Daily Posts

Netease and JOYY Inc Deliver Strong Q2 Results, Offshore RMB Appreciated Versus USD Over the Past Three Months Despite Tensions

Key News

Asian equities were largely higher overnight with the Hang Seng posted a small loss. Hong Kong volume leader Tencent -2.02% succumbed to profit taking after posting great Q2 results highlighted by revenue growth of nearly 30%. China Mobile was up +3.6% after posting 1st half 2020 results, and Alibaba Hong Kong was up +1.97%. Meituan Dianping was down -1.12%, China Unicom +25.6% after reporting 1st half 2020 results that beat analysts’ expectations, and Semiconductor Manufacturing (SMIC) +2.23%. Several brokers noted that China Unicom and China Mobile purchases were likely funded from investors rotating out of Tencent. NetEase Hong Kong was up +3.57% in advance of earnings released after the market’s close, while JD.com Hong Kong was up +1.41%.

Hong Kong continues to battle a flare up in coronavirus cases locally, while Macau gaming stocks took a breather on relaxed travel restrictions. Mainland stocks had a quiet night on light volumes as investors digest earnings and concerns around US China political rhetoric weighed on the tech sector. Healthcare was off, though CanSino Biologics’ STAR Board IPO potentially led investors to reallocate from current holdings to fund the IPO, which ripped over +100%. July ownership data of Chinese Treasury bonds saw a very large increase from the “other institutions” category that includes the PBOC. There is speculation that PBOC bought Chinese Treasuries which would put liquidity into the financial system. We mentioned yesterday that there is concern China’s July M2 and loan data was light, indicating stimulus is slowing. By buying bonds, cash goes into the financial system. We won’t know if the PBOC bought bonds until its balance sheet data is available, but it is feasible that stock investors worries may be misguided. 

MSCI released the pro forma for the Quarterly Index Review (QIR) after yesterday’s US close. The February and August QIR is a smaller rebalance as stocks going up/down as market cap changes lead to index weight adjustment, though it does have additions and deletions based on companies moving up/down from large/mid cap index to/from small cap index. The May and November Semi-Annual Index Review includes adding new companies that previously were not in the index universe. Before I put you to sleep, watch Peleton (PTON US), which is being added. You’ll notice PTON has only one large passive manager as a shareholder, but that is going to change at month end. There weren’t many changes in MSCI EM, but the numerical count of China stocks will increase from 711 to 713 as there were three adds and one delete. China’s percentage weight will decline ever so slightly from 41.4% to 41.2%. At 41.2%, China’s weight is 2X larger than all of Emerging Markets Europe/Middle East/Africa and EM Latin America. 

CNH is China’s offshore currency price for renminbi. Over the last several months, US stocks and particularly US listed Chinese stocks have reacted to headlines as computers are programmed to read headlines and sell stocks on the news. This reaction has shaken out investors in the stocks at times. Our institutional brokers ignore these headlines and focus on if CNH moves on the headlines. I suspect that many of them have made money as they scoop up shares from investors shaken out by these headlines. If you pull up a chart of CNH, you’ll see that it has appreciated versus the dollar over the last three months, despite the at times distressing headlines. I believe CNH’s price action validates our kabuki theater thesis that US China political rhetoric is more bark than bite. Investing based on emotion is never a good idea. Around the next headline, I recommend taking a deep breath and pull up CNH.

The WSJ reported that Apple, Ford, Walmart, Walt Disney, Procter & Gamble, Intel, MetLife, Goldman Sachs, Morgan Stanley, United Parcel Service, Merck and Cargill were among the participants in a White House call as “U.S. companies whose fortunes are linked to China are pushing back against the Trump administration’s plans to restrict business transactions involving the WeChat app from Tencent Holdings, saying it could undermine their competitiveness in the world’s second-biggest economy.” This follows an August 10th Editorial Board titled “Blackballing Chinese Stocks”, which notes that excluding Chinese companies from US exchanges is a bad idea. The WSJ’s tone toward China has recently improved. Maybe they know something about this weekend’s US China trade talks that we don’t?

Tomorrow, we will find out if Alibaba Hong Kong, Meituan Dianping, and Xiaomi will be added to the Hang Seng Index. Online housing company Beike (BEKE US) will list on the NYSE today after raising $2.1B from selling 106mm shares for $20. JD.com took a 20% stake in Fook Convenience Stores, while Vipshop (VIPS US) is reportedly exploring a Hong Kong share class.

