Tencent:HK NDR Takeaway

Payment. Tencent waives transaction fees on users for normal ecommercetransaction, red envelop and money transfer and therefore incurred a big bankhandling fees in 3Q. While the company will continue to subsidize big volumered envelop as it has spilt-over effect on ecommerce and helps core business,it recently changed the policy and will charge fees on accts over Rmb20kmonthly transfer. On the merchant side, Tencent charges 60bps pertransaction, which is attractive for merchants as it is lower than 100bps byUnionPay. Tencent is profitable on these transactions, as it is more thanenough to cover 10bps that they need to pay the bank.

Advertising. Spending on premium content has resulted in 3ppts ad GMdecline in 3Q15. Tencent will keep aggressively investing in content in thenext six months in the anticipation that Youku will beef up content purchasewith US$628m cash on the balance. Key ad inventories include Qzone, newsapp, official accounts, appstore and others including moments. Ad revenuesurprise in 3Q was more driven by news app rather than video. Moment ads isstill in early stage of monetisation but will eventually be bigger than Qzone adrevenue. Tencent recently expanded moment ad category to real estate andtravel but still has limited number of moment advertisers.

Game. Strong mobile game revenue in 3Q was not a pent-up effect but morebecause of the strategy change to launch segmented games with differenttargets such as DAU, ARPU and retention rate. The mgmt believes thattoday’s mobile game market is like PC game market in 2003 in terms of gamemix and monetisation and still has a long way to go. Tencent said the lowermargin of game in 3Q was due to higher revenue from licensed titles andchannel payment on iOS related game revenues.

Asset-light is the company’s key philosophy. Tencent has no intention tomassively expand sales force to ramp up ads revenue or takes majoritystakes in all of their investees. Instead, Tencent will direct traffic to theirpartners, who in turn will bring in advertisers. Management believe that it isbecoming harder for start-ups to succeed. O2O verticals may spend lessmoney on user subsidy but more on marketing to gain traffic.