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Pinduoduo & Meituan Report Mixed Q3 Results

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Key News

Asian equities were mixed but mostly lower overnight as losses spilled over from Friday’s Omicron-fueled downturn. Mainland China was a bright spot as Shanghai, Shenzhen, and the STAR Board closed -0.04%, +0.39%, and +0.77%, respectively. Meanwhile, Hong Kong was lower as the Hang Seng fell -0.95% and the Hang Seng Tech Index fell -0.86%.

As global markets concerned themselves with the Omicron variant coming out of South Africa, China’s officials assured the public that the country’s zero-tolerance policy on COVID would help prevent the spread of the variant. Sinovac stated that they are working to collect samples of the Omicron variant and will test the effectiveness of their vaccine against the strain and said it is prepared to produce an updated vaccine for this variant if needed. Additionally, President Xi pledged to deliver another one billion doses of COVID-19 vaccines to African countries – that comes on top of the roughly 200 million China previously supplied to the continent.

The Ministry of Industry and Information Technology (MIIT) found that 9 of Tencent’s apps did not adhere to the Personal Information Protection Law, which was implemented on August 20th. MIIT will require government approval of all new apps from Tencent. The heightened review period is expected to last until the end of the year. However, Tencent’s existing apps are still available for download. Tencent has experience with strict approval requirements from its gaming business and we believe the company will be able to successfully navigate the new app rules.

Interestingly, China Daily offered this rationale for the intensified regulation:

“China’s internet and digital economy is booming, which has spawned a large amount of data. Market research company International Data Corp predicts that by 2025, China’s data will account for 27.8 percent of the world’s total, ranking first worldwide.”

With so much data being generated in China, improving data security and governance has become an important initiative. This is not unlike data security considerations that have been popping up in the US, though China is taking a different approach in response.

In a positive piece of news we overlooked while preparing our Thanksgiving Turkeys on Thursday, Baidu has obtained a permit to begin collecting fares for its Apollo robo-taxi business. The permit marks the first time such a large Chinese city allowed a company to charge the public for robo-taxi rides. Baidu’s Apollo fleet currently operates in 27 cities around the world.  

Pinduoduo announced mixed Q3 results as the company continues to invest heavily in R&D and new business initiatives, leading to a miss on the topline. However, management did a great job of managing costs and the company turned a profit for the quarter even as analysts expected a net loss. The company’s R&D expense reached an all-time high and is expected to remain high in coming quarters. Pinduoduo announced the launch of the “10 Billion Agriculture Initiative,” which seeks to help rural farmers obtain new technologies and sell their goods online, and also continues to invest in growing Duo Duo Grocery, cementing its position in food E-Commerce. Management clearly still values growth over immediate profit margin enhancement.

(All % changes are year-over-year)

  • Revenue +51% to RMB 21.5 billion, -18% below estimate
  • Active Buyers in Q3 +17,4 million year-over-year to 867.3 million
  • Non-GAAP Net Income RMB 3.2 billion versus estimate RMB -364 million
  • Net Income Margin 14.6% versus 3.3% in Q3 2020
  • Marketing Services Revenue +44% to RMB 17.9 billion
  • R&D Cost RMB 2.4 billion

Meituan also reported Q3 over the Thanksgiving holiday, beating estimates slightly on topline revenue. However, a gloomy outlook from CEO Wang Jing sent the company’s share price down. He stated that strict Covid-19 lockdowns and slowing consumer demand will have a “meaningful negative impact” on delivery volumes over the next few quarters. The company’s margin took a hit due to regulation-driven increases in costs.

  • Revenue +38% to RMB 48.83 billion versus estimate 48.57 billion
  • Net Income RMB -7.01 billion versus -3.71 billion in Q2
  • Net Income Margin -14.4%

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.39 versus 6.39 Friday
  • CNY/EUR 7.20 versus 7.23 Friday
  • Yield on 1-Day Government Bond 1.50% versus 1.50% Friday
  • Yield on 10-Year Government Bond 2.83% versus 2.82% Friday
  • Yield on 10-Year China Development Bank Bond 3.11% versus 3.10% Friday
  • Copper Price +0.07% today