H-Share Update

The Hang Seng came off morning highs to close -0.05%/-13 index points at 25,230 as volume declined -19% to just above the 1-year average. Breadth was off with 21 advancers and 26 decliners led by Tencent -2.02%/-57 index points, Techntronic +10.92%/+45 index points and China Mobile +3.6%/+39 index points. Chinese domiciled companies listed in Hong Kong +0.28% versus Hong Kong domiciled companies +0.29%, using the HS China Enterprise and Hong Kong 35 Indexes as proxies. The 205 Chinese companies listed in Hong Kong were off -0.14%, led by utilities +1.98%, health care +1.66%, staples +1.25%, industrials +0.93%, tech +0.59%, energy +0.53%, real estate +0.34%, discretionary -0.16%, financials -0.5%, communication -1.05%, and materials -1.38%.

Southbound Stock Connect volumes were light in mixed trading. Shanghai Stock Connect volume leaders were Tencent bought 9 to 5, SMIC sold 3 to 2, and CNBM sold 3 to 1. Mainland investors bought $8mm of Hong Kong stocks today as Southbound Connect trading accounted for 9.8% of Hong Kong turnover.

A-Share Update

Shanghai & Shenzhen traded in a tight range today, closing +0.04% and +0.06% at 3,320 and 2,216. Volumes were off-19% to just above the 1-year average, while breadth was mixed with 2,219 advancers and 1,406 decliners. Large, mid and small were mixed. The 510 Mainland Chinese companies within the MSCI China All Shares were off -0.16%, led by communication +1.4%, utilities +0.6%, staples +0.38%, industrials +0.32%, energy +0.1%, discretionary -0.01%, materials -0.02%, real estate -0.11%, financials -0.25%, tech -0.45%, and health care -1.6%.

Northbound Stock Connect volumes were light to the recent levels in mixed trading. Shanghai Stock Connect volume leaders were China Tourism Group bought 7 to 5, Jiangsu Hengrui Medicine sold almost 2 to 1, and Kweichow Moutai bought by a small margin. Shenzhen Stock Connect volume leaders were East Money bought 8 to 5, BOE Technology bought 5 to 1, and Luxshare sold a little more than 2 to 1. Foreign investors sold -$299mm of Mainland stocks today as Northbound Stock Connect trading accounted for 4.7% of Mainland turnover.

Live streamer and short video social media company JOYY Inc (JOYY US) reported strong Q2 results after the US close yesterday that handily beat analyst expectations. The company announced previously that it sold 810k shares of HUYA to Tencent, leading to a $810mm coming into the company. Percentage numbers below are year over year for Q2 2020 versus Q2 2019.

  • Revenues +36.3% to $826mm (RMB 5.84B) versus estimate RMB 5.132B
  • Cost of Revenues +50% to $533mm (RMB 3.769B)
  • Gross profit +16% to $293mm (RMB 2.071B)
  • Gross margin declined to 35.5% from 41.7%
  • Operating expenses were $285mm (RMB 2.016B)
  • Net Income $87mm (RMB 619mm)
  • Adjusted EPS +27.2% to $0.79 (RMB 5.57) versus analyst estimate RMB 4.99
  • Q3 Revenue Outlook between 26.7% to 29.9%

Online gaming company NetEase reported Q2 results before the US open today that exceeded analyst expectations by a fairly wide margin. Earlier this week NetEase inked a deal with Universal Music Group on the same day as Tencent Music Entertainment. Tencent and NetEase are competitors in the online gaming space. In June NetEase celebrated its 20th year anniversary in June. Would you believe that NTES outperforms Amazon and up until recently outperformed Apple? Everyone talks about risk but never the rewards. On the conference call, management noted a pick up in Chinese consumer spending. Percentage numbers below are year over year for Q2 2020 versus Q2 2019.

  • Revenue +25.9% to $2.6B (RMB18.2B) versus analyst estimate of RMB 17B
  • Online Games were $2B
  • Gross profit +26.6% to $1.386B (RMB 9.792B)
  • Gross profit margin 63.8%
  • Operating Expenses +40.1% to $795mm (RMB 5.622B) up from RMB 4.891B
  • Non GAAP Net Income $739mm (RMB 5.226B) versus analyst estimate of RMB 4.242B
  • Adjusted EPS $5.64 (RMB 34.58) versus analyst estimate RMB 27.64

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.94 versus 6.94 yesterday
  • CNY/EUR 8.23 versus 8.18 yesterday
  • Yield on 1-Day Government Bond 1.38% versus 1.43% yesterday
  • Yield on 10-Year Government Bond 2.96% versus 2.96% yesterday
  • Yield on 10-Year China Development Bank Bond 3.47% versus 3.49% yesterday