Daily Posts

Tencent and Pinduoduo’s Q3 Results Beat Estimates

Key News

Asian markets were, for the most part, slightly lower or unchanged overnight, though Shenzhen and New Zealand were outliers to the upside. China released credit data overnight indicating that fiscal conditions tightened somewhat in October amidst an improving domestic economy. M2 grew by +10.2% versus an expected +10.9%.

Hong Kong and Singapore will open up a “travel bubble” between the two cities in a sign of confidence in their defeat of the coronavirus. Travel between the two will be permitted starting November 22nd without the need to quarantine in either city, though travel will be limited to 200 people per day in either direction. This represents a stark contrast with Europe and the US., where Covid-19 cases continue to rise. Yesterday, New York announced new restrictions on bars, restaurants, and large gatherings.

The rotation to value lost some steam in China overnight as tech and discretionary outperformed. Tencent’s above estimate earnings likely played a role. This can be evidenced by the divergence between the Shanghai Composite Index and the growth-heavy Shenzhen Component Index, which rose as the latter fell.

Tencent, Pinduoduo, and Huya Q3 Earnings Review

Online gaming giant Tencent (700 HK), which is famous for its WeChat social media platform, reported very strong Q3 financial results after the close in Hong Kong and prior to the US market open. This is a $700 billion company that grew revenue by +29% YoY in the third quarter. You got to love it. Super solid. As expected, management fielded questions about the new anti-monopoly draft rules on their earnings call. Management’s response was very cool, concise and collected. After all, you don’t end up running a company like Tencent without being, as they say in Massachusetts “whicked smaht”. The company pointed out that the rules are only “draft rules” that emphasized not only fair competition, but also innovation. They don’t believe the rules are something completely new or unique to china. They did point out that online games don’t appear to be a focus.

  • Revenues +29% to $18.421B (RMB 125.447B) versus estimate RMB 123B
  • Gross margin 45%
  • WeChat users 1.212 billion
  • Online gaming revenue +45% to RMB 41.422B
  • Online Advertising revenue +16% to RMB 21.351B
  • FinTech revenues +24% RMB 33.255B
  • Operating profit  +34% to $5.597B (RMB 38.116B) versus estimate RMB 37B
  • Net Margin 31%
  • EPS RMB 3.40 versus estimate RMB 3.23
  • Cash held by company $39.044B (RMB 265.892B)

E-commerce company Pinduoduo (PDD US) reported Q3 financial results this morning. The company saw very strong top line growth in the quarter while the growth-focused company cut costs to deliver net income. Pinduoduo’s CEO is a self-proclaimed tech nerd, who has said he is more interested in growing the business than profits. Pinduoduo very deftly delivered net income at a time when everyone is focused on valuation, which is very smart on their part. Bravo!

  • Revenue +89% to $2.092B (RMB 14.209B) versus estimate RMB 12.205B
  • Gross Merchandise Value sold $214.7B (RMB 1.457B)
  • Average monthly active users +50% to 643mm
  • Active buyers +36% to 731mm for the past twelve months
  • Adjusted Net Income $68.7mm (RMB 466mm) versus estimate
  • Adjusted EPS $0.05 (RMB 0.33) versus estimate RMB -1.10

Online video streamers Huya (HUYA US) and Douyu (DOYU US) reported Q3 results prior to yesterday’s US open. I’m going to focus on HUYA as the two Tencent-backed companies are in the process of merging. Both stocks traded up as HUYA gained +3.47% and DOYU gained +1.4% yesterday.

  • Revenue +23.3% to $414mm (RMB 2.814B) versus estimate RMB 2.815B
  • Cost of Revenues +18% to $323mm (RMB 2.194B)
  • Gross profit +52.7% to $91.m4mm (RMB 620mm)
  • Average Monthly Average Users+18.3% to 172mm while mobile MAUs +16.3% to 74.2mm
  • Paying Users +13.2% to 6mm
  • Adjusted Net Income +75% to $53mm (RMB 362mm) versus estimate RMB 343mm
  • Adjusted EPS (RMB 1.50) versus estimate RMB 1.40

H-Share Update

The Hang Seng opened higher but slid to close -0.22%/-57 index points at 26,169 as volume declined -37% from yesterday, which is still 140% of the 1-year average. Breadth was off with 17 advancers and 31 decliners. The 204 Chinese companies within the MSCI China All Shares Index gained +1.74% led by discretionary +5.44%, communication +3.76%, tech +2.8%, health care +2.07% and staples 1.78% while real estate -2.21%, utilities -1.27%, financials -1.18% and industrials -1.05%. Southbound Stock Connect volumes were moderate/light as Mainland investors bought $206 million worth of Hong Kong stocks as Southbound Connect trading accounted for 9% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen had a choppy session until closing -0.11% and +0.43% at 3,338 and 2,273, respectively, as volume declined -18% from yesterday, which is -12% below the 1-year average. Breadth was mixed with 1,767 advancers and 1,926 decliners. The 518 Mainland Chinese stocks within the MSCI China All Shares Index gained +0.1% led by discretionary +2.12%, materials 0.97%, and health care +0.9% while financials -1%, real estate -0.74%, and energy -0.62%. Northbound Stock Connect volumes were moderate as foreign investors sold Shanghai stocks and bought Shenzhen stocks for a net sale of -$76 million as Northbound Connect trading accounted for 5.5% of Mainland turnover.

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.61 versus 6.63 yesterday
  • CNY/EUR 7.81 versus 7.80 yesterday
  • Yield on 1-Day Government Bond 1.92% versus 1.91% yesterday
  • Yield on 10-Year Government Bond 3.26% versus 3.24% yesterday
  • Yield on 10-Year China Development Bank Bond 3.72% versus 3.71% yesterday