Good day and welcome to the NetEase 2021 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time. I would like to turn the conference over to Margaret Shi, IR Director of NetEase. Please go ahead.

Thank you, Operator. Please note, the discussion today will contain forward-looking statements relating to the future performance of the Company and are intended to qualify for the safe harbor from liability. As established by the U.S. Private Securities Litigation Reform Act. Such statements are not guaranteed future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of this list is beyond the Company's control and could cause the actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factor that could affect NetEase's business and the financial result, which is included in certain filings of the Company with the Securities and Exchange Commission, including its annual report on Form 20-F and the announcements and their filings on the website of Hong Kong Stock Exchange. The Company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, Management will also discuss certain non-GAAP financial measures for comparison purposes only. For definitions of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2021 Second Quarter earnings, a news release issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the NetEase corporate website at ir.netease.com. Joining us today on the call from the NetEase Senior Management team is Mr. William Ding, our Chief Executive Officer, and Mr. Charles Yen, our Chief Financial Officer. I'll now turn the call over to Charles who will read the prepared remarks on behalf of them.

Thank you, Margaret, and thank you, everyone, for participating in today's call. Before we begin, I would like to remind everyone that all percentages are calculated based on the renminbi. Our gross momentum continued in the second quarter with total net revenues of RMB 20.5 billion, representing an increase of 13% year-over-year. But for our online games, in the second quarter, total revenue was RMB 14.5 billion, up 5% year-over-year, despite a high comparable base in 2020. Our PC and mobile games remain our dual growth engines for online games. On the PC side, NARAKA BLADEPOINT, our next-generation Battle Royale game is one of the hottest games in the market. First launched in China in July, followed by the global launch in August the 12th. NARAKA BLADEPOINT quickly became the best weekly seller on Steam, winning the enthusiasm of Chinese and overseas players and marking a new breakthrough for us in the global market. With captivating gameplay and state-of-the-art graphics, NARAKA BLADEPOINT's debut was very well received among hardcore players in Western markets. We will continue this positive trend by introducing more content from different cultures around the world, and start to work on other formats of the game, including console games and mobile versions as we look to tap into these large market opportunities in China and abroad. Our legacy flagship PC titles, particularly FWJ, New Westward Journey Online, and TianXia continue to show remarkable longevity with strong year-over-year growth to nearly two decades of operation. We have created a strong and sophisticated social community within each game. And we continue to keep our users engaged with the regular introduction of high-quality expansion packs. This type of longevity has also been extended to the mobile side. Fantasy Westward Journey mobile game, Westward Journey Online mobile game and there are…

Thank you. [Operator Instructions] Again, [Operator Instructions] to ask a question. And for the benefit of all participants on today's call, if you wish to ask a question to management in Chinese, please immediately repeat your question in English. Please limit your questions to one at a time. If you wish to have a follow-up question, please rejoin the queue. And we will now take the first question from Alex Yao from JP Morgan. Please go ahead.

[Indiscernible] . Thank you, Management, for taking my question. I have a question on teenager in-game indulgence and the new policy introduction. Can you share with us your policies on teenager in-game indulgence protection? And also, how should we think about the impact of the recently introduced new policy that minors cannot play a game during the weekend? They can only play the game at a specific time, i.e. 8:00 PM to 9:00 PM from Friday to Sunday -- how should we think about the financial and the operational impact to your gaming business? Thank you.

[Indiscernible] [Indiscernible]

Yes. I'm sure many of you have read on the news about the new anti-addiction protection measures that the government has issued on teenagers underage kids. there are some very prudent requirements such as only 3 hours a week is allowed to play games. As one of the largest gaming companies in China, we're in full support of this decision. Over the past years, we have noticed there are certain games around the industry that has had a negative impact on children. And then -- so we think that the new requirements, the new regulations will keep teenagers away from people, teenagers, away from games for as far as possible. So we want companies anything to treat together to support this regulation and requirement. And also, financially, we would like to share with you that less than 1% of our revenue actually comes from under-aged children. Thank you.

Alex, just to clarify, when we say less than 1%, we are defining minors at age below 18. Different companies might have disclosed different data, but according to China law, minors [Indiscernible] definition is for people below the age of 18. For that category of population, it accounts for less than 1% of our total games gross billing, financial implication.

Thank you.

And we will now take our next question from Kenneth Fong from Credit Suisse. Please go ahead.

