-GAAP profit attributable to shareholders was RMB17.1 billion, up 19% year-on-year. Non-GAAP net margin was 29%, down 4 percentage points from last year.

Let’s turn to segment gross margin. Gross margin for VAS was 67%, up 1 percentage point year-on-year or up 2 percentage points quarter-on-quarter. This sequential increase was mainly due to higher portion of revenue generated from in-house PC client games and full quarter contribution from Weixin and Mobile QQ games, which were mainly developed in-house.

Gross margin for online advertising was 32%, down 17 percentage points year-on-year or down 20 percentage points quarter-on-quarter. The sequential decrease was mainly due to accelerated amortization in quarter four for online video content cost to reflect change in user viewing patterns. Excluding the impact of the accelerated amortization of online video content cost, the gross margin for online advertising would have been 54%.

Gross margin for eCommerce transactions was 5%, down 4 percentage points year-on-year or down 1% percentage points quarter-on-quarter. The sequential decrease mainly reflected the impact of promotional sales of November and December.

For the full year of 2013, gross margin ratios for IVAS was stable at 66%. Online advertising declined from 49% to 45%, mainly due to accelerated amortization of video content costs and eCommerce increased one percentage points from 5% to 6%.

Moving on to operating expenses, selling and marketing expenses were RMB2 billion, up 86% year-on-year and 39% sequentially. Both sequentially and annual increase were due to eCommerce promotion in the quarter, increase in marketing expenses for PC and smart phone games, media platforms and WeChat in international markets.

As a percentage of revenue, selling and marketing expenses increased to 12% from 9% in the fourth quarter last year. G&A expenses was RMB2.8 billion, up 30% year-on-year and 6% sequentially. The year-on-year change mainly reflected increase in R&D expenses and staff force. As a percentage of revenues, G&A expenses decreased to 16% from 17% in the fourth quarter last year.

Included under G&A, R&D expenses was RMB1.3 billion, up 21% year-on-year or down 4% sequentially. Sequentially, R&D expenses decreased 4%, as we chewed up related staff force. R&D expenses represented 8% of quarterly revenue. On a full year basis, selling and marketing expenses was RMB5.7 billion, up 90% over 2012 and represented 9% of annual revenue.

G&A expenses was RMB10 billion, up 29% over 2012 and represented 17% of any revenue. R&D expenses was RMB5.1 billion, up 22% over 2012 and represented 8% of any revenue. As at quarter end, we had about 27,500 employees, which is up 14% year-on-year or 2% sequentially. Year-on-year increase was mainly due to headcount increase in eCommerce business.

Let’s look at margin ratios for the fourth quarter. Gross margin was 51.7%. The year-on-year decline of 4.9% was due to increased contribution from eCommerce revenue this year and accelerated amortization of video content costs. Non-GAAP operating margin was 31.4%, down 4.1% year-on-year or 2.9% quarter-on-quarter.

Non-GAAP net margin was 26.8%, down 6.9% year-on-year or 1.6% Q-on-Q. The year-on-year decrease of 6.9 percentage points were mainly due to operating margin decline and lower tax reversal for subsidiaries. During the fourth quarter, we did not buyback any shares.

For the full year, we repurchased a total of 6.6 million shares for approximately HKD1.6 billion. The total number of shares outstanding at year end was 1.867. For 2013, basic EPS was up 22% year-on-year to RMB8.464 and diluted EPS was up 21% year-on-year to RMB8.298.

Non-GAAP basic EPS was RMB9.316 and diluted EPS was RMB9.134, both increased by 19% from last year. Subject to the approval of shareholders at the Annual General Meeting to be held on 14th of May, we are proposing an annual dividend of HKD1.2 per share. This is 28% above last year’s dividend and the payout ratio is stable at 11%.

The CapEx for the quarter was RMB1.7 billion, down 6% year-on-year or up 4% quarter-on-quarter. Operating CapEx was RMB916 million, up 55% year-on-year or down 7% quarter-on-quarter. The operating CapEx was RMB763 million, down 36% year-on-year or up 20% quarter-on-quarter.

Free cash flow reached RMB5.2 billion, up 20% year-on-year and 26% quarter-on-quarter. Our net cash position at year end remains strong at RMB36.2 billion, up 32% year-on-year and 5% quarter-on-quarter.

