Tencent (700 HK) (TCEHY US is their unsponsored ADR) released Q2 financial results after the Hong Kong close. The results beat analyst expectations, though I’m scarred after Tencent Music Entertainment beat analyst expectations but was crushed in US trading hours. Thus far analysts appear positive on Tencent’s results. Online advertising was a clear, bright spot, with revenue that increased by +19% year over year (YoY). One could argue that the increase provides a small insight into China’s economy, indicating a rationale for advertisers to spend money to get their brands out there. However, FinTech revenue growth, i.e., mobile payments and loans, slowed to a low single-digit due to “slow consumption spending.” All results are YoY/compared to Q2 2023.

• Revenue increased by +8% to RMB 161.1 billion ($22.6 billion) from RMB 149.2 billion versus analyst expectations of RMB 161.3 billion.
• Value-added services (VAS) revenue increased by +6% to RMB 78.8 billion from RMB 74.2 billion, with China gaming revenue up by +9% to RMB 34.6 billion and international up by +6% to RMB 13.9 billion.
• Online advertising revenue increased by +19% to RMB 29.9 billion from RMB 25 billion.
• FinTech and Business Services revenue increased by +4% to RMB 50.4 billion from RMB 48.6 billion.
• Adjusted Net Income increased by +53% RMB 57.3 billion ($6 billion) from RMB 37.5 billion versus analyst expectations of RMB 48.6 billion.
• Adjusted EPS was RMB 6.01 versus analyst expectations of RMB 5.07.
• Total Cash increased to RMB 415.2 billion ($58.3 billion), while free cash flow increased by +35%.
• In Q2, the company bought back 103.7 million shares, paying Hong Kong $37.5 billion for those shares.   

Key News

Asian equities were generally higher, while Hong Kong and Mainland China fell on light summer volumes before today’s US CPI as the US dollar weakened overnight.

It’s as if the yen carry trade implosion never occurred. Pakistan was closed for Independence Day.  Yesterday’s data on July new loans and aggregate financing were widely cited as a factor as both missed expectations, though both improved from June. Bank loans, less so loans to banks, decreased by RMB 77 billion ($10.7 billion) from June, which was “the first drop since July 2005, as more debt was repaid than taken out,” according to Bloomberg News, though seasonality is a factor. Paying off old debt makes sense, as interest rates have fallen, meaning your debt rate is much higher than the current rate available. Paying off debt isn’t bad as debt remains an overhang, though it potentially weighs on consumption, R&D, and investing.

Supply/credit availability is not China’s problem but demand with very minimal fiscal steps taken by the government to restore animal spirits in the stock market nor providing incentives to consumers to spend more. Chinese citizens and investors are giving the government’s efforts a big thumbs down and voting with their feet. The continued Treasury bond market rally is an example of huge demand driving the yield lower.

Hong Kong managed to stay above recent short-term support, a step above longer-term support, as Hong Kong posted small losses in advance of Tencent’s results. Hong Kong’s most heavily traded stocks by value were Tencent, which was down -1.27% but will be able to restart its buyback post results, Alibaba was down -0.45% in advance of tomorrow's results, China Mobile was up +1.39%, AIA was down -1.71%, and Meiutan was down -1.26%. Internet stocks were lower on no news, with NetEase down -3.88%, Trip.com down -1.87%, JD.com flat before results tomorrow, Baidu down -0.24%, and Kuaishou down -1.33%.

Tencent Music Entertainment (TME US, 1698 HK) fell by -18.13% in Hong Kong, though the Hong Kong stock only represents 1% of the value traded in the US. TME beat analyst expectations, though a slight miss on new subscribers' outlook and a change in focus on user revenue from new subscriber growth sent shares significantly lower. The stock has outperformed, which is likely a factor as investors bought the rumor and sold the news.

Mainland investors were net sellers of Hong Kong via Southbound Stock Connect with ETFs sold. China was off small as volume hit a new 52-week and 4-year low with little evidence of the National Team supporting. US Treasury officials will meet on Thursday and Friday with PBOC officials as the Financial Working Group meetings continue in Shanghai. Before the meeting, a Chinese think tank economist stated, “China will release growth momentum through a new round of reform and opening-up in the future.” Let’s hope the future is sooner rather than later.  

I would like to apologize as Bloomberg continues to show Meituan is reporting today, though the company’s website hasn’t disclosed a date yet. Apologies!

In China, a lot of attention is being given to the Harbin visit, a former Japanese WW2 veteran of Unit 731, which conducted biological and chemical testing on Chinese civilians. Western media doesn’t give these atrocities much attention, though it is worth doing your own research. It's an ugly reminder of why war should be avoided, IMO.

The Hang Seng and Hang Seng Tech fell -0.35% and -0.99%, respectively, on volume down -3.95% from yesterday, which is 67% of the 1-year average. 123 stocks advanced, while 344 declined. Main Board short turnover fell by -21% from yesterday, which is 56% of the 1-year average, as 15% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Value and small capitalization stocks “outperformed”/fell less than growth and large capitalization stocks. All sectors were negative, with healthcare down -2%, materials down -1.39%, and communication services down -1.37%. The top sub-sectors were telecommunication services, food/beverages, and banks, while media, pharmaceuticals, and healthcare equipment were the worst. Southbound Stock Connect volumes were very light as Mainland investors sold -$133 million of Hong Kong stocks and ETFs, with China Mobile a moderate net buy, SMIC a small buy, the HK Tracker ETF a large net sell, HS Tech ETF a moderate net sell, and Tencent a small net sell.  

