Daily Posts

Tencent Music Entertainment and Kuaishou Earnings as Baidu Hong Kong Lists

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Key News

Asian markets followed the US equity markets higher at the open but quickly reversed as the US and EU’s sanctions for humanitarian reasons on Chinese officials were responded with a forehand back over the net from China reciprocating the move. Several brokers mentioned a Bloomberg article with Li Daokui, an ex-PBOC member of the monetary policy committee, stating that investors flow into emerging markets may reverse on higher US interest rates later this year as a culprit of Hong Kong’s weakness. Investors in Turkey might disagree with the second half of the 2021 assessment. Investors in Asia didn’t look at our indicator of political rhetoric seriousness as CNY was flat overnight, telling us this is more bark than bite. Baidu’s Hong Kong listing opened up +0.79%, reached an intra-day high of +1.83%, but closed flat. Baidu’s US share class had anticipated a strong move on the Hong Kong listing though the timing post-correction isn’t great as sentiment has become more cautious.

I had mentioned that FTSE Russell indexes moved from Alibaba’s US share class to their Hong Kong share class for their indexes. The largest EM ETF globally is benchmarked to the FTSE index, though it is benchmarked to a customized FTSE EM index. The index and thus the ETF benchmarked to it did not move to the Hong Kong share class. Being based in the US, it makes sense to me to operationally stick to the US share class. Due to the Hong Kong stamp tax being raised 30% in August to 13bps on buys and sells, it makes cents. 

MSCI released a two-part white paper titled “Foundations of Dedicated China Allocations” aimed at institutional investors, such as pension plans, foundations, and endowments, on how to break out a China allocation. We’ve previously mentioned the success of many institutional investors in Chinese private equity beginning twenty years ago as the Yale Endowment model’s use of alternatives was replicated. An element of that private equity went into Chinese companies leading to strong returns. The report looks at the asset allocation of four sovereign wealth funds/pension plans: Singapore’s GIC, Australia’s FutureFund, Norway’s NBIM, and Canada’s CPPIB. What is interesting are the very high allocations to emerging markets (50%, 24%, Asia 20%, and 33% respectively) versus traditional benchmarks. In the footnote, it states that three of the four have offices in China. It doesn’t explicitly state if this is public equity investments, but I’d assume so.  I recall reading that the average US household has just over 2% of their equity in EM stocks. Makes you think! 

  • Bilibili has raised $2.6B from investors by selling 25mm shares in its upcoming Hong Kong relisting. 
  • Tencent reports tomorrow after the Hong Kong close.
  • Wuxi Biologics (2269 Hong Kong) reported after the Hong Kong close of revenues up +41% and net income up +67% year-over-year in 2020.

Bytedance rival and recent Hong Kong IPO and short video provider Kuaishou Technology (1024 Hong Kong) reported Q4 financial results after the Hong Kong market’s close today. The company had a large paper loss driven by the fair value change of convertible bonds that analysts will overlook. While expenses did increase, they were not outsized. The company’s cash increased tremendously to RMB 20.619B in 2020 from RMB 3.996B in 2019. While Kuaishou is known for its short videos, which generated 43.6% of revenue,  online marketing services grew to be the biggest contributor to revenue at 47%. The company was able to effectively monetize its user base through more advertising revenue. As a growth company, investors are apt to overlook the larger loss which is partially driven by the convertible bond. At the same time, the market is increasingly focused on quality so the company should look to becoming profitable in the future. 

  • Revenues +52.7% to RMB 18.098B from RMB 11.852B
  • Live streaming revenue +71.9% to RMB 7.899B (43.6% of revenue), online marketing service +26.6% to RMB 8.511B (47%) and other services +9.4% to RMB 1.687B 
  • Average daily users +31.4% to 271.3mm while average monthly users +23% to 475.7mm
  • Gross profit increased 83.5% to RMB 8.503B from RMB 4.633B
  • Operating loss widened 8.2% to RMB -1.377B from RMB 974mm
  • Fair value change of convertible bond was  a loss of RMB 17.695B
  • This ballooned losses to RMB -19.263B
  • Adjusted Net loss declined -12.2% to RMB 704mm from RMB 802mm

Online music platform Tencent Music Entertainment (TME US) reported Q4 financial results after the US close yesterday. The results were fairly uninspiring as not that bad but not that good neither. Take a look!

  • Revenues increased +14.3% to RMB 8.34B ($1.28B) versus analyst expectations of RMB 8.336B and Q4 2019’s RMB 7.293B
  • Online music paying users +40.4% to 56mm from 39.9mm though social entertainment paying users declined -14.3% to 10.8mm from 12.6mm
  • Both mobile monthly active users for online music and social entertainment declined with the former off -3.4% to 622mm and the latter -4.3% to 223mm
  • Cost of revenues and total operating expenses increased by 17.4% to RMB 5.64B ($864mm) and 18.4% to RMB 1.68B ($157mm)
  • Interesting the company tax rate fell in Q4 to 5.5% from 12.4% 
  • Adjusted net income was RMB 1.364B  versus analyst expectations of 1.353B and Q4 2019’s RMB 1.360B
  • Adjusted EPS was RMB 0.80 versus analyst expectations of RMB 0.80 and Q4 2019’s RMB 0.80

H-Share Update

The Hang Seng closed off -1.34% while the Chinese companies listed in Hong Kong within the MSCI China All Shares Index were off -1.95%, with staples, discretionary, utilities, and materials materially weaker. Growth sectors were hit after yesterday’s rebound on stronger volume gaining +24% from yesterday, which is just above the 1-year average. Hong Kong volume leaders by value traded were Tencent, which fell -0.79% in advance of its Q4 post the Hong Kong close tomorrow, e-cigarette stock Smoore International, which dropped -27.22% on news that e-cigs will be treated like cigarettes, Meituan, which fell -5.24% on strong outflows from Southbound Connect, Alibaba Hong Kong, which was off -0.52%, Xiaomi, which fell -4.11%, Baidu Hong Kong, which was flat, Geely Auto, which fell -6.63%, Hong Kong Exchanges, which fell -1.58%, China Mobile, which was off -0.86%, and Kuaishou Tech, which fell -4.32% as the company reported Q4 after the Hong Kong close. Southbound Stock Connect flows were light as Mainland investors sold $566mm of Hong Kong stocks as Southbound connect trading accounted for 13.8% of Hong Kong turnover.

A-Share Update

Shanghai, Shenzhen, and STAR Board were off -0.93%, -1.13%, and -0.51% respectively as volume increased +3.6% from yesterday but was still below the 1-year average. There was talk that several STAR Board-focused mutual funds have launched recently as we should see that cash put to work soon. Energy and materials were off today while alcohol stocks Kweichow Moutai, which rose +0.3%, and Wuliangye Yibin, which rose +1.06% outperformed. Similar to Hong Kong, many growth sectors that were up yesterday were hit today. Even carbon-neutral stocks were off along with metals off heavily as breadth saw 1,067 advancers and 2,814 decliners. Foreign investors sold $1.103B of Mainland stocks, which is almost exactly what they bought yesterday, as Northbound Connect trading accounted for 6.6% of Mainland turnover. Bonds continued to rally, CNY was flat versus the $, and copper was up a touch.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.51 versus 6.51 Yesterday
  • CNY/EUR 7.74 versus 7.76 Yesterday
  • Yield on 10-Year Government Bond 3.21% versus 3.23% Yesterday
  • Yield on 10-Year China Development Bank Bond 3.61% versus 3.63% Yesterday
  • China’s Copper Price +0.37% overnight