Now, I will walk you through the financial impact relating to the recent two investments. We will use equity accounting and treat Dianping and JD.com as associate companies starting from first Q 2014. Our investment in Dianping, we will capture our share of net income or losses in P&L and recognize our equity interest and balance sheet.

For investment in JD.com, we will consolidate revenues and costs for our physical goods marketplace businesses and continue to consolidate revenues and costs from our principal business after disposal of 9.9% interest in issue. We will book disposal gain of RMB1.9 billion of under other gains or losses and capture our share of [Jingdong] (ph) income or losses under share profit program or loss from associates. We expect to recognize income arising from services provided our partnership agreement and also encouraged channel costs on JDC revenue distributed through [Jingdong] (ph).

For the balance sheet, we will recognize our equity holding and interest in associates. For the cash flow statement, there will be an outflow of US$215 million at closing and further cash flow relating to our subscription of jingling partnerships.

Last but not least, we are proposing for shareholders approval one to five shares split to facilitate ownership and trading of small investors such as our employees and retail investors. We will keep hundred shares unchanged. This share split will be effective on 15th of May 2014 subject to approvals by shareholders and the stock exchange of Hong Kong. The final dividend for 2013 after shares split will be RMB0.24 per share and payable on 30th of May 2014.

This concludes our presentation. Thank you.

Catherine Chan

Thank you, John. Operator, shall we take the first question, please?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Your first question comes from Chao Wang from Nomura. Please ask the question.

Chao Wang - Nomura

Hi. Good evening. Thanks for taking my questions. My question is just regarding mobile games. So you guided RMB600 million revenue for mobile games, just wanted to double-check whether it’s fully (indiscernible) improvements going on or is the shares gains and also just from the game center on the Mobile QQ and Weixin. It also includes the leverage for mobile game for feature phones and as a result we assume that feature phone even decline and main driver is position into the smart phones games? Thank you.

Martin Lau

In respect of the figure that we have disclosed, it’s RMB600 million. That income bought on both online games and our social networks, because it’s part of the -- such as the pattern and part of the gaming side. And it does not include the legacy type of mobile games those that are not on the smart phones.

Chao Wang - Nomura

Thank you, Lau. Actually, I have a quick follow-up on the revenue connecting of the mobile games. Is this also based on amortization approaching you are having and what is the decline amortization period? How does that if you compare to our PC games? Thank you.

Martin Lau

Actually in relation to platform games, they will be deferral of revenue. However, for, most users, they return to charge it immediately or within a timely period of two weeks or a month. So, the deferred revenue would not be at the same proportion as you know with the PC games.

Chao Wang - Nomura

Thank you very much.

Catherine Chan

Next question, please?

Operator

Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask the question.

Eddie Leung - Merrill Lynch

Hey. Good evening. Thank you for taking my questions. I’m just wondering on the O2O strategy. So it probably seems like you guys relying more on process. Do you anticipate going forward you need to perhaps set up a direct sales force or a team of business development peoples to take into a national perhaps your local advertising opportunities? So this is my first question. And then just also on housekeeping, I’m wondering if you could share with us the number of official accounts of Weixin as well as the ARPU trend of your different types of games? Thanks.

Martin Lau

In terms of O2O initiative, I think we approach it, first of all from a platform perspective. We do want to provide any merchant or any sort of individual partner. The basic ability to be involved in the Weixin platforms. So what we provide is official accounts and then sort of within the official accounts, we are going to continue to evolve different functionalities for the different types of industries that the O2O merchants is in.

We will offer also Weixin payments so that the new partner can actually get paid and we are also going to include additional features for at least merchants to be able to promote themselves such as Guan Dian Tong target as their marketing system. So all these features will be open to whoever, who wants to sort of be involved in the O2O overall ecosystem.

Now, that’s the basic infrastructure. Now, in addition to that, we do want to target this in verticals in the process of turning these merchants or these individual companies into a participant. So, we do rely on certain partners who have already built a pretty good ecosystem of such vertical industries. For example, Dididache who has got a very big crowd of taxi drivers, for example, the MTN who already connects with hundreds or thousands and millions of merchants and local new restaurants and also to different service providers.

So, I think partnership is important part of the strategy. At the same time over time, we would look at the different verticals and depending on what will be the most effective way of marketing to these new merchants, these vertical merchants will decide whether using partnership is a better way or using instead of the self help way for people to sign up, or having direct sales force to cover these merchants, sometimes for larger merchants, right. Like certain retailers, we do have a pretty targeted group of people to cover them on an individual basis. So that we have more custom made solution for them.

