Market

Tencent Q2 Results Deliver, How An Air Pocket Explains Price Action

  • Revenues increased 20% to $21.4B/RMB 138.26B versus estimate RMB 138.19B
  • Games revenue increased +12% to RMB 43B
  • FinTech revenues increased +40% to RMB 41.9B
  • Online Advertising Revenue increased +23% to RMB 22.8B versus estimate RMB 22.69B
  • Monthly Active Users of WeChat/Weixin increased 3.8% to 1.251B versus estimate of 1.25B
  • Gross Margins 45% which is down from 46% last year and quarter
  • Both selling/marketing expenses and general/administrative expenses increased year over year and quarter over quarter.
  • Operating Margin 38% versus 34% a year ago and 42% last quarter
  • Adjusted Net Income RMB 34B versus estimate RMB 32.84B
  • EPS RMB 4.47 versus estimate 3.29

Key News

Asian equities had a strong day less India and Australia, which were off slightly.

Remember Tencent’s earnings were after the Hong Kong close. We also had e-commerce player Vipshop (VIPS US) beat analyst expectations along with the Twitter of China Weibo (WB US).

We got a bounce overnight in Hong Kong listed China internet stocks though Alibaba HK was off a touch. Tencent saw net buying from Mainland investors via Southbound Stock Connect (the platform that allows Mainland investors to buy Hong Kong listed stocks). I had anticipated a strong media campaign following yesterday’s Mainland sell-off. It didn’t happen likely due to President Xi’s speech at the NPC meetings being front-page news. There was an emphasis on “common prosperity” addressing income inequality. Investors noted the speech emphasized reducing financial risks sending Mainland financial stocks flying.

Mainland value sectors outperformed while growth sectors saw profit-taking. Solar manufacturers were weak on chatter that solar glass prices might be rising.

I had a very busy day yesterday but managed to connect with a few of our institutional brokers who specialize in Chinese equities. My question: What am I missing? China internet companies’ price action has been awful despite companies’ fundamentals that appear to be unaffected by regulation, less after-school tutoring and likely Didi. Simple answer: A lack of buyers. Active portfolio managers have moved to the sidelines until we have more clarity on regulation. At the end of June, managers got the names out of their portfolios as they need to disclose their holdings. Active managers’ move out of HK and US stocks has likely led them to buy Shanghai and Shenzhen listed stocks as they can’t eliminate China’s nearly 40% weight in MSCI Emerging Markets Index. Year to date foreign investors have bought $39.463B of Mainland stocks net of sales via Northbound Stock Connect. This is more than 2020’s net buying of $31B. Short sellers continue to push their bets that the stocks will fall. Ever been on an airplane that hits an air pocket? That’s what has happened. Historically you would have players come into the names but it hasn’t occurred due to the uncertainty. There are no professional buyers as they don’t want to risk their jobs catching a falling knife.

Clearly, we need clarity on the end game which we might have gotten a taste of yesterday. Remember that the user data law going into effect means there is a finish line on this issue. That is a good thing! Tencent’s results, similar to Alibaba, provide another catalyst. How many companies with a market cap over $450B are growing revenue more than 20%? Only twelve stocks globally including Alibaba and Tencent along with Johnson & Johnson

JNJ

, Nvidia
NVDA
, Visa
V
, Tesl
TSLA
a, Facebook, Amazon
AMZN
, Alphabet, Microsoft
MSFT
, Appl
AAPL
e, and Saudi Arabian Oil according to my Bloomberg screen. Tencent’s P/E ratio of 18 is the lowest! There is a monster rally out there when the professional investors come back into these names. Hopefully, we get it sooner than later!

H-Share Update

The Hang Seng opened higher, came off its intra-day highs closing +0.47% while the Hang Seng TECH closed +0.13% on volumes -19% from yesterday which is 80% of the 1-year average. The 208 Chinese companies listed in HK within the MSCI China All Shares gained +0.76% led by financials +2.22%, staples +1.39%, industrials +0.98%, discretionary +0.74%, tech +0.55%, energy +0.41%, and real estate +0.35% with healthcare off -0.82%. HK’s most heavily traded by value were Tencent +0.28%, Meituan +2.15%, Alibaba HK -0.12%, AIA +0.57%, Geely Auto +2.54%, Li Ning +5.6%, BYD +1.58%, Ping An +2.97%, Xiaomi +0.41% and Wuxi Biologics -0.97%. Southbound Stock Connect volumes were moderate/light as Mainland investors bought $55mm of HK stocks as Southbound trading accounted for 13% of HK turnover.

A-Share Update

Shanghai, Shenzhen, and STAR Board gained +1.11%, +0.84%, and -0.08% on volume -8.81% from yesterday which is 129% of the 1-year average. The 522 Mainland stocks within the MSCI China All Shares gained +0.99% led by financials +4.73%, real estate +1.19%, industrials +0.82%, materials +0.62% and utilities +0.51% while discretionary -0.65%, energy -0.32%, communication -0.28%, tech -0.18% and staples -0.16%. The Mainland’s most heavily traded by value were broker East Money +7.2%, Kweichow Moutai -0.92%, China Northern Rare Earth +1.75%, Sungrow Power -7.05%, Longi Green Energy -3.55%, CATL +3.13%, Citic Securities +5.6%, Qinghai Salt Lake Industries +6.43%, Shanxi Meijin Energy -2.1%, and Tianqi Lithium +5.14%. Northbound Stock Connect volumes were moderate/high as foreign investors bought $529mm of Mainland stocks today as Northbound trading accounted for 5.1% of Mainland turnover.

Last Night’s Exchange Rates, Prices & Yields

  • CNY/USD 6.48 versus 6.48 yesterday
  • CNY/EUR 7.59 versus 7.63 yesterday
  • Yield on 10-Year Government Bond 2.85% versus 2.88% yesterday
  • Yield on 10-Year China Development Bank Bond 3.18% versus 3.22% yesterday
  • Copper Price -1.26%

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