Q1 Financial Results

Online gaming and social media behemoth Tencent (700 HK) reported Q1 financial results after the Hong Kong close/before the US market open today. The company beat topline expectations, operating profit, and EBITDA while Adjusted net income and Adjusted EPS were off a touch. With 63 buy ratings, 3 holds, and 0 sell ratings, to say that the company is well-loved is an understatement. Being the second-largest company in emerging markets and the eighth-largest company globally helps. Tencent has not been fined for anti-competitive practices yet and the topic did not come up on the management call.

In the Q4 2020 earnings call, President Martin Lau was bombarded with questions about regulation. He pointed to the strong performance of the company's fintech arm under the new rules. Once again, the FinTech unit did exceedingly well as revenue rose +47% year-over-year (YoY) in Q1. Not an issue! Operating and Net margin both improved YoY as expenses increased, but only incrementally YoY. The company did book a healthy RMB 19.521 in the “other gains” category, likely due to Kuaishou’s IPO as Tencent owns 21.49% of the company. Similar to Alibaba, Tencent stated, “we are proactively increasing our rate of investment in new opportunities by investing a portion of our incremental profits for 2021, which we believe will deliver high returns in the long run.”

Percentage changes are YoY comparisons of Q1 2021 to Q1 2020. Tencent proxies Naspers and Prosus were both +2% at the time of writing. There was very little discussion of internet regulation on the conference call other than that tutoring regulation could affect advertising, though this is not a significant worry. They did mention that Tencent is participating in the digital renminbi pilot. Management called the digital RMB just a replacement for cash.

• Revenues increased 25% YoY to RMB 135.3B ($20.6B) beating analyst expectations of RMB 133.75B and Q1 2020’s RMB 108.065B
• Revenues from online games (the company calls it Value Added Services) increased 16% to RMB 72.4B from Q1 2020’s RMB 62.429B
• Revenues from online advertising increased 23% to RMB 21.8B from Q1 2020’s RMB 17.713B
• Revenues from FinTech increased 47% to RMB 39B from Q1 2020’s RMB 26.475
• Monthly Active Users of WeChat mobile and PC increased 3.3% to 1.241B
• Adjusted net income RMB 33.118B versus analyst expectations of RMB 34.732B and Q1 2020’s RMB27.079B
• EPS RMB 4.91 versus analyst expectations of 3.54 and Q1 2020’s RMB 2.99
• Adjusted EPS RMB 3.41 versus analyst expectations of 3.56

Online real estate transaction platform and real estate brokerage company KE Holdings (BEKE US) reported Q1 financial results after the US close yesterday. What a difference a year makes! KE went from a steep loss in Q1 2020 to stunning strong results in Q1 2021, shattering analyst expectations. Unfortunately, yesterday's results will be overshadowed by the company's announcement that its founder and chairman of the board Zuo Hui passed away today at the age of 50. On behalf of KraneShares, I would like to extend my sympathies to the Zuo family and KE Holdings. The South China Morning Post has a nice tribute available online. 

• Revenues increased 190.7% to RMB 20.7B ($3.2B) versus analyst expectations of RMB 18.68B
• Gross transaction value increased 224.2% to RMB 1.069B ($163.3B)
• Monthly Active Users increased 78.2% to 48.5mm
• Net income RMB 1.058B ($161mm) versus a loss in Q1 2020 of RMB -1.231B
• Adjusted net income RMB 1.502B versus analyst expectations of 1.058B
• EPS increased to RMB 0.88 ($0.13) versus analyst expectations of RMB 0.66
• Adjusted EPS increased to RMB 1.25 ($0.19) versus analyst expectations of RMB 0.91 and Q1 2020’s loss of RMB -3.64
• Q2 Revenue forecast between RMB 22.5B ($3.4B) to RMB 23.5B ($3.6B) representing an increase between 11.7% and 16.7% versus Q2 2020
• Cash on the books is RMB 39.764B ($6.069B)

Key News

Asian equities had a quiet night in mixed trading as investors digest the Fed’s notes, which mentioned slowing the pace of bond purchases. There were more calls to stem the rise of commodity prices in China overnight. Premier Li chimed in on the issue, sending Hong Kong and Mainland China's material sector down (again) as coal, steel, and metals were off significantly. Energy stocks were also off, driven by the potential for a US-Iran nuclear deal, which could see Iran’s oil supply open up.

