Tencent Q2 Earnings Overview

Tencent reported mixed results amid low expectations. Remember that the year-over-year (YoY) figures are all negative, but that was expected and baked into the current share price. Management did a reasonable job cutting costs. During the conference call, when asked about China’s internet regulation, management stated that they are seeing a “positive trend for the platform economy” and “no material regulation detrimental to the industry.” When asked about the Reuters article on Tencent selling Meituan via a block trade, management stated the article was “inaccurate.” They then stated that investors liked how they spun off their stake in JD.com via a special dividend. They also addressed Tencent’s potential exposure to a 2H 2022 rebound, which is highlighted in the graphic below.

• Revenue declined by -3% YoY to RMB 134B versus expectations of RBB 134B
• Adjusted net income declined by -17% to RMB 28.1B versus expectations of RMB 24.3B
• Adjusted EPS RMB 2.94 versus expectations of RMB 2.51

Key News

Asian equities were higher overnight on light volumes except for South Korea and the Philippines. Indonesia had the day off for Independence Day. Hong Kong internet stocks rebounded following Meituan’s sell-off yesterday on a Reuters article that Tencent will sell its stake. As we showed yesterday, Tencent’s PR head denied the story on Chinese social media after the close. Today’s most heavily traded stocks by value were Meituan, which gained +3.34%, Tencent, which pulled a James Bond and rose +0.07%, Alibaba HK, which gained +0.44%, and Kuaishou, which fell -0.28%. Mainland investors were skeptical as Meituan was sold heavily via Southbound Stock Connect. Hong Kong volumes were light in advance of Tencent’s financial results, which were reported after the Hong Kong close. 

The Mainland market was off but did a 180 as Premier Li, speaking in Shenzhen, called on China’s six biggest provinces that account for 45% of China’s GDP to “take the lead and play a key supporting role in stabilizing the economy.” The government will “implement policies to stabilize the economy.” The clean technology sector had a strong day led by the EV ecosystem, solar, and wind stocks. Foreign investors bought a healthy $1 billion worth of Mainland stocks today via Northbound Stock Connect. In another sign of the disparity between onshore China (Shanghai/Shenzhen, 95% owned by investors in China) versus offshore China (Hong Kong and US-listed stocks, foreign investors definition of China), real estate was the best sector in China +3.45%.

In comparison, Hong Kong was down -0.33%. Outside of China, there was very little coverage of the government backing property developers’ bonds. As we noted last week, there has been a significant reduction in property buying restrictions, and interest rate cuts help. Offshore Chinese high-yield bonds have started to stabilize. Some tasty yields are available for those willing to get into a hated asset class. Chinese Treasury bond prices had another strong day while CNY appreciated versus the US dollar. 

The Hang Seng and Hang Seng Tech indexes gained +0.46% and +0.42%, respectively, on volume that was down -14% from yesterday, which is 63% of the 1-year average. 256 stocks advanced while 207 declined. Hong Kong short sale turnover declined by -16% from yesterday, which is 62% of the 1-year average, as short sale turnover accounted for 16% of total turnover. Value factors outperformed growth factors while small caps outpaced large caps. Top sectors were discretionary +1.19%, energy +1.09% and industrials +0.73% while healthcare -1.23%, materials -0.37% and real estate -0.32%. Top sub-sectors were appliances such as TVs, washers and dryers, and wind stocks, while cobalt, natural gas, and biotech were among the worst. Southbound Stock Connect volumes were light as Mainland investors sold -$306mm of Hong Kong stocks, with Meituan selling heavily, Kuaishou selling moderately, and Tencent selling small.

Shanghai, Shenzhen, and the STAR Board were mixed, closing +0.45%, +0.69%, and -0.44%, respectively, on volume +5% from yesterday, 102% of the 1-year average. 2,326 stocks advanced while 2,095 stocks declined. Value factors outperformed slightly while large caps outperformed small caps. The top sectors were real estate +3.46%, discretionary +3.39%, and industrials +1.68%, while materials were the only down sector -1.08%. The top sub-sectors were Apply supply chain, stock brokers, and online games, while rare earths, industrial gases, and chemical fibers were among the worst. Northbound Stock Connect volumes were moderate as foreign investors bought a healthy $1.014B of Mainland stocks today. Chinese Treasury bond prices had another good day. CNY appreciated +0.13% versus the US $ to 6.77 from 6.78, while copper gained +0.52%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.78 versus 6.79 Yesterday
• CNY/EUR 6.89 versus 6.87 Yesterday
• Yield on 10-Year Government Bond 2.61% versus 2.64% Yesterday
• Yield on 10-Year China Development Bank Bond 2.81% versus 2.82% Yesterday
• Copper Price +0.52% overnight