Good Morning!

Takeaway: Industrial production missed driven by lower output from the manufacturing category. The other two sectors comprising the industrial production figure, mining and power supply, saw a modest decline and modest upswing respectively. By industry, auto manufacturing was significant negative contributor declining -4.4% YoY while telecom/computer slipped to 6.1% from June's 10.4% YoY. Autos were a significant contributor to Retail Sales decline as w/out Autos' -2.6% YoY decline, the release would have been 8.8%. Ultimately as the middle person in global trade, China provides a tell like in poker on the global economy. China's economic slowing has a consequence for developed and EM economies upstream and downstream. China's policymakers will have to reconsider their measured stimulus following today's release. Taking a bad news is good news perspective, we may likely see bank reserve requirement ratio cuts, further loans to small/medium private companies and a relaxation of monetary conditions.

Tencent (700 HK) released earnings after the HK close today with topline revenue missing analyst expectations though bottom-line net income was a solid beat. The release looks healthy to me though brokers and analysts haven't chimed in yet. Naspers shares are off ~2% as the robots sell on the revenue miss though once buyside PMs take a deeper dive, I believe they will be buying any dip. While gaming revenue +8% YoY/54% of total revenue, what gets me excited is the jump in FinTech and Business Services category jumped 37% YoY to RMB 22.888B and now account for 26% of total revenue. The monetization of WeChat as a financial wallet and increased cloud computing sales will be active drivers in the coming quarters. Remember almost two years ago; the WSJ incorrectly reported that the Chinese government was taking stakes in Chinese internet giants. Policymakers want SOEs to utilize the technologies from Tencent and others to make themselves more efficient. The uptick in Tencent's growing Fintech revenue segment is evidence of its robust pipeline of new business revenue streams. With gaming approvals still coming online, Tencent's core could also see a pickup.

• Revenue +21% YoY to RMB 88.821B from 73.675 versus estimate 93.41B
• Gross profit +14% to RMB 39.126B
• Operating profit +26% YoY to RMB 27.521B
• Operating margin 31%
• Profit RMB 24.136B +35% from 17.867 versus estimate 21.1B
• Diluted EPS + 35% YoY RMB 2.52
• WeChat/QQ monthly uses 1.13B +7% YoY

Key News

• Asian equity markets cheered Trump's olive branch on delaying imposing China tariffs to allow for holiday and back to school purchases. Vice Premier Liu He's phone conversation with his US counterpart also boosted sentiment. HK and mainland China popped higher at the open. Though IP/Retail Sales/FAI data release at 10am local time sucked some life out of the rally as demonstrations continued in HK.
• I was thinking about the US labeling China currency manipulator. If currency devaluation was an economic positive, wouldn't Argentina be an economic superpower?

The Hang Seng jumped +1.7% at the open though eased over the day to close +0.08%/+20.9 index points to close 25,302. Volumes were light (again) as breadth mixed with 20 advancers and 28 decliners. Index heavyweight Tencent gained +1.8%/+49.2 index points pre-earnings announcement, Sunny Optical +8.74%/+17.7 index point post strong earnings yesterday, and HSBC gained +0.52%/+12.7 index points. Real estate stocks weighed on the index due to demonstrations. The HK stocks within the MSCI China All Shares gained +0.53% led by tech (ie Sunny) +3.04%, communications (ie Tencent) +1.25%, discretionary +0.96% and energy +0.59% while materials fell -0.73% as gold stocks saw profit taking, staples -0.61% and healthcare -0.34%. Southbound Connect volumes were moderate with buyers out in force as CCB saw 12 to 1 buy to sell, Sunny even strong ratio and Tencent 4 to 1.

Shanghai & Shenzhen opened +0.97% and +1.3% though eased slightly to close +0.42% and +0.69%. Volumes were light while breadth was surprisingly strong with 2,661 advancers and only 803 decliners. Small and mid-caps outperformed large caps due to sector dispersion. The mainland stocks within the MSCI China All Shares gained +1.26% led by healthcare +2.29%, staples +2.22%, discretionary +2.01%, tech +1.65%, energy +11.32%, utilities +1.18% and industrials +1.01%. Northbound Stock Connect flows were moderate though Shenzhen Connect had higher volume led by buyers while Shanghai Connect was very slightly net sell. In aggregate foreign investors bought $168mm of mainland stocks.

We noticed an interesting market timing strategy embedded in a mainland research report we received a few months ago. The strategy compared the Chinese 10 Year Gov't Yield against the Shanghai Composite dividend stock yield. The current ratio is close to January levels due to the rally in Chinese gov't bonds. The Shanghai Composite dividend currently stands at approximately 2.5% , while the Chinese 10 Year Gov’t Yield is just over 2.9%, making this ratio approximately 0.86. The market timing strategy suggests that the closer this ratio is to one, the better time it is to buy.

Joe Tsai is reportedly buying the remaining 51% of the Brooklyn Nets he doesn't already own. For Knicks fans, this could be the final nail in the coffin.

• CNY 7.01 versus 7.06; 38bps pick up versus US $
• Yield on 1 Day Chinese Gov't Bond 2.01% versus 1.99%
• Yield on 10 Year Chinese Gov't Bond 3.05% versus 3.05% 
• Yield on 10 Year China Development Bank Bond 3.51% versus 3.5%
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.3%.