Daily Posts

CNY Rallies as Baidu Brings the JOYY to its Q3 Results, KE Holdings Crushes Q3 Results

Baidu (BIDU US) reported Q3 results after the US close yesterday. The company also announced that it is officially buying JOYY Inc’s (YY US) China online video streaming business to garner more eyeballs to its ecosystem. JOYY, which reported positive Q3 results as well, will focus on its Bigo online video platform that is popular in SE Asia. 

  • Revenue +1% to $4.16B (RMB 28.2B) versus estimate RMB 27.521
  • Adjusted Net Income $1.03B (RMB 7B) versus estimate RMB 4.581B
  • Adjusted Net margin 25%
  • Adjusted EPS $3 (RMB 20.35B) versus estimate RMB 13.45
  • Q4 forecast between $4.2B and $4.6B which is % growth between -1% to +10%

Online entertainment business and Baidu spin-off iQIYI (IQ US) reported after the US close yesterday. The results beat low expectations but were clearly off. 

  • Revenue -3% to $1.1B (RMB 7.2B) versus estimate RMB 7.412B
  • Membership services revenue +7% to $585mm (RMB 4B) 
  • Online advertising -11% to $271mm (RMB 1.8B)
  • Operating loss -$178mm (RMB 1.2B) versus estimate RMB -1.849B
  • Net loss -$173mm (RMB 1.2B) which an improvement from Q3 2019’s loss of RMB -3.7B
  • Loss per share -$0.24 (RMB -1.61)
  • Q4 forecast $1.07B to $1.14B which is a year over year percentage between -3% to +3%

Also reporting after the US close yesterday was online housing platform KE Holdings (BEKE US). The results were very strong! You’ll notice a big difference between the GAAP and Adjusted (ie non-GAAP) EPS, which is not unusual for growth companies that give stock options to employees. For GAAP accounting, the stock options are an expense, which is why many growth companies report both GAAP and Adjusted numbers.

  • Revenue +70.9% to $3B (RMB 20.5B) versus estimate RMB 17.13B
  • Cost of Revenues +78% to $2.4B (RMB 16.2B)
  • Gross profit +49.1% to $0.6B (RMB 4.4B)
  • Gross margin 21.3% versus 24.4% in Q3 2019
  • Net income loss $11mm (RMB 75mm)
  • Adjusted net income +210.6% to $274mm (RMB 1.858B) versus estimate 1.101B
  • EPS loss -$0.05 (RMB -0.33) versus estimate RMB -0.44
  • Adjusted EPS +762.5% to $0.20 (RMB 1.38) versus estimate 1.10
  • Gross transaction value (GTV) +87.2% to $154.6B (RMB 1.050 trillion)
  • Mobile monthly active uses +50.7% to 47.9mm
  • Adjusted Net Income +210.6% to $274mm (RMB 1.858B)
  • Q4 revenue forecast between $2.8B (RMB 19.2B) and $3B (RMB 20.2) which is a gain between 33.5% to 40.5%

Key News

Asian equities posted small gains overnight with Mainland China and South Korea off a touch. CNY, China’s currency traded during Mainland trading hours, appreciated 0.43% versus the US $ to 6.55. The Hang Seng posted a small gain led by re-opening stocks as growth names were sold to fund the purchases. Hong Kong volume leaders were Tencent, which fell -2.6% despite strong buying from Mainland investors via Southbound Stock Connect, Meituan Dianping, which fell -4.84% after yesterday’s Hang Seng Index inclusion rally, Alibaba Hong Kong, which fell -1.65%, JD.com, which was off -7.12% despite strong Q3 results, Xiaomi, which fell -4.37% on news that Huawei is selling its low-end Honor mobile phone business, and BYD which fell -4.37% despite positive auto sales in China. Reopening/vaccine hopes fueled energy stocks while airlines and shipping companies lifted the industrial sector.

