Q1 Financial Results

Search giant Baidu (BIDU US and 9888 HK) reported solid Q1 financial results before the US open this morning driven by its core search business. For several years, Baidu has been utilizing the cash thrown off from the core search business to invest in cloud computing, machine learning, autonomous driving via its Apollo network, and smart speakers like Alexa. These efforts appeared to have paid off as “non-marketing revenue” increased 70% to $646mm (RMB 4.2B) driven by cloud computing and “other services”. Yes, this is small relative to the core search business, but it is growing rapidly. Baidu also owns the entertainment network iQIYI, which it spun off. Similar to Q4 2020, management has kept costs down, leading to a strong increase in net income and earnings per share (EPS). This is a very smart move as the market is increasingly focused on quality/net income/free cash flow versus hyper revenue growth/no net income. Q1 2021’s percentage change is year over year (YoY) in comparison to Q1 2020. 

• Revenues increased 25% to $4.29B (RMB 28.1B) versus analyst expectations of RMB 27.269B
• Baidu Core (Search) increased 34% to $3.13B (RMB 20.5B), online marketing revenue +27% to $2.48B (RMB 16.3B) and non marketing revenue +70% to $646mm (RMB 4.2B)
• Total Costs & Expenses increased to RMB 25.345B ($3.868) from Q4 2020’s RMB 25.286 and Q1 2020’s RMB 22.982
• Net income RMB 25.032B ($3.82B)
• Adjusted Net income RMB 4.362B ($666mm) versus analyst expectations of RMB 3.62B which is an increase of 204% YoY though off -38% quarter over quarter
• Adjusted EBITDA increased 107% YoY though off -31% quarter over quarter to RMB 5.9B ($901mm) versus analyst expectations of 5.148B
• Adjusted EPS RMB 12.38 ($1.89) which is up versus Q1 2020’s RMB 8.84 though off versus Q4 2020’s RMB 20.08
• Q2 Revenue forecast between $4.5B (RMB 29.7B) and $5B (RMB 32.5B) implying a growth rate between 14% to 25% with Baidu Core growing between 20% and 33%
• Baidu has $26.4B (RMB 172.9B) of cash and cash equivalents as free cash flow was $400mm (RMB 2.6B)

I’ve always found Baozun (BZUN US and 9991 HK) to be an interesting company as it helps “brands execute their e-commerce strategies in China”. The company helps foreign firms navigate the various e-commerce platforms, advising which key opinion leaders (KOL) to hire, and setting up their WeChat and Weibo accounts. I need to do more research as the disparity between the company’s GAAP and Adjusted net income is very wide. Many tech companies and the analysts that follow them are more focused on adjusted (non-GAAP) because the stock options they give for GAAP accounting purposes are considered a cash use even the company doesn’t spend money giving options. The company announced an ADR stock buyback of $125mm in a sign management believes the stock is cheap. 

• Revenues increased +32.6% to RMB 2.020B ($308mm) versus analyst expectations of RMB 2.032B
• Gross merchandise volume increased +43.8% to RMB 13.410B
• Number of brand partners increased to 281 from 239
• Total operating expenses increased to RMB 1.967B ($300mm) from Q1 2020’s RMB 1.51B
• Net income increased to RMB 2.132B ($192mm) from Q1 2020’s RMB 1.659B
• Adjusted net income increased from Q1 2020’s RMB 25.549B to RMB 62.228B ($9.498B)
• Adjusted EPS RMB 0.83 ($0.13) from Q1 2020’s RMB 0.44
• The company reported cash holdings of RMB 4.461B ($680mm) which is down a touch

Baidu spin-off and online entertainment company iQIYI (IQ US), which is often referred to as the Netflix of China, reported Q1 financial results before the US market open. iQIYI faces numerous challengers for users’ attention such as Bytedance (TikTok), Kuaishou, and others. The company is trying to grow market share but generating losses by doing so. The company is not growing top-line quickly. Adding insult to injury are the Archegos hedge fund-owned shares. The unwind has left IQ below its IPO price and at an all-time low. With all that said, the Q1 results did beat analyst expectations.