Hong Kong investors got a first look at many Chinese internet stocks post-earnings release due to their holiday yesterday. Investors cheered JD.com’s results, sending the Hong Kong listing up +3.69% and Trip.com’s Hong Kong listing up +2.95%. I was a bit surprised that Baidu’s Hong Kong listing was off -0.37% as the company message of non-advertising revenue increasing 4X in the next four years matching advertising revenue is a bold statement. ByteDance’s founder and CEO Zhang Yiming will step down as CEO at year-end. His statement reminded me of Pinduoduo’s founder and CEO, who also stepped down a year ago. As a computer engineer by trade, he didn’t like the job, specifically mentioning that he didn’t like managing people and would rather spend time online alone.  

The second half of Q1 2021 saw everything but the kitchen sink thrown at Chinese internet companies. The Value/Cyclical/Reopening trade funded by Growth/Work From Home trade, US regulation, China regulation, and the Archegos meltdown all contributed to the correction. This has led to a sentiment overhang with investors. I discovered an investor who is buying US and Hong Kong-listed Chinese internet stocks hand over fist. This investor appears to care less about the above concerns. The investor? Mainland Chinese investors! The people who use these companies’ services daily are buying these stocks in size. The data behind this bold statement? Many investors are familiar with China’s inbound quota programs called QFII and RQFII that allow foreign investors to buy Mainland stocks. There is also an outbound quota program called QDII which allows Mainland investors to buy foreign securities.

In Mainland China, there is an ETF comprised of US and HK listed Chinese internet stocks, which listed back in January 2017. Below is a chart of shares out of standing. During the recent correction, shares outstanding, shares created through the creation/redemption process, have gone vertical while AUM has increased despite the performance loss. Since mid-February’s correction shares outstanding have doubled! What do they know that we don’t?  

H-Share Update

The Hang Seng closed down -0.5% at 28,450 as volume increased 29% from Tuesday to 104% of the 1-year average. The 200 Chinese companies listed in Hong Kong within the MSCI China All Shares Index gained +0.12%, driven by discretionary +3.58%, tech +1.72%, and utilities +0.62% while energy -4.53%, materials -3.25%, industrials -1.6%, and financials -1.19%. Hong Kong’s most heavily traded by value were Meituan, which rose +5.08%, Tencent, which rose +0.25%, Alibaba HK, which fell -0.77%, Xiaomi, which rose +2.82%, AIA, which fell -2.03%, BYD, which rose +6.35%, JD.com HK, which rose +3.69%, Ping An, which fell -0.86%, Geely Auto, which rose +4.26%, and China Construction Bank, which fell -2.07%. Southbound Stock Connect volumes were light but up a touch from recent low volumes as Mainland investors bought $693mm of Hong Kong stocks as Southbound trading accounted for 12.4% of HK turnover. Tencent, Meituan, and Xiaomi saw large inflows. 

A-Share Update

Shanghai, Shenzhen, and STAR Board diverged -0.11%, +0.12%, and +0.28% respectively as volume increased +9.46%, which is 96% of the 1-year average. Breadth saw 1,496 advancers and 2,103 decliners. The 517 Mainland stocks within the MSCI China All Shares Index gained +0.23%, led by financials +1.13%, staples +0.93%, communication +0.87% nd healthcare +0.25% while energy -3.1%, materials -2.03% and utilities -0.91%. Mainland’s most heavily traded by value were BYD, which rose +0.09%, broker East Money, which rose +1.42%, Changan Auto, which fell -6.35, COSCO Shipping, which fell -7.36%, appliance maker Midea, which rose +4.36%, BAICC Blue Park New Energy Technology, which rose +6.31%, Tianqi Lithium, which fell -5.56%, EV battery maker CATL, which rose +0.72%, Ganfeng Lithium, which fell -0.37%, and Zijin Mining, which fell -4.29%. Northbound Stock Connect reopened today with foreign investors selling -$236mm of Mainland stocks as Northbound Stock Connect trading accounted for 7.4% of Mainland turnover. CNY was basically flat, bonds had a very strong day gaining nearly+1%, which is a massive move, and copper was taken to the woodshed.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.44 versus 6.44 yesterday
• CNY/EUR 7.85 versus 7.85 yesterday
• Yield on 1-Day Government Bond 1.70% versus 1.70% yesterday
• Yield on 10-Year Government Bond 3.10% versus 3.13% yesterday
• Yield on 10-Year China Development Bank Bond 3.54% versus 3.54% yesterday
• Copper Price -2.84% overnight