John Lo

In relation to the games ARPU for MMOG, it will fall within RMB140 to RMB300, that’s a quarterly figure and for Advanced Casual Games, it falls between RMB80 to RMB190. I would like to give you another figure in relation to smart phone games. If we viewe the whole portfolio as one game, we are not talking about one particular game within the smart phone platform, we are talking about the portfolio of games. If we view that as a single game, the ARPU will fall within RMB60 to RMB70 per quarter.

Martin Lau

So in terms of official accounts, we now have more than RMB2 million official accounts within the Weixin ecosystem.

Eddie Leung - Merrill Lynch

Thank you. Very helpful, Martin and John. Thanks.

Catherine Chan

Thank you for your question. Operator, next question, please?

Operator

Next question comes from the line of Dick Wei from Credit Suisse. Please ask the question.

Dick Wei - Credit Suisse

Hi. Thank you for taking my questions. I have a question on the WeChat mobile related to eCommerce. I wonder if there is any progress you can share as well as how are the social foundations or how does that helps with the convergence, anything you can share? Thank you.

Martin Lau

So, Dick, you want to -- I don’t quite get your question, sorry? So can you…

Dick Wei - Credit Suisse

My question is about the mobile commerce right [before secured] (ph) physical goods went, what kind of -- maybe what kind of conversions we’re seeing or what kind of traffic are we seeing from any of the retail platform and any of these maybe call dictate analysis that can help to improve the conversion compare to other platforms in the industry?

Pony Ma

I think right now it’s sort of way too early to talk about this. From a physical goods perspective, we just experimented with one entry point with limited product selections. And we have also just started to do some -- extend our Guan Dian Tong into some of the official accounts on experimental basis right. So I think it will be early in terms of really leveraging our social platform for the benefit of the physical goods business.

Over time I would imagine sort of, we would have much more prominent entry points with a much bigger selection of products. We would also have a social infrastructure and current social sharing of various different products. We would have a much broader coverage of our Guan Dian Tong advertising network as well as continuously improving targeting mechanism to improve the conversion rate of the advertising network. So all these will be coming in the future, but right now there is maybe something we had discretionary service in terms of the physical goods eCommerce ecosystem [formulation] (ph) at this point in time.

Dick Wei - Credit Suisse

Great. Thank you very much.

Catherine Chan

Thank you.

Operator

The next question comes from the line of Timothy Chan from Morgan Stanley. Please ask your question.

Timothy Chan - Morgan Stanley

Good evening. Thank you for taking my questions. I have two questions. The first one is lot of the WeChat promotion overseas, could you comment of the effectiveness of the WeChat promotions and whether you are going to step up the marketing assets again this year and how should we think about your overall marketing spending this year? And my second question is about your latest video strategy, your views on the competition and also the potential consolidation in the sector? Thank you.

Martin Lau

With regard to marketing spending, WeChat, specifically, for the full year 2013 we came in line with our estimate of $100 million to $200 million in market spending for WeChat. That was spread pretty broadly across the range of geographies. Some of those geographies proved less hospitable, some of them proved more hospitable. For 2014, we will probably be spending a similar amount to our spend in 2013, but we will be targeting it more on in markets where we see traction, where we see opportunities really drive engagements as opposed to just connecting a lot of registered users who don’t necessarily engage. So that’s specifically on the marketing spending for WeChat.

On marketing spending in general, we will have some incremental initiatives, for example related to popularizing our payment, Weixin payment through Taxi app and other mechanisms.

And then with regard to video, the competitive landscape, we’re assuming will be very intense this year. We are budgeting video content cost to approximately double year-on-year because we want to outspend the market a little bit and increase our market share. The bad news on video is we continue to be loss making. The good news is that our video advertising revenue is growing at a greater pace and substantially more than doubling year-on-year in the fourth quarter of 2013.

Timothy Chan - Morgan Stanley

Thank you.

Catherine Chan

Thank you. Next question please.

Operator

Your next question comes from the line of Alex Yao from JPMorgan Chase Bank. Please ask your question.

