Meituan Q2 Earnings Overview

Meituan (3690 HK) announced Q2 financial results after the close today that beat analyst expectations and extreme pessimism about China consumer stocks, as evidenced by the stock falling by -3.2% in Hong Kong trading pre-results. In addition to the strong results, the company announced a $1 billion share buyback program to “demonstrate its confidence in its own business outlook and prospects.” Thank you, management!

• Revenue increased by +21% to RMB 82.25 billion from RMB 67.96 billion versus expectations of RMB 80.42 billion
• The number of on-demand delivery transactions increased by +14.2% to 6.17 billion from 5.40 billion
• Operating margin increased to 16.9% from 8.7%
• Adjusted net income increased by +77.6% to RMB 13.61 billion from RMB 7.66 billion versus expectations of RMB 10.34 billion
• Adjusted EPS increased to RMB 2.19 versus expectations of RMB 1.70
• During the six months ended June 30, the company bought 222 million shares for HK $23.325 billion

Key News

Asian equities were largely higher on light volumes except for Mainland China and Hong Kong in advance of Nvidia’s widely anticipated results today. We shouldn’t overthink the price action, as summer volumes are so light that market moves are exacerbated. 

Overweight stocks and countries such as US technology stocks, Japan, India, South Korea, and Taiwan semiconductor stocks remain in favor, though Hong Kong has hung in there of late.

One positive factor is the resiliency of China’s renminbi versus the US dollar, which is usually a tailwind for Hong Kong stocks, though unfortunately, it has not been recently. A potential factor weighing on Mainland China and Hong Kong markets is MSCI’s indices net sale of both markets on Friday, though index/passive asset managers’ brokers will start to trade in advance of Friday’s at the close buys and sells.

US National Security Advisor Jake Sullivan held a second day of meetings with the ageless Chinese Foreign Minister Wang Yi.

Financial results were a factor in Hong Kong, with Nongfu Spring down -10.43% after disappointing results, Anta Sports gained +4.47% on strong financial results; investors rewarded JD.com, which gained +1.77% after yesterday’s shareholder-friendly $5 billion share buyback announcement.

Meituan fell -3.2% in advance of today’s financial results, which were announced after the Hong Kong close. Alibaba fell by -1.06%, though, after the close announced its conversion to a Hong Kong and New York dual primary listing, paving the way for a September inclusion in the Southbound Stock Connect. It was interesting that Tencent fell -1.99% and was a rare net sell in Southbound Stock Connect as potential Mainland investors freed up cash for Alibaba’s inclusion.

Mainland China market was mixed/lower on light volumes as the Shanghai sits on support. Financial results were a factor, with the real estate sector lower and Fen Wine's 17.7% revenue and 10% profit growth disappointed investors, dragging on alcohol peers. National team efforts buying their favored ETFs had little impact. The argument that Chinese policymakers are waiting for the US election results is a weak one, as regardless of who wins, is policy really going to change? Maybe, but maybe not. Regardless of the winner, raising domestic consumption will be necessary as the global economy weakens, lowering demand for Chinese exports (the Fed is cutting because the US economy is slowing!). It's time for policymakers to get moving, IMO, as the mainland markets are giving policymakers a big thumbs down.

I caught a political pundit who was speaking about US-China decoupling. As usual, the conversation was all rhetoric and no data. I especially liked the idea that US companies should “just move production to India,” which fails to recognize the opportunity in China’s $18 trillion GDP versus India’s $3.5 trillion. So, what would a decoupling mean for US investors? I ran a screen for US-listed companies with a market cap of over $500 million, and more than 5% of those companies' revenue is from China, and then did the same for India. How many US-listed companies generate over 5% of revenue in China versus India? 89 versus 9! Amongst those 89 include some of the most widely held stocks, including Apple, Tesla, and Nvidia. I’m not familiar with any of the US companies with over 5% India revenue, as an FYI. I'm not so sure decoupling would be good for investors! 

The Hang Seng and Hang Seng Tech fell -1.02% and -1.59%, respectively, on volume up +2.18% from yesterday, which is 91% of the 1-year average. 112 stocks advanced, while 353 declined. Main Board short turnover increased by +6.6% from yesterday, which is 89% of the 1-year average, as 17% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Large capitalization and value stocks fell less than small capitalization and growth stocks. All sectors were negative, with real estate down -3.73%, consumer staples down -3.12%, and materials down -2.38%. Pharmaceuticals and household/personal products were the only positive sub-sectors, while food/beverage/tobacco, media, and software were the worst. Southbound Stock Connect volumes were light as Mainland investors bought $342 million of Hong Kong stocks and ETFs, with the HS Tech ETF seeing moderate net buying while Tencent saw moderate/large net sell.

Shanghai, Shenzhen, and the STAR Board were mixed -0.40%, +0.01%, and -0.46%, respectively, on volume down by -2.9% from yesterday, which is 62% of the 1-year average. 3,244 stocks advanced, while 1,610 declined. Growth and small capitalization stocks outperformed/fell less than value and large capitalization stocks. The top sectors were utilities, up +0.57%, communication services, up +0.40%, and technology, up +0.09%, while consumer staples fell -1.46%, real estate fell -1.25%, and consumer discretionary fell -1.18%. The top sub-sectors were motorcycle, education, and leisure products, while automobile, liquor, and water were the worst. Northbound Stock Connect volumes were very light. Treasury bonds were flat. CNY and the Asia dollar index were flat versus the US dollar. Copper and steel were lower.

Last Night's Performance

Last Night's Exchange Rates, Prices, & Yields

• CNY per USD 7.13 versus 7.13 yesterday
• CNY per EUR 7.93 versus 7.97 yesterday
• Yield on 10-Year Government Bond 2.17% versus 2.19% yesterday
• Yield on 10-Year China Development Bank Bond 2.26% versus 2.28% yesterday
• Copper Price: -0.89%
• Steel Price: -0.03%