Thank you, Charles and Margaret. [Indiscernible] [Indiscernible] Thank you for taking my question. I have two questions. One is the new regulation for online game boost, this can limit the exposure for the underage. While the short-term financial impact will be limited, how should we think about clearer cultivation going forward, and will that limit the longer-term or medium-term potential for fleet growth? The second question is, with no more exclusivity for the music copyrights, how should we think about our direction, pace, as well as investment in the music copyright and content going forward? Thank you.

[indiscernible]. [Indiscernible]

Yes. On the first question, we think that the healthy wholesome growth of our children, it's a top priority for the nation, for the government. And as a Company, we need to think about our responsibility. We need to think about -- think long-term and for the greatness of the society. So we are interested -- in making positive high-quality games that appeal to adults and appeal s to the audience around the globe. Well, we are not as interested in making a profit in -- through minors. And to answer your second question, as you might have just noticed that TME has just announced -- made announcements about relinquishing the exclusivity, and we certainly hope that is a sincere announcement from TME, it's not a decision. They are not going to be saying one thing and do another. Here, we want to appeal to the opportunity to appeal to the label companies and every stakeholder and partner in the industry to co-create a wholesome, balanced news industry and NetEase with ultimate sincerity and sufficient funding. We want to work together with at one in this industry.

[Indiscernible]

I would also like to add that we are very thankful for the right decision that the regulatory bodies have made relating to the antitrust regulations and policies. The antitrust policy says a very clear and positive, and very exciting signal to the entire industry, which is what is anticipated and warmly welcomed by users. Thank you.

Thank you.

Thank you, Kenneth. Next question.

And we will now take the next question from Alex Poon from Morgan Stanley. Please go ahead.

[Indiscernible]. [Indiscernible] . I'll translate myself. My question is related to the strong game pipeline in the second half, including Lord of the Rings, NARAKA BLADEPOINT BLADEPOINT, Harry Potter, and Nightmare Breaker, etc. And all of these games are very strong titles. How should we think about the game revenue growth and the contribution from these games, especially starting in the fourth quarter? Thank you very much.

Thank you, Alex. I'll answer your question directly in English. As you may know, NARAKA BLADEPOINT was already launched in the summer, and we have made another major breakthrough on the Steam platform. This -- again, this is not only a new genre game but also a new achievement I think very excited to witness. Next month is going to be busy. Harry Potter, Lord of the Rings, and a few other games are all set to launch in September, with a few others in the latter half of this year. The one thing though, I want to reiterate is that NetEase -- here at NetEase, we always emphasize the quality of the games, the longevity of the games, and the user appreciation and receptivity of these games. We are not so much interested in the financial ups and downs in one particular quarter or two, but rather we are very confident that our relentless effort in launching these new games will continue to diversify our gaming genre offerings continue to advance our global expansion initiatives, as well as gaining more market share across different categories of the games. And to echo what William commented earlier on, we really think the open secret of winning the heart of the gamers is through the quality and the content, rather than any other tricks or measures. So Alex, hopefully, that answers your question.

[Indiscernible] , Charles. Thank you.

And we will now take the next question from Natalie Wu from Haitong International. Please go ahead.

[Indiscernible] Thanks, Ms. [Indiscernible] Charles and Margaret for taking my question and congratulations on another solid quarter. My question is regarding the game NARAKA. So just wondering what's Managements expectation for the game regarding the revenue model. What percentage of the revenue will come from the copy-based and RT-based revenue model. And then also, how should we see the longevity of this game? And will there be more derivative versions of another genre of NARAKA coming out in the future? And also, will this success have any potential shift on our strategic focus and investment in the future? Thank you.

[Indiscernible] . [Indiscernible] [Indiscernible] .

Thank you. Thank you, Natalie. Do they also come from [Indiscernible] Yes, for the game right now with Doctor Mix of copy-based sales and also in-game purchase. As of today, the items -- the in-game items that we've created have been very attractive to our players, which have caused a very encouraging sale of in-game items. So today, our in-game purchases actually contribute more than the copy basis sales. Going forward, we'll continue to create more in-game items of assumptions that appeal to our worldwide users. In terms of longevity, we have a long-term plan for this game. Today, we actually host -- we have ranged a number of very exciting eSports campaigns in China and abroad will continue to introduce those new characters, the new gameplays, to keep the content interesting to our users. So we are very confident with the longevity of this game. In terms of, the strategy going onto different formats of entertainment, we're actually going to launch this game on consoles around Christmas time, and we also have a team working on the mobile version of this game. And at the same time, we have -- we host equal campaigns around the world to keep creating various -- to keep the interest high around the game. And on that, we keep creating viral discussions of the game. So that's -- so we have a very holistic plan for NARAKA BLADEPOINT. Thank you.