Alex Yao - JPMorgan Chase Bank

Hi, good evening, everyone. Thank you for taking my questions. Two questions on my side. Number one, can you talk about your eCommerce strategy now that you have transferred pretty much majority of your eCommerce assets to your partners? And secondly, in the press release you guys discussed that market competition intensified compared to aligned strategies with mobile opportunities and made aggressive organic and the organic investments along the value chain. So where do you see the most competitive threats and how would you respond? Thank you.

Martin Lau

In terms of eCommerce strategy, I think there will be a two-pronged strategy. The first one is around physical goods, eCommerce and in the managed way. So basically it’s sort of the having a shopfront as well as having a marketplace that host a lot of different merchants for selling their products. So this kind of format, we will actually partner with JD.com as our strategy. Basically sort of we would leverage a lot of our platform advantages as well as our traffic to support JD.com to keep on building the scale of being a leading B2C merchant as well as to build a large marketplace that host a whole hose of different merchants.

So that’s our strategy on sort of this managed and centralized shortfront approach. At the same time, we would also partner with various retailers who actually want to sell their products online, particularly on the mobile Internet and a lot of these merchants, they just want to have their own shop. They don’t necessarily want to be part of a big marketplace, but they want to have their own shop, some of them sort of maybe offline retailers, some of them may just have specific kind of product that they want to sell on the mobile Internet. And a lot of them would have their own ways of cumulating different user base and they just want to have a shopfront on the mobile Internet and this is sort of what we called our managed distributed ecosystem of eCommerce and that’s something that Weixin will continue to support through our official account and through our payment systems as well as through our Guan Dian Tong advertising network.

Now in terms of market competition, I think market competition is just sort of intensifying across the board, right. I think it’s very clear that mobile Internet has really a lot whole range of new possibilities. In the past when we are on the PC Internet, you are limited by the device, you are limited by the time on which you are online, but when we get to the mobile Internet basically sort of the mobile device asking some extension of a person’s body as well as person’s everyday life. So also it’s a different lifestyle activities can’t actually be integrated within the mobile Internet device. So that’s why everybody sees the opportunity. The opportunity also gives rise to new entrants, it gives rise to ways to which the online industry can connect with traditional industries.

So that’s why we see competition is increasing, at the same time opportunities expanding. And in this kind of environment, we felt we will be making investments both in terms of strengthening our own platform, in terms of building an ecosystem that would connect our platforms with all sorts of different industries who wants to get onto the mobile Internet and access users and we also want to invest in best-in-class vertical players so that together we can actually build some unique services and unique value add for our users and these are the areas that we will be investing our resources.

Alex Yao - JPMorgan Chase Bank

That’s very helpful. Thank you very much.

Catherine Chan

Thank you for your questions. Next question please operator.

Operator

Your next question comes from the line of Cynthia Meng from Jefferies. Please ask the question.

Cynthia Meng - Jefferies

I thank you management and congratulations for a strong quarter. I have two questions. One is on the focus of investment for 2014. We remember in 2013 management talked about overseas pre-tax expansion as well as eCommerce and mobile investment. So now that we have to deal with the Dianping and JC.com on the eCommerce side, what will be the focus of investment for this year 2014? Are we still going to continue investing a lot in promotions in retail overseas expansions? That’s my first question.

And I have a follow-up question. Going forward a longer-term strategy for Tencent in terms of operating models. Now we have a different salary regarding eCommerce, how would we think about the operating model for Tencent? Are we going to focus more on interactive on social and entertainment and mobile Internet? Can management give more color on that front please? Thank you.

Martin Lau

Great. In terms of the first question about the focus of investment, we see some three buckets of investments activity for 2014. The first is really driving the mobile Internet. We feel that Weixin and Mobile QQ a great launchpads or aircraft carriers which can support a wide range of other applications. We started to see that with our news applications. We started to see that with our smart phone game application. But there is a whole host of other things we can do on mobile Internet leveraging the success of Weixin and Mobile QQ. So that’s really about taking the investment we’ve already made and driving incremental leverage from it.

Second source of investment is actually putting capital to work and that would include popularizing our Weixin payment service, which I alluded to you earlier in the context of the taxi bookings, that would include the doubling -- approximate doubling of the video content cost, I referred to you earlier and that would include roughly flattish spending year-on-year on WeChat marketing internationally.

The third part of investment is really investing our time and energy in our traffic in maximizing the benefits we can deliver to some of our strategic partners, including JD, including Gaopeng, including Dididache, CSC and so forth.