Shanghai, Shenzhen, and the STAR Board fell -0.6%, -0.86%, and -1.38%, respectively, on volume down -0.18% from yesterday, which is 59% of the 1-year average. 1,375 stocks advanced, while 3,473 declined. Large capitalization and value stocks fell less than small capitalization and growth stocks. The top sectors were utilities up +1.61%, communication services up +1.23%, and financials up +0.04%, while materials fell -1.62%, healthcare fell -1.09%, and consumer discretionary fell -0.8%. The top sub-sectors were telecommunications, internet, and cultural media, while motorcycle, office supplies, and power generation equipment were the worst. Northbound Stock Connect volumes were light as foreign investors were net sellers of Mainland stocks, with Cypc, Foxconn, and Shanxi Fen Wine small net buys, while Kweichow Moutai, Wanhua, and Tongwei were small/moderate net sells. CNY and the Asia dollar index gained versus the US dollar. Treasury bonds rallied. Copper and steel fell.

Last Night's Performance

Country/Index	Ticker	1-Day Change
China (Hong Kong)	HSI Index	-0.4%
Hang Seng Tech	HSTECH Index	-1%
Hong Kong Turnover	HKTurn Index	-4%
HK Short Sale Turnover	HKSST Index	-21.1%
Short Turnover as a % of HK Turnovr	N/A	14.6%
Southbound Stock Connect Net Buy/Sell (US $ Millions)	N/A	-133.3
China (Shanghai)	SHCOMP Index	-0.6%
China (Shenzhen)	SZCOMP Index	-0.9%
China (STAR Board)	Star50 Index	-1.4%
Mainland Turnover	.chturn Index	-0.2%
Nouthbound Stock Connect Net Buy/Sell (US $ Millions)	N/A	Not Available
Jing Daily China Global Luxury Index	CHINALUX Index	0.6%
Japan	NKY Index	0.6%
India	SENSEX Index	0.2%
Indonesia	JCI Index	1.1%
Malaysia	FBMKLCI Index	0.2%
Pakistan	KSE100 Index	-0.1%
Philippines	PCOMP Index	0.8%
South Korea	KOSPI Index	0.9%
Taiwan	TWSE Index	1.1%
Thailand	SET Index	-0.4%
Singapore	STI Index	0.9%
Australia	AS51 Index	0.3%

MSCI China All Shares Index	# of Stocks	Average 1-Day Change (%)
Hong Kong Listed	154	-0.87
Communication Services	9	-1.41
Consumer Discretionary	29	-0.8
Consumer Staples	13	-0.43
Energy	7	-0.16
Financials	24	-0.24
Health Care	14	-2.04
Industrials	18	-1.06
Information Technology	11	-0.42
Materials	11	-1.43
Real Estate	6	-0.54
Utilities	12	-0.44
China Listed	487	-0.45
Communication Services	13	1.3
Consumer Discretionary	41	-0.73
Consumer Staples	32	-0.72
Energy	17	-0.32
Financials	68	0.11
Health Care	45	-1.02
Industrials	74	-0.73
Information Technology	93	-0.51
Materials	80	-1.55
Real Estate	7	-0.52
Utilities	17	1.68

US & Hong Kong Dually Listed	Ticker	1-Day Change (%)
Tencent HK	700 HK Equity	-1.3
Alibaba HK	9988 HK Equity	-0.4
JD.com HK	9618 HK Equity	0
NetEase HK	9999 HK Equity	-3.9
Yum China HK	9987 HK Equity	0.8
Baozun HK	9991 HK Equity	1.9
Baidu HK	9888 HK Equity	-0.2
Autohome HK	2518 HK Equity	0
Bilibili HK	9626 HK Equity	-0.6
Trip.com HK	9961 HK Equity	-1.9
EDU HK	9901 HK Equity	-2.9
Xpeng HK	9868 HK Equity	1.7
Weibo HK	9898 HK Equity	-1.7
Li Auto HK	2015 HK Equity	-1.3
Nio Auto HK	9866 HK Equity	1.2
Zhihu HK	2390 HK Equity	0.5
KE HK	2423 HK Equity	-2.2
Tencent Music Entertainment HK	1698 HK Equity	-18.1
Meituan HK	3690 HK Equity	-1.3

Hong Kong's Most Heavily Traded by Value	1-Day Change (%)
TENCENT HOLDINGS LTD	-1.3
ALIBABA GROUP HOLDING LTD	-0.4
CHINA MOBILE LTD	1.4
AIA GROUP LTD	-1.7
MEITUAN-CLASS B	-1.3
NETEASE INC	-3.9
CHINA CONSTRUCTION BANK-H	-0.4
CNOOC LTD	-0.3
HONG KONG EXCHANGES & CLEAR	-1.2
XIAOMI CORP-CLASS B	-0.2

Shanghai and Shenzhen's Most Heavily Traded by Value	1-Day Change (%)
FOXCONN INDUSTRIAL INTERNE-A	2.9
SHANGHAI BELLING CO LTD-A	5.8
DAZHONG TRANSPORTATION GRP-A	0.8
XIANGXUE PHARMACEUTICAL CO-A	6.6
ZHONGJI INNOLIGHT CO LTD-A	-1
XIAMEN KING LONG MOTOR GR -A	10
NAVINFO CO LTD-A	7.5
AEROSPACE HI-TECH HOLDINGS-A	1.2
CHINA YANGTZE POWER CO LTD-A	1
KUNLUN TECH CO LTD-A	4.9

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.14 versus 7.16 yesterday
• CNY per EUR 7.87 versus 7.82 yesterday
• Yield on 10-Year Government Bond 2.19% versus 2.22% yesterday
• Yield on 10-Year China Development Bank Bond 2.24% versus 2.26% yesterday
• Copper Price: -0.54%
• Steel Price: -2.41%