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JD.com Delivers Strong Topline Results, Hong Kong-listed Internet Stocks Rebound

JD Q2 Earnings Update:

JD.com reported Q2 financial results this morning that beat on topline revenue growth though the bottom line was weak as expenses increased. The company had mentioned this would happen in their Q1 earnings call as the company invests in growing its business. On today’s earnings call, the company said it is adhering to internet regulation with several new laws going into effect this fall. JD Retail, JD’s e-commerce unit which accounts for the vast majority of revenues, had a strong quarter driven by the June 618 shopping event. The event saw 236 brands achieve sales of over RMB 100mm, as transaction volumes increased 28% from last year’s event.  

  • Revenues increased 26.2% to $39.9B/RMB 253.8B versus estimate RMB 248.47B
  • JD Retail revenue increased to $36.018B/RMB 232B from Q2 2020’s RMB 189B
  • Annual active customer accounts increased to 531mm from Q2 2020’s 417mm
  • Cost of revenues increased more than 2X to RMB 170B, Research/Development also more than 2X and General/Administrative up more than 3X
  • Adjusted Net Income $0.7B/RMB 4.6B versus Q2 2020’s RMB 5.9B
  • Adjusted EPS RMB 2.90 versus analyst estimate RMB 2.12
  • Cash on the books increased RMB 31.9mm over the last twelve months to $27.6B/RMB 178.1B

Key News

Asian equities had a strong day as the markets and sectors hit hardest on Friday rebounded strongly. Hong Kong had a strong day led by clean technology and China internet companies.

After the close, Tencent announced it purchased 230k shares today in a sign the company believes its stock is cheap. Mainland investors agreed as Tencent saw net buying from Mainland investors via Southbound Connect trading for the second day in a row.

Alibaba HK was an outlier to the downside on reports Zhou Jiangyong, the former head of Hangzhou, was arrested on corruption charges. Chatter on his arrest indicates it may have been related to Ant’s IPO, though the company publicly denied the rumor. Investors are choosing to shoot first and ask questions later. Today’s market action is a positive as the news didn’t weigh on the entire sector as we’ve seen in the past.

We also have the new internet user data law, called the Personal Information Protection Law, which will go into effect on November 1st while the Data Security Law goes into effect in September. Fingers crossed we are closer to the end of the internet regulation uncertainty.

Hong Kong was lifted on news of the launch of MSCI China A Connect 50 Index futures, which we discuss further below. The Mainland similarly was lifted by semiconductors, the clean technology space including electric vehicles, solar, wind, and metals. The Mainland saw a pickup in volumes, which we like to see, though Hong Kong volumes were off by a touch. Reports that efforts to snuff out the Delta variant have been successful helped investor sentiment today.

MSCI China A 50 Connect Index futures

Hong Kong Exchanges and Clearing (HKeX) and MSCI announced that MSCI China A 50 Connect Index futures will launch on October 18th. This will be the first China A-shares derivative product listed in Hong Kong. The index selected is mutually beneficial to both HKeX and MSCI, as FTSE has a China A 50 future listed on Singapore Limited (SGX). Both HKeX and MSCI get to take it to their respective arch-rival. Hopefully, an MSCI China A Index futures program will be listed shortly after, as MSCI’s definition of the Shanghai and Shenzhen stocks that are eligible within the Stock Connect program is the MSCI China A Index.

The futures launch eliminates one issue preventing MSCI from continuing its inclusion of China A-shares within broader indexes such as the MSCI Emerging Markets Index.  The outstanding issues include China A-shares settlement being on trade date versus the global standard of two-day settlement. The other issue is the lack of alignment between holiday calendars in Mainland China and Hong Kong.

H-Share Update

The Hang Seng opened higher but slid off its highs to close +1.05% as volume declined -16.95% from Friday which is 101% of the 1-year average. The 209 Chinese companies listed in Hong Kong within the MSCI China All Shares gained +0.98% led by utilities +4.81%, healthcare +4.71%, tech +3.16%, industrials +3.11%, energy +2.99%, materials +2.66%, communication +1.91% while discretionary and real estate -1.08% and -1.07%. Hong Kong’s most heavily traded stocks by value were Tencent +1.97%, Alibaba HK -3.67%, Meituan +1.03%, Hong Kong Exchanges +5.66%, Xiaomi +3.84%, BYD +4.79%, Geely Auto -0.58%, Kuaishou Technology +2.57%, Wuxi Biologics +7.1% and China Merchants Bank +4.4%. Southbound Stock Connect volumes were moderate as Mainland investors bought $54mm of Hong Kong stocks as Southbound trading accounted for 12.3% of Hong Kong turnover.

A-Share Update

Shanghai, Shenzhen, and STAR Board opened higher and kept going closing +1.45%, +2.35%, and +2.29% as volume increased +6.74% which is 143% of the 1-year average. The 522 Mainland stocks within the MSCI China All Shares gained +1.87% led by communication +3.51%, industrials +3.18%, energy +2.98%, tech +2.74%, healthcare +2.37%, materials +1.79%, discretionary +1..73%, utilities 1.69%, staples +1.45% and financials +0.41% while real estate -0.35%. The Mainland’s most heavily traded by value were Qinghai Salt Lake Industries +5.45%, Northern Rare Earth +9.53%, Kweichow Moutai +1.43%, Tianqi Lithium +1.27%, Wuliangye Yibin -0.16%, BYD +1.65%, CATL +5.62%, Chongqing Changan Auto +0.71%, Ganfeng Lithium +2.64% and Cosco Shipping +6.7%. Northbound Stock Connect flows were moderate as foreign investors bought $282mm of Mainland stocks as Northbound trading accounted for 5.5% of Mainland turnover.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.48 versus 6.49 Friday
  • CNY/EUR 7.60 versus 7.59 Friday
  • Yield on 10-Year Government Bond 2.87% versus 2.84% Friday
  • Yield on 10-Year China Development Bank Bond 3.250% versus 3.18% Friday
  • Copper Price 1.49% overnight