So that's about putting dollars to us, because we have already put the dollars in acquiring the shares and so forth. It’s more about taking our existing traffic and recourses and using them to provide full benefit to our partners.

James Mitchell

Well, in terms of offering model and sort of newer areas that we are going to be focused on. I think there are certain core businesses that we definitely sort of continue to putting a lot of resources to build our operations around and that will include the social platform, that will include the games, that will include our media and digital content platforms. So these are the areas that we would continue to invest and putting resources to build out the platforms under various services.

Now there are also areas as we move into the mobile internet, there are areas in which we see a much broader ecosystem of various different players and that would include areas like eCommerce, areas like O2O services, as well as even sort of areas like online finance and sort of, I would say verticals education, healthcare and other vertical areas.

I think in a lot of these new areas, we would approach it from two angles. One is there are areas that where we may actually do it ourselves, if we -- you can have strong an expertise in. But I think because these are new areas that require quite a bit of industry know-how or even in a lot of areas offline capabilities then we would actually rely even more so on what we call the open platform strategy and within the open platform strategy, I would say, there are two distinctive formats, one is taking search and best-in-breed platform partners.

So it, clearly, there are partners who have already do a lot of expertise in the certain area, who have already build an ecosystem of many of the participants such as Dididache, such as Gaopeng, such as in the future JD.com. We would be working with them and we may sort of approach it in a deep partnership type of model in which we do investment and we also sort of become their deeply related operating partner and try to create value-added services for the users.

On the other hand, we also would want to work on ecosystem prospective, we would provide certain basic infrastructures, so that participants can actually design themselves on their effort, right.

So we will have a pure open system where a lot of smaller merchants, smaller participants can actually sign-up and they can promote themselves using a lot of the infrastructure that we have, using our log-in status, using our social network, using our payment system, using our Guan Dian Tong advertising networks.

So a lot of these people would also just be able to add themselves onto the network. So I think we would be focused on building these basic building blocks for attracting people to our ecosystem.

Cynthia Meng - Jefferies

Thank you.

Catherine Chan

Thank you. Our next question...

Operator

Next question…

Catherine Chan

Yes, please.

Operator

Next question comes from line of Chi Tsang from HSBC. Please ask your question.

Chi Tsang - HSBC

Good evening. Thank you for very much taking my question. I had, just a housekeeping question and then I have a real question. Housekeeping question is, I’m wondering if you expand in terms of your new definition of MAU and also what is actually different from this MAU versus what you’ve reported historically. I am wondering if how that is benchmark versus sort of your global peers in terms of net defining MAU?

Pony Ma

Okay. Well, in terms of mobile MAU, what we include in the definition estimate that in addition to a log-in, right, a log-in actually we have to, the user need to have a proactive engaged with the platform either through sending one message at least or posting a feed into either at the moment or the social network or you have actually proactively engage in the transaction, right. So these are the kind of we will say valuable activity that a person would have to be engaged in, in order for us to count as an active user.

So that's actually sort of slightly more relaxed from the previous definition which, that has to be one message sent and the reason we actually relaxed a little bit is to say because both our Mobile QQ platform and our Weixin platform actually it has become a platform as such as this that extends beyond just a communication. So that's why we relaxed but at the same time, its actually more stringent and I would say a lot of the other definition of monthly active users which usually account the log-in of a user in a month.

Chi Tsang - HSBC

Great. Thank you for that. And then I am also wondering, just in terms of your Weixin games monetization, I have seen some sort of news feed that you identified roughly between RMB200 million to RMB300 million in Weixin games revenue in the fourth quarter, I am wondering sort of how that might ramp this year given the game portfolio and may be different sort of, John, you gave on Weixin games? Thank you.

John Lo

I think we would expect a fairly healthy growth rate given the increased number of games, given the games we serve, increasing the targeted niches and given games that have serve targeted niches and typically achieve higher ARPU and RPPU than any other broader mass market games. So just by way of background.

Catherine Chan

Yes, thank you. Next question please?

Operator

Your next question comes from the line of Varun Ahuja from JPMorgan Hong Kong. Please ask your question.

Varun Ahuja - JPMorgan Hong Kong

Hi. Thanks for taking my questions. Most of them have been answered. I just wanted a broad color on your expansion strategy to financial services. I mean is it going to be limited to providing in-hand online gaming options to subscribers and basically just expanding more horizontally to your customers or is there something more than that. I mean if you could just throw some color and potential investment. I understand its early stages but any potential investment size that you are considering. And secondly, if you could just quickly touch on your CapEx guidance for 2014. Thank you.