Shipping and logistic companies rallied on the RCEP trade deal signed Sunday. Growth stocks were weaker with healthcare off on the vaccine news. A similar story played out in the Mainland with Shanghai off -0.21% and Shenzhen off -0.9% led lower by growth-focused mid and small caps. Foreign investors participated in the rotation as Shanghai stocks were bought and Shenzhen stocks were sold. One broker noted that Trump is unlikely to go silently into the night with more China regulations pushed through before Biden’s inauguration. 

The WSJ had an exclusive article (ie. White House leak) that the SEC will make a push to tighten rules on US-listed Chinese companies over the long-running PCAOB issue of Chinese companies not allowing their auditor books to be examined due to the Chinese law before head Jay Clayton leaves at year-end. This is another attempt to force China’s rules on a Biden administration similar to last week’s Executive Order. Ultimately, the PCAOB issue is apt to be resolved under a Biden administration as there has been limited engagement between the US and China on the issue. Chinese companies continue to list here, which is an indication that they believe the issue will be resolved. Let’s be sure to check CNH today as stocks tend to move, but currency provides an indication if the bark has any bite to it. 

Over the last decade, China has gone from 17% to over 40% of MSCI Emerging Markets. Numerically, China has gone from 138 holdings to over 700 stocks of the EM index holdings. Of course, we’ve only added 20% of the potential weight of the Chinese A-Shares within the MSCI China A Index. Full inclusion would get China to around 50% of the index. However, Hong Kong domiciled stocks within the MSCI Hong Kong are not considered part of China nor EM as they are considered a developed market. I’ve speculated that 47 stocks, including AIA and Hong Kong Exchanges, with a market cap of $487B of market cap could be added to the definition China at some point. Hong Kong has a strong regulator with the Securities & Futures Commission (SFC) and Independent Commission Against Corruption (ICAC).

I noticed that former index provider FTSE CEO Mark Makepeace opinioned on the issue while promoting his new book “FTSE: The Inside Story” on Sky News. As Hong Kong becomes more aligned with China both politically and financially, a “demotion” to EM could occur. While considered a downgrade, the flows would be significantly more being in EM over the developed market. Adding Hong Kong’s market cap ($487B) to MSCI China’s market cap ($2.814 trillion) and then dividing by MSCI EM’s market cap ($6.510 trillion) would raise China’s weight within MSCI EM to 50.7%! That’s not including the additional 10% coming from the addition of Chinese A shares, which taken together gets us to 60% of MSCI EM! It’s happening people. Not today, not tomorrow but it’ll happen!

H-Share Update

The Hang Seng came off the day’s high but closed up +0.13%/+33 index points at 26,415. Volume was off by -1% from yesterday, which is 119% of the 1-year average while 32 stocks advanced and 17 declined. The 204 Chinese companies listed in Hong Kong within the MSCI China All Shares Index fell -1.09%, with energy up +2.07%, financials +1.28%, and industrials +0.79%, while discretionary fell -3.13%, communication -2.46%, healthcare -2.09%, and tech -1.53%. Southbound Stock Connect volumes were moderate/light as Mainland investors sold $63mm of Hong Kong stocks as Southbound trading volume accounted for 10.1% of Hong Kong turnover. 

A-Share Update

Shanghai & Shenzhen were off by -0.21% and -0.9% to close at 3,339 and 2,269 respectively. Volume was up +6% from yesterday, which is 105% of the 1-year average while breadth was off with 1,246 advancers and 2,492 decliners. The 519 Mainland stocks within the MSCI Chin All Shares Index were off -0.16%, with real estate up +2.76%, financials +1.2%, and energy +0.79% while healthcare was off -2.52%, staples -0.74%, and materials -0.71%. Northbound Stock Connect volumes were moderate/high with foreign investors buying Shanghai stocks while selling Shenzhen stocks for a net buy of $8mm as Northbound Connect trading accounted for 6.5% of Mainland turnover.

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.56 versus 6.58 yesterday
  • CNY/EUR 8.69 versus 8.68 yesterday
  • Yield on 1-Day Government Bond 1.50% versus 1.73% yesterday
  • Yield on 10-Year Government Bond 3.29% versus 3.27% yesterday
  • Yield on 10-Year China Development Bank Bond 3.72% versus 3.71% yesterday