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Key News

North Asian equities had an ugly night as Japan, Hong Kong, China, India, and Taiwan were all off. However, South Korea did not seem to get the memo. Southeast Asia held up as Thailand, Singapore, the Philippines, and Malaysia saw gains.

There was no single catalyst as political rhetoric and threats to global reopening weighed on markets. US Treasury yields were not a factor. In addition to EU lockdowns, BioNTech’s vaccination was suspended in Hong Kong, leading to an ugly day for reopening plays such as airlines, hotels, restaurants, and local Macau gaming stocks.

Reports about Tencent founder and CEO Pony Ma meeting with internet regulators were filled with conjecture as the company said it will comply with the rules. We also had Bloomberg reporting the PBOC will oversee technology companies’ use of personal data. However, I did not see this reported on by any Mainland media sources, Mainland brokers, or Mainland financial newsfeeds.

Tencent Earnings Overview

Social media and online gaming giant Tencent (700 HK) reported Q4 results after the close in Hong Kong today. Overnight, there was a great deal of talk about founder and CEO Pony Ma’s meeting with internet regulators. Increased regulation has been an overhang for the space as the market hates uncertainty. During the earnings call, analysts did ask about this. The company said they respect users’ data.

Tencent was also asked how new regulations will affect the company’s fintech operations. Company directors responded that they “always comply with regulations” and exercise “prudent risk management”. The company aims to work with financial institutions, rather than replace them. New loan rules include a 30% funding ratio, a max loan size of RMB 200k, and no loans to college students. CEO Martin Lau stated the company complied with these rules before they were released, which is why they will be less affected.

Tencent reported strong results for the 4^th quarter of 2020. Tencent is famous for its WeChat instant messaging and social media platform though online gaming remains a dominant revenue driver. One interesting nugget from the release was that online gaming revenues were 3X personal computer revenues. The company outlined its ESG policies as well, demonstrating that it is attuned to global investors’ focus.

Percentage changes are year over year.

• Revenue increased 26% to RMB 133.669B ($20.486B) versus analyst expectations of RMB 133.068B
• Monthly Average Users of WeChat and its Chinese version Weixin increased +5.2% to 1.225B  from 1.164
• Paying users of Value Added Services (VAS, i.e. gaming and WeChat) increased +21.9% to 219.5mm
• VAS increased +28% to RMB 67B with online games growing 29% to RMB 39.1B
• Online Advertising +22% to RMB 24.7B
• FinTech/Business Services increased +29% to RMB 38.5B
• Adjusted Net Margin 44%
• Adjusted net income increased 30% RMB 33.207B versus analyst expectations of RMB 32.645B
• Adjusted EPS RMB 3.49 versus analyst expectations of RMB 3.42 and Q4 2019’s RMB2.24
• Cash at quarter-end was RMB 259.507B ($39.772B)

Tencent proxies Prosus is off ~-1% in European trading while Naspers is off ~-0.77% in South Africa. If you or your ETF/mutual fund own Tencent, Prosus, and Naspers, you own the same exposure three times!

H-Share Update

The Hang Seng dropped -2.03%, closing below 28k at 27,918 with 1 advancing stock and 52 decliners as volume increased +14% from yesterday to 123% of the 1-year average. There was no safety in value stocks today as the broader Hang Seng Composite Index had 51 advancers and 439 decliners while the Chinese companies listed in Hong Kong and within the MSCI China All Shares Index fell -2.05%. Hong Kong’s volume leaders by value traded were Tencent, which fell -0.8%, Meituan, which fell -3.88%, Geely, which fell -11.75% as revenue was down -5.4% and net income -32% year-over-year, Xiaomi, which fell -2.53%, Kuaishou Tech, which fell -12.02% following results after Hong Kong’s close yesterday as revenues grew strongly, but losses widened, Alibaba HK, which was flat as some might notice the company’s valuation metrics are two standard deviations below the five year average, HK Exchanges, which fell -2.94%, condiment maker Yihai Int’l, which fell -10.19% after financial results missed analyst expectations, Ping An Insurance, which fell -0.75%, and BYD, which fell -6.87% in sympathy (or pain) with Geely despite earnings next week. Southbound Connect volumes were light as Mainland investors sold Meituan and Tencent overnight.

A-Share Update

Shanghai, Shenzhen, and STAR Board were off -1.3%, -1.41%, and -1.22%, respectively, as volume declined -3.42% from yesterday to just 87% of the 1-year average. Breadth left much to be desired with 1,158 advancers and 2,687 decliners. As in Hong Kong, value stocks were no safe haven as materials fell -4.66% and industrials fell -3.46%. The only positive today was Northbound Stock Connect volumes, which were moderate as foreign investors purchased $767 million worth of Mainland stocks.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.53 versus 6.52 yesterday
• CNY/EUR 7.72 versus 7.74 yesterday
• Yield on 1-Day Government Bond 1.40% versus 1.50% yesterday
• Yield on 10-Year Government Bond 3.19% versus 3.21% yesterday
• Yield on 10-Year China Development Bank Bond 3.59% versus 3.61% yesterday
• China's Copper Price -0.88% overnight