• Revenue increased 4% to RMB 8B ($1.2B) versus analyst expectations of RMB 7.674B
• Membership revenue declined YoY from RMB 4.634B to RMB 4.311 though up from Q4 2020’s RMB 3.835
• Online advertising revenue increased YoY from RMB 1.536B to RMB 1.916B and up from Q4 2020’s RMB 1.859B
• Operating costs and expenses declined YoY but increased QoQ to RMB -8.982B
• Operating loss was RMB -1.014B
• Net loss was RMB -1.27B which is a decline YoY and QoQ
• Adjusted EPS loss was RMB-1.61 versus analyst expectations of RMB -1.91
• Q2 revenue forecast is $1.1B (RMB 7.21B) to $1.17B (RMB 7.65B) representing a growth rate of -3% to +3%

Online gaming company NetEase (NTES US and 9999 HK) reported Q1 2021 financial results before the US market open, which beat analyst expectations. The company, taking cash from its profitable gaming business and investing in both a search engine and online music, announced a deal with Sony Music yesterday. The company keeps a close eye on expenses while continuing to buy back shares and pay a dividend. The company is very well run and it shows! 

• Revenues increased 20.2% to RMB 20.5B ($3.1B) versus analyst expectations of RMB 4.253B
• Online game revenue increased 10.8% to RMB 15B ($2.3B) while search engine Youdao revenue increased +147.5% to RMB 1.3B ($204.5mm) while innovate businesses increased +39.7% to RMB 4.2B ($640mm)
• Mobile gaming accounted for 72.8% of gaming revenue
• Net income increased to RMB 4.513B ($688mm) from Q1 2020’s RMB 3.95B
• Adjusted net income increased to RMB 5.080B ($775mm) versus analyst expectations of RMB 4.253B and Q1 2020’s RMB 4.212B
• Adjusted EPS RMB 7.47 ($1.14) versus analyst expectations of RMB 6.04
• The quarterly dividend was increased to $0.06 from Q1 2020’s $0.464
• The company announced a $2B ADR repurchase plan on Feb 25, 2021
• The company holds cash on the books of RMB 106.249B ($16.216B) as cash flows from operating activities in Q1 2021 were RMB 5.542B ($846mm)

Online music and audio entertainment company Tencent Music Entertainment Group (TME US) provided Q1 2021 financial results after the US market close yesterday. The results somewhat remind me of Starbucks' results back in late April in that the number of users declined though the amount spent by users increased. Investors are apt to like the top, though the bottom (net income) was off a touch versus analyst expectations. It is interesting to note that TME appears to be taking advantage of regulators' focus on companies with large user bases by inking an online music deal with Sony. TME announced that they are working with regulators as their exclusivity deals with music labels raise anti-monopoly concerns. TME stock is off 51% from its peak following the liquidation of Archegos’ position in the stock. 

• Revenues increased +24% YoY to $1.19B (RMB 7.82B) versus analyst expectations of $7.345B
• Online music paying users +42.6% YoY to 60.9mm though online music mobile monthly users declined -6.4% to 615mm
• Revenues from online music services increased +34.5% to $420mm (RMB 2.75B)
• Social entertainment paying users declined -12.4% to 11.3mm users while monthly mobile users -14.2% to 224mm
• Revenues from social entertainment services increased +18.9% to $775mm (RMB 5.08B)
• Cost of revenues increased +23.6% to $818mm (RMB 5.36B)
• Net profit was $141mm (RMB 926mm) versus RMB 887 in Q1 2020
• Adjusted net profit was $180mm (RMB 1.18B) versus RMB 1.1B in Q1 2020
• Diluted EPS was $0.08 (RMB 0.55)
• Adjusted diluted EPS was $0.11 (RMB 0.69) versus analyst expectations of RMB 0.70
• Net cash provided by operating activities increased to $287mm (RMB 1.88B) from RMB 1.07B in Q1 2020
• Cash on the books declined to $4.12B (RMB 26.97B) from RMB 28.94B

Key News

Asian equities had a strong day with Taiwan rocketing +5% as foreign investors bought the dip as locals puked on pandemic concerns. China extended tariff exemptions on 79 US products in what is widely viewed as an olive branch to the US. There was very little media coverage due to the current view – if it isn’t negative, it isn’t fit to print.

