Tencent’s Q2 Profitability Narrative Misses The Point

Key News

Asian equities were mixed overnight on light summer volumes as Korea and Indonesia outperformed, while Hong Kong and Thailand underperformed.

Less confidence in a potential reprieve in the Iran conflict contributed to volatility overnight. Meanwhile, Mainland China outperformed Hong Kong. Mainland-listed chipmakers, including CXMT and Cambricon, which are listed on the STAR (Science & Technology) Market, led gains onshore. Meanwhile, concerns over internet platforms' profitability led to relative weakness offshore with the release of Tencent's Q2 earnings.

The People's Bank of China (PBOC) had paused seven-day reverse-repo injections on Tuesday, the first such pause since June, though policy rates remain low, with the seven-day reverse-repo rate at 1.40%. Nonetheless, lower liquidity may have contributed to a lack of buyers.

Lower summer volumes definitely led to a lack of buyers offshore, which did not benefit Tencent, despite being the most heavily traded stock in Hong Kong by value. Mainland investors sold a net -$371 million worth of Hong Kong-listed stocks and ETFs. Meanwhile, Hong Kong's volumes were only 79% of the 1-year average, while Mainland China's volumes were stronger.

Tencent Q2 Earnings Overview

Tencent missed estimates on its bottom line. One of the most notable aspects of Tencent's release was the company’s free cash flow statement. Free cash flow was RMB -13.8 billion after executing RMB 59.3 in capital expenditure payments. The company’s free cash flow excluding spending on AI compute procurement would have been positive at RMB 37.9 billion. Exclude compute spending, and the company is highly profitable!

Tencent has also been increasing its revenue from AI-driven advertising, as merchants are increasingly using Tencent-native AI tools to target advertisements. This could mean strong, long-term growth and a stable, solid base for revenue from merchants seeking the best AI targeting.

% changes are year-over-year (YoY) unless otherwise indicated

• Revenue +11% to RMB 204.8 billion
• Net Income 70.6 billion ($10.5 billion)
• Net Margin 35%
• Earnings per Share RMB 7.4 ($1.1)

Last Night's Performance

Country / Index	Ticker	1-Day Change
China (Hong Kong)	HSI Index	-0.8%
Hang Seng Tech	HSTECH Index	-1%
Hong Kong Turnover	HKTurn Index	2.8%
Hong Kong Short Sale Turnover	HKSST Index	8.3%
Short Turnover as a % of Hong Kong Turnover	N/A	0.2
Southbound Stock Connect Net Buy/Sell (US $ Millions)	N/A	-371.15
China (Shanghai)	SHCOMP Index	0.3%
China (Shenzhen)	SZCOMP Index	1.1%
China (STAR Board)	Star50 Index	1.6%
Mainland Turnover	.chturn Index	-7.9%
Japan	NKY Index	0.8%
India	SENSEX Index	-0.2%
Indonesia	JCI Index	1.7%
Malaysia	FBMKLCI Index	0.6%
Pakistan	KSE100 Index	0.3%
Philippines	PCOMP Index	0.6%
South Korea	KOSPI Index	3.7%
Taiwan	TWSE Index	0.9%
Thailand	SET Index	-0.7%
Singapore	STI Index	-0.6%
Australia	AS51 Index	-0.4%
Vietnam	VNINDEX Index	-0.0005

Indicator	Hong Kong	Mainland China
Today's Volume % of 1-Year Average	79	93
Advancing Stocks	26 (Hang Seng)	156 (CSI 300)
Declining Stocks	65 (Hang Seng)	135 (CSI 300)
Outperforming Factors	Value	Growth
Underperforming Factors	Growth	Value
Top Sectors	Real Estate, Information Technology, Materials	Real Estate, Information Technology, Materials
Bottom Sectors	Communication Services, Consumer Discretionary, Energy	Energy, Utilities, Health Care
Top Subsectors	Semiconductors, Technology Hardware, Real Estate Management	Communication Equipment, Real Estate, Forest Industry
Bottom Subsectors	Media & Entertainment, Consumer Discretionary, Coal	Motorcycles, Oil & Gas, Energy Equipment
Southbound Connect Buys	Minimax, Tencent, SMIC	N/A
Southbound Connect Sells	Alibaba, KB Laminates, YOFC	N/A

MSCI China All Shares Index	# of Stocks	Average 1-Day Change (%)
Hong Kong Listed	165	-1.12
Communication Services	11	-2.36
Consumer Discretionary	28	-2.06
Consumer Staples	13	-0.34
Energy	6	-1.87
Financials	25	-0.6
Health Care	16	-0.63
Industrials	22	-0.03
Information Technology	12	1.45
Materials	14	1.24
Real Estate	7	4.61
Utilities	11	-0.74
Mainland China Listed	386	0.76
Communication Services	8	0.38
Consumer Discretionary	26	-0.15
Consumer Staples	19	-0.01
Energy	12	-1.33
Financials	64	-0.11
Health Care	31	-0.7
Industrials	58	0.43
Information Technology	95	2.21
Materials	52	0.85

US & Hong Kong Dually Listed	Ticker	1-Day Change (%)
Tencent HK	700 HK Equity	-2
Alibaba HK	9988 HK Equity	-3
JD.com HK	9618 HK Equity	-2.8
NetEase HK	9999 HK Equity	-5.1
Yum China HK	9987 HK Equity	-0.2
Baozun HK	9991 HK Equity	0.7
Baidu HK	9888 HK Equity	-2.5
Autohome HK	2518 HK Equity	-0.9
Bilibili HK	9626 HK Equity	-3.3
Trip.com HK	9961 HK Equity	-0.6
EDU HK	9901 HK Equity	-3.3
Xpeng HK	9868 HK Equity	0
Weibo HK	9898 HK Equity	-1.5
Li Auto HK	2015 HK Equity	0.7
Nio Auto HK	9866 HK Equity	-1.7
Zhihu HK	2390 HK Equity	0
KE HK	2423 HK Equity	1.5
Tencent Music Entertainment HK	1698 HK Equity	-12.6
Meituan HK	3690 HK Equity	-1.5

Hong Kong's Most Heavily Traded by Value	1-Day Change (%)
TENCENT HOLDINGS LTD	-2
ALIBABA GROUP HOLDING LTD	-3
MINIMAX GROUP INC	9
Z AI CO LTD	1.3
HUA HONG GRACE SEMICONDUCTOR	7.1
KINGBOARD LAMINATES HLDG LTD	10.7
SEMICONDUCTOR MANUFACTURI-H	3.2
MEITUAN-CLASS B	-1.5
XIAOMI CORP-CLASS B	-1.1
YANGTZE OPTICAL FIBRE AND-H	7.5

Shanghai and Shenzhen's Most Heavily Traded by Value	1-Day Change (%)
ZHONGJI INNOLIGHT CO LTD-A	3.8
CXMT CORP-A	6.2
EOPTOLINK TECHNOLOGY INC L-A	3.1
GIGADEVICE SEMICONDUCTO-CL A	2.7
SUZHOU DONGSHAN PRECISION-A	3.3
SUZHOU TFC OPTICAL COMMUNI-A	7.9
GUANGDONG FENGHUA ADVANCED-A	1
CAMBRICON TECHNOLOGIES-A	1.4
YUNNAN LINCANG XINYUAN GER-A	5.7
VICTORY GIANT TECHNOLOGY -A	1.8

Last Night's Exchange Rates, Prices, & Yields

• CNY per USD
• CNY per EUR
• Yield on 10-Year Government Bond
• Yield on 10-Year China Development Bank Bond
• Copper Price
• Steel Price