Tencent’s Q2 Profitability Narrative Misses The Point
5 Min. Read Time
Key News
Asian equities were mixed overnight on light summer volumes as Korea and Indonesia outperformed, while Hong Kong and Thailand underperformed.
Mainland China outperformed Hong Kong overnight, as 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), China's central bank, 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. This did not benefit Tencent, which, despite being the most heavily traded stock in Hong Kong by value, fell -2%. However, Tencent was a net buy from Mainland investors via Southbound Stock Connect.
Mainland investors sold a net -$371 million worth of Hong Kong-listed stocks and ETFs overnight. Meanwhile, Hong Kong's volumes were only 79% of the 1-year average, while Mainland China's volumes were stronger at 93%.
Tencent Q2 Earnings Overview
Tencent missed some estimates on its bottom line. However, 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. 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 exceedingly free cash flow positive. However, the market is focusing on the near-term lack of growth in profitability, rather than the long-term potential from its significant AI investment as the company secures compute power.
A bright spot was significant growth in revenue from AI-driven advertising, as marketing services increased 22%. Merchants are increasingly using Tencent-native AI tools to target advertisements within Tencent's vast network that includes WeChat, China's most popular social media and messaging platform. Domestic games revenue was also positive, increasing 17%.
% changes are year-over-year (YoY) unless otherwise indicated
- Revenue +11% to RMB 204.8 billion ($30.4 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 6.75 versus 6.74 yesterday
- CNY per EUR 7.77 versus 7.78 yesterday
- Yield on 10-Year Government Bond 1.71% versus 1.72% yesterday
- Yield on 10-Year China Development Bank Bond 1.76% versus 1.76%