China Mobile’s decision to relist on the Shanghai Stock Exchange after losing its delisting appeal with the NYSE is getting some attention. I still believe the company is apt to challenge the Executive Order in court, similar to Xiaomi.

Energy stocks had a strong day as crude oil futures punched above $66 as the IEA called for a halt of new oil projects to fight climate change. Gold stocks had a strong day in the Mainland while healthcare was off in the Mainland on news the government might waive patents on coronavirus vaccines. Charts of the Shanghai and Shenzhen market have punched above resistance levels closing above the 3,500 and 2,300 levels.

USAfacts.org provided their state of the union, 2021 government 10-k, and 2021 annual report. The non-partisan data provider, founded by Steve Ballmer, attempts to provide data analysis of the US government’s finances and other interesting data points. I highly recommend taking a look at how your tax dollars are spent. I’ll step off the soapbox now. 

H-Share Update

Hong Kong stocks ripped in advance of tomorrow’s market holiday for Buddha’s birthday gaining +1.42%, though volumes were off -10.36% from yesterday, which is only 81% of the 1-year average. The 200 Chinese stocks listed in Hong Kong within the MSCI China All Shares Index rose +1.43%, led by energy +3.96%, real estate +2.735, industrials +2.02%, healthcare +2.01%, tech +2.01%, and utilities +1.8%. Hong Kong’s most heavily traded by value were Tencent, which rose +1.17%, Meituan, which rose +2.28%, Alibaba Hong Kong, which rose +1.07%, Li Ning, which fell -3.23%, China Mobile, which rose +2.66%, Xiaomi, which rose+1.72%, Ping An, which rose +0.18%, Hong Kong Exchanges, which rose +2.07%, Mengniu Dairy, which rose +1.02%, and AIA, which rose +0.78%. Southbound Stock Connect volumes light as mainland investors bought $563mm of mainland stocks as Southbound trading accounted for 11.4% of Hong Kong turnover.

A-Share Update

Shanghai, Shenzhen, and STAR Board diverged at +0.32%, +0.17%, and -0.55% respectively as turnover plummeted -18.98% from yesterday, which is only 84% of the 1-year average. One culprit on the lack of volume was because Northbound Stock Connect was closed today due to Hong Kong’s holiday tomorrow. The 517 Chinese stocks within the MSCI China All Shares Index rose+0.25%, led by energy +2.06%, real estate +1.25%, communication +1.09%, and materials +0.75%, while healthcare and discretionary fell -0.88% and -0.11% respectively. The most heavily traded stocks by value were Fosun Pharma, which fell -8.33%, broker East Money, which rose +0.26%, Tianqi Lithium, which fell -4.29%, COSCO Shipping, which gained +4.95%, Changan Auto, which fell -1.26%, Chongqing Sokon, which gained +10%, BAIC BluePark New Energy Tech, which gained +6.54%, BOE Tech, which gained +1.07%, Wuliangye Yibin, which gained +0.78%, and Huadong Medicine, which fell -0.47%. It is interesting to note that Kweichow Moutai didn’t make the top ten, which is rare though it closed with a James Bond rising +0.07%. CNY appreciated to 6.43, bonds gained, and copper rose +1.25% overnight.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.43 versus 6.44 yesterday
• CNY/EUR 7.85 versus 7.82 yesterday
• Yield on 1-Day Government Bond 1.70% versus 1.70% yesterday
• Yield on 10-Year Government Bond 3.15% versus 3.15% yesterday
• Yield on 10-Year China Development Bank Bond 3.54% versus 3.52% yesterday
• Copper Price +1.25% overnight