腾讯控股(00700) 　　Strong 3Q revenue despite soft mobile games 　　Performance ads and payment revenue beat expectations 　　Maintain Buy and trim TP to HKD245 from HKD256 　　3Q results highlight power of its platform. The key strength of Tencent's strategy,in our view, is the different ways it can monetize the high user base and engagementon all of its social properties. When one monetization engine slows, it is able to fireup another engine. In 3Q, total revenue grew 52% y-o-y, beating our estimate by 2%,as lower than expected smartphone game revenue (its biggest revenue category)was offset by social subscription, payment and strong performance-based adsrevenue. Tencent has the traffic, products and ad inventory to manage through shorttermweaknesses in a particular business to maintain very strong revenue growth. 　　Strong revenue growth with slight miss on EPS. Total revenue grew 52% y-o-y toMB40bn, 3% above consensus. EPS of RMB1.24 was 4% below our estimate but inlinewith consensus. Gross margins of 54% missed our estimate by 133bps, due tochannel costs for smartphone gaming and higher video content costs. Adjustedoperating margins of 37% also missed our estimate due to promotional spending ongames and payment. We expect continued high spending on video content andlicensed games to negatively impact gross margins. Sales and marketing costs willalso remain elevated due to merchant education for payment adoption, promotion ofmobile utility apps and advertising costs to promote its hit video content. 　　Soft mobile games but strong ad and other revenue. Smartphone gaming grew87% y-o-y to RMB 9.9bn, 9% lower than our estimate. While Tencent has over 100mDAUs for mobile game, including 40m for Honor of Kings, it only released 2 casualgames and 3 mid-core games in 3Q. We point out that Tencent's strategy is toamass users and then increase monetization gradually. Rising monetization and newgames will drive mobile game revenue next year. Social revenue increased 58% y-oydue to digital content subscriptions and the consolidation of China Music Corp.Tencent had 20m video subscribers in October. Brand advertising only grew 21% yo-y, due to weak demand but also due to cannibalization from subscription revenueand to Tencent changing its news feed ad products from time-based to click based.This helped performance (P4P) ads beat estimates, growing 83% y-o-y. Given theweak outlook for brand advertising given macro uncertainty, Tencent will see fastergrowth from P4P ads than brand ads in 2017. While WeChat moments continue to bethe biggest driver of P4P ads, ad load will likely remain low at 1/user/day, asmanagement focuses on efficiency and targeting instead of ad inventory. Otherrevenue was very strong, up 348% y-o-y, reaching 12% of revenue. Cloud revenuedoubled q-o-q from a small base but payments remained the biggest component andcommission revenue from merchants will likely continue to grow rapidly.