And Natalie, to your last part of the question, whether we -- whether there is any inspiration for our overall games strategy. I think the breakthrough achieved by NARAKA BLADEPOINT, gives us extra confidence in terms of diversification, not only in-game genres, but also in different distribution platforms. For instance, NARAKA BLADEPOINT is a very successful game that has tapped into the global, particularly the Western gamer community, via the Steam platform. I think that gives us more experience and know-how of developing and publishing future games, especially towards the global market. Operator, next question, please.

Thank you. We will now take our next question from Thomas Chong, from Jefferies. Please go ahead.

[Indiscernible] . [Indiscernible] Thanks, management, for taking my questions. My first question is about Harry Potter. Given the game is going to be launched worldwide, just want to get a sense of our expectation for this game in the domestic market versus the overseas market? Any color about our marketing strategies, the way that we attract users? Any strategy that can be shared would be grateful. And then my second question is about the reasons for regulatory and [Indiscernible] Given the government is having stringent measures about the fandom culture in China and more regulations on live streaming these days. Just want to get a sense of how the fandom culture will affect our music business, and also our live-streaming outlook? Thank you.

Thank you, Thomas. I will answer your first question on Harry Potter directly in English. And William will comment on your second question. For Harry Potter, it is set to launch in the greater China area on the 9th of September, which is about 9 days from now, highly anticipated. Given the strong popularity and global appeal of the Harry Potter IP, we're very confident that the high-quality game will be a huge success, both domestically and in the international market. With this game launch, we are hopeful that it can further reinforce the NetEase game brand image amongst the global gamer community. That's the answer to your first question.

[Indiscernible]

So we are actually in support of the recent regulations on the entertainment industry. For NetEase Cloud Music that we think that made an impact for us is somewhat minimal, because for us the priority, the strategic goal is about creating original music. So our focus is on helping independent musicians to create music. And those are talented individuals in China. Thank you.

[Indiscernible]

Operator, next question, please. Thank you, Thomas.

Thank you. We will now take the next question from Eddie Leung, from Bank of America Merrill Lynch. Please go ahead.

[Indiscernible] [Indiscernible] . We have 2 questions. The first one is on the tax rate, we understand that certain Internet companies couldn't get the approval for -- to enjoy a preferential tax rate of key software subsidiaries recently. So just wonder if NetEase would see any impact on the tax rate? And then secondly, regarding the overseas game markets. So we expect NetEase to set up more overseas studios. And if so, any more color on the future plan? Thank you. [Indiscernible]

Thank you, Eddie. Well, in the interest of time, let me answer your two questions directly in English. Firstly, on the tax rate, this is in fact not a new development in our 20-F issued earlier this year, we have already disclosed that there will be certain tax policy changes, as announced by the Tax Bureau earlier this year. Certain industries, including e-commerce, games, et cetera, are no longer eligible for the key software qualification. As a result, we can no longer enjoy the 10% preferential tax rate. However, specifically for NetEase, for game businesses, we're still entitled to the high tag of qualification which grants us a 15% preferential tax rate, net-net, we believe these tax rate changes will have, roughly speaking, about 3% implication to us. So 2020, our overall effective tax rate is around 19%. I think this year, for 2021, a full year full-year level, our tax rate will be somewhere in the low 20 labor [Indiscernible] . Secondly, for our overseas gaming expansion, we've previously announced our ambition to achieve at least a 30% of our game gross billing contributed from the overseas market in 3 to 5 years' time. We are very well on track to achieve that. NARAKA BLADEPOINT is a matter of the exciting achievements that we have. we have achieved this year. For the overseas market, we are now very proactively setting up overseas studios in Canada, in Japan, and in Europe. The format of our collaboration, or rather the format or strategies for us to tap into the international market can be very diversified, doesn't necessarily require us to set up our own standalone studios. We are also very active in collaborating with world-class players around the world, supplementing each other's strengths. In some cases, jointly developed or co-developed shift gains that are targeting for the global gamer community. I think NetEase remains very open-minded, very practical, and very, very active in this regard.

[Indiscernible] . Thank you.

Thank you, Eddie. Operator, in the interest of time, let us conclude the call today. Thank you all very much.

Thank you.

Thank you once again [Indiscernible] Maybe I'll just finish with those concluding marks. Thank you, once again for joining us today. If you have any questions, please feel free to contact us directly at [Indiscernible] relation. Have a great day. Thank you.

Thank you.

And ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.