Martin Lau

In terms of online finance, I think, we must do in a very early stage of ramping up our knowledge about this industry and so defining what are the potential areas that we can add value to our users and we can participate in a value-added manner. I would say a few principals right now. Number one, we do want to partner with a lot of very outstanding financial institutions in the industry.

We are not participating in the business just sort of, to disturb others and what we see is there is very good set up of financial institutions who are readily providing good services. And what we have tried to do is actually sort of provide the bridge to connect more users to these financial institutions. And we will provide these sort of good products to the users.

Curious, we also stand from users and what we have tried to do is actually to compliment our range of value add to the users, what we see is after we’ve provide a very good social functionality, after we have provided digital contents and gaming where we see clear need among our users in getting access to good financial services that's sort of evidence in a fact that how the title has ramped pretty nicely which resulted in a lot of promotions within our platform.

So what we try to do we would work with our financial institution partners and try to commit with the products that are catered to the needs about our users and we will add to ask the conduit to help them get transact with each other. I think that's the main principal that we have in mind. Of course, as we continue to build our expertise in the industry, we will have more specific strategy around this but this is so far what we can discuss with you.

John Lo

And in terms of CapEx, unfortunately I won’t be able to give any guidance. However, I would like to share with you that back in 2010, as a percentage of revenue, operating CapEx represent about 6%. And in 2011, it was 11% as a result of building up of infrastructure for our open path on strategy and in both 2012 and 2013, our operating CapEx were 6% for both years. I would guess that in the future, we won’t be seeing a big OpEx spending just like what we did in 2011.

Varun Ahuja - JPMorgan Hong Kong

All right. So is it safe to say that the 6% that you’ve maintained in 2012 have been, I mean, it would be in similar range going forward?

James Mitchell

I think it’s under scale of business now. Unless there are new strategic initiatives, we don’t think that there will be significant change in that level.

Varun Ahuja - JPMorgan Hong Kong

Understood. Thanks a lot for your time.

Catherine Chan

Thank you very much. Operator, in the interest of time, we shall take the last three questions, please.

Operator

Certainly. Next question comes from the line of Alicia Yap from Barclays. Please ask the question.

Alicia Yap - Barclays

Hi. Good evening everyone. Thanks for taking my questions. My first question is actually regarding the Weixin payment. So can management share with us on how should we think about the progressions and the trend for the payment monetization for this year? And then in related to that for the Dididache in the first quarter, how much of that should we expect the expenses to incur in the first quarter?

Martin Lau

In terms of Weixin payments, I would say, the primary goal for us at this point of time is really to increase the number of users that are connecting their bank card to Weixin payments. We’re not only not making money, we actually are spending quite a bit of money to sort of promote that the linkage. But what we see is that once users have find that their bank cards, they can start to really consume not only sort of new, a few services but sort of a whole set of different services.

And overtime, as we continue to build up the ecosystem of the O2O services, hence, we will provide more user case along payment and that would help to move a lot of these Weixin payment users into more active users. So at this point in time, we are spending a lot of efforts in signing of Weixin payment users, which I think we’re making a pretty good progress.

In terms of Dididache, a lot of the promotional expenses we will have, you pointed out will be booked in the first quarter. I would say certainly it’s in the several hundred million type of R&D range. We will sort of have the more exact number as we close the quarter but certainly that’s the guidance for now.

Alicia Yap - Barclays

I see. And then my second question is with regard to the WeChat international. So given what happen to Facebook acquisition from the Whatsapp and also Rakuten under Viber, is management -- is there any change on management view on the overall international expansion plans and which countries that we plan to continue pushing the user engagement? Thank you.

James Mitchell

I think we would be pretty vocal that since the mid of last year that the incumbent apps such as Whatsapp, a way more established in certain markets, for example, Germany, Spain and Mexico. And inconsequently, heartily fits that it’s difficult for a new entrant app, no matter how good it is, since you make dramatic progress in those markets with the very strong incumbent. Since late last year, we’ve really been focusing on markets where we’re strong on greenfield markets. And I think that inclination is only reinforced by the recent change of ownership of Whatsapp.

