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BIDU/IQ Earnings Review

Hope all is well!

Key News 

Asian equity markets were mixed as Japan, Taiwan, South Korea, and Malaysia ended the day higher while Hong Kong, China, India, and Indonesia had modest losses. It was quiet on the news front as investors digested yesterday’s strong gains, and ahead of the widely awaited US Fed meeting tomorrow. The People’s Bank of China “The PBOC” announced the first 1-year loan rate at 4.25% below the previous benchmark rate of 4.35%. The rate was slightly underwhelming. Expectation for this rate is to tick down over time. Premier Li was quoted saying that more policies are needed around employment. Some market participants interpreted the comment as more stimulus may be on the way.

Huawei’s 90-day reprieve was a positive sign though the US Commerce Department added 46 foreign affiliates to the entity list that prohibits them from buying US technologies. The administration is not differentiating Huawei’s telecommunication equipment unit from its mobile phone unit, which is the world’s second-largest behind Samsung and ahead of Apple. In addition to the Google Android operating system, Huawei cell phones use chips from Skyworks (SWKS) and Qorvo (QRVO), both of which dominate the market. Huawei’s China supply chain network, including more than one hundred listed Chinese companies, gained following the news. If I were Huawei, I might consider splitting the company into two distinct units. 

The Hang Seng eased in afternoon trading ending the day at a loss of 0.23% detracting 60.3 index points to close at 26,231. Volume was moderate below the 1-year average accompanied by 21 advancers and 28 decliners. Index heavyweights AIA lost 1.09% detracting 30.3 index points, Tencent was down 1.01% equivalent to 27.1 index points, and HSBC lost 0.95% and 22.9 index points. CSPC Pharma gained 11.11% or 22.6 index points on strong earnings while Apple suppliers Sunny Optical and AAC gained 4.87% and 3.22% respectively. Hong Kong stocks within the MSCI China All Shares Index gained 0.13% led by healthcare (+3.67%) as CSCP’s earnings fueled a sector rally, technology (+1.61%), consumer staples (+1.46%), energy (+1.12%) and utilizes (+1.03%). Real estate, on the other, fell 0.61%, communications lost -0.46% as Tencent dragged, and financials were off by 0.4%. Southbound Connect volumes were moderate with mainland buyers back and as volume leader China Construction Bank (CCB) registering a nearly 10 to 1 buying ratio while Tencent had buyers slightly outpace sellers. 

The Shanghai & Shenzhen markets diverged as Shanghai lost 0.11% and Shenzhen gained 0.14% both on light volumes and mixed breadth as 1,562 stocks advanced and 1,772 stocks declined. Small caps underperformed on the day in addition to Financials dragging the Shanghai market lower as the new loan rate could pressure margins. The mainland stocks within the MSCI China All Shares Index lost 0.24% with communication rallying 1.58% driven by Huawei related stocks, consumer staples (+0.59%) and real estate (+0.17%). The laggards included utilities (-1.84%), financials (-0.65%), healthcare as the sector’s Hong Kong rally didn’t spread to the mainland (-0.54%), technology (-0.48%) and consumer discretionary (-0.44%). Northbound Connect volumes were moderate with Shenzhen Connect volume exceeded that of Shanghai Connect’s. Foreign investors pulled $178 million after yesterday’s monster $1.1 billion inflow.

Baidu (BIDU US) reported results that beat analyst expectations after the close on Monday.

  • Revenue +1% YoY to RMB 26.3B ($3.835B) versus estimate RMB 25.77B
  • ADJ operating income -70% YoY RMB 1.96B ($285mm) versus estimate RMB 748.9mm
  • ADJ EPS -54% YoY to RMB 10.11 ($1.47) versus estimate RMB 6.27
  • Daily active users 188mm
  • Q3 revenue forecast RMB 26.9B to 28.5B versus estimate RMB 27.85B

iQIYI (IQ US) reported mixed results as the topline revenue beat though the company’s loss exceeded analyst expectations. While membership revenue increased 38%, online advertising declined 16% YoY combined with a 14% increase in their cost of content. 

  • Revenue +15% YoY RMB 7.11B ($1B) versus estimate RMB 7.02B
  • ADJ EPS loss RMB 3.22 ($0.49) versus estimate loss RMB 3.10
  • Subscribing members +50% YoY to 100.5mm from 67.1mm (Netflix has 148mm as an FYI, while I’m FYIing worth mentioning NFLX has a market cap of $135B versus IQ’s
  • Q3 Forecast 7.21B to 7.63B versus estimate 7.79B

We are close to closing out Q2 earnings season. Keep your eye out for Baozun Wednesday, BILI next Monday, MOMO next Tuesday while Ctrip closes out earnings season September 9th.

A mainland media source noted the National Council for Social Security Fund announced the basic pension plan returned 2.56% in 2018 versus a 5.23% return in 2018. There are two reasons I mention: 1) mainland equity markets were off 24% in 2018, the SSF has very little equity exposure. 2) the total assets of the basic plan are $99B, while the National Social Security Fund’s total assets are $317B. These plans are significantly underfunded! In order to serve China’s population, there are going to need much more money dedicated to the plan while needing a much higher rate of return.

CNY 7.05 versus 7.05

  • Yield on 1 Day Chinese Gov’t Bond 2.16% versus 2.11% 
  • Yield on 10 Year Chinese Gov’t Bond 3.04% versus 3.04% 
  •  Yield on 10 Year China Development Bank Bond 3.52% versus 3.52%

Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.37%.