Martin Lau

I will also say that international expansion is a really long-term initiative. We don’t expects sort of nearly get it done with just one app. Like, I think it’s a holistic strategy that we have been approaching. And in addition to sort of the promotion of the WeChat, we also have been viewing presence within sort of specific local markets in order to deepen our reach and our involvement in the ecosystem within distant markets. We also have been very active in making investments in entrepreneur teams, so that we can leverage the creativity of the different local markets in order to kind of fit those markets, so these strategies will continue.

Alicia Yap - Barclays

I see. Great. Thank you.

Catherin Chan

Next question, please?

Operator

Your next question comes from the line of Elinor Leung from CLSA. Please ask your question.

Elinor Leung - CLSA

Hi. Thank you for taking my question. My question is related to the payment census. How do you see the recent regulation on online payment? How is that going to affect your revenue growth there or transactions there and also how is that growing? How aggressive you will expand your online payment in 2014, especially offline, and would a new regulation affect your O2O business because that’s highly tied to your payment services?

Martin Lau

Yeah. I would say, it’s sort of around mobile payment, especially sort of when they touch a point, the O2O bit. I think this is obviously a new area for all the industry participant including the regulators. What I would say is despite, we having some or having some discussions with the regulators. I would say a few things. One, it is a very big opportunity. Two is, there is a clear user need. There is a clear merchant’s need and there is clear room for innovation.

And thirdly, at the sort of broad level, the regulators actually encouraging innovative services, but when we get into the specific implementation of certain services, I think we need to have much tighter communication with the regulators, because when they actually endorse a certain bit of innovation, there need to be sort of more discussion between the industry and the regulators. So that we can explain how the solution is actually implemented to the regulators.

And at the same regulators can actually voice their concerns and voice their opinions through us, so that we can include their opinions into the implementation of the solutions. So I think it will be interactive process. It will be a very interactive process with the regulators. But what we feel is as long as the dynamics there, as long as the opportunities are there, we would be able to find solutions that are acceptable to the regulators and that will be sort of welcome by the users as well as welcome by the merchants. So we’re still long-term bullish on this overall market.

Elinor Leung - CLSA

Okay. Thank you.

Catherine Chan

Thank you very much. Operator, shall we take the last question please.

Operator

Definitely. Last question comes from the line of Thomas Chong from BOCI. Please ask your question.

Thomas Chong - BOCI

Hi, good evening. I have two questions. My first question is about the mobile games. Given they are six games which have over 10 million DAU, can management give some sort of color or some sort of ranking in terms of which -- in terms of defending order in terms of revenue contribution of the six games? And my second question is about online advertising. Given management’s strategic focus in online video advertising this year, should we expect online video advertising to surpass your traditional portal advertising for this year or next year? Thanks.

James Mitchell

Correct. So with regard to the revenue ranking for the mobile game, what’s interesting is that the revenue for the mobile game doesn’t directly correlate with the usage. So some of the most popular games monetize very well and some of the most popular games monetize less well. On the other hand, we have some of the niche games I alluded to earlier, which would have substantially less than 10 million DAUs but achieved very healthy monetization because of the nature of those games, because of the nature of the people playing those games.

But overall I believe that we’re creating a platform, the strongest platform as per the broadest portfolio and we’re in a very early stages of conducting that broadening of the portfolio. So we’re very happy with what we see so far in terms of the ability of new games to expand the cumulative unique daily attributes as opposed to just cannibalizing the existing DAUs and in terms of the abilities of different types of games to monetize different types of uses. So that’s on the mobile games.

With regard to the online advertising, I think we’re still healthy above industry with revenue growth rates in 2013 extending through the fourth quarter. And that hardly reflects the strong growth in our online video product, but it also reflects the rapid expansion of Guan Dian Tong and our traditional portal advertising business continues to grow, albeit at a slower rate than the other two. So overall, I think that we’re just very broadly happy with our online advertising business.

Thomas Chong - BOCI

Thanks.

Catherine Chan

Thank you very much. Operator, we are rounding up on the call now. If you wish to check our press release and financial information, please visit our website under www.tencent.com/ir. We will also post a replay of this webcast on the site shortly. Thank you. And see you next quarter.

Operator

Thank you. That does conclude the conference for today. Thank you for participating in Tencent Holdings Limited 2013 fourth quarter and annual results announcement conference call. You may all disconnect now. Have a nice day.

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