Tencent Q3 Earnings Overview
Tencent reported Q3 financial results after the Hong Kong close that met analysts’ Q3 revenue expectations while beating on adjusted net income and adjusted EPS.
The company’s strong margins, profitability, and cash flow generation stand out. Results were driven by the strong year-on-year (YoY) growth of domestic game revenue +14% to RMB 37.3B versus international game revenue +9% YoY to RMB 14.5B. Marketing Services (formerly Online advertising) grew +17% to RMB 30B in a positive signal for the company but also for the Chinese economy. There is no reason to advertise if no one is buying.
FinTech revenue grew +2% YoY to RMB 53.1B as “payment services revenues declined due to subdued consumption spending,” which led to a “decrease in payment revenue offset by increase in wealth management services revenue.” Lackluster mobile payments explain why we are skeptical of an Ant Group IPO.
Great question from GS’ internet analyst Ronald, who asked about the macro economy. Management was encouraged by the recent policy by the Chinese government to provide stimulus to the economy. Management felt the recent policy was timely and was described as strong, which is why they remain constructive on the longer term outlook.” Stimulus measures “will take time.” How are they positioning themselves?
Having gone through a period of domestic regulatory scrutiny, they see the macro environment improving, as evidenced by an uptick in transactional value following the October stimulus following a month-on-month decline in Q3, indicating that the stimulus is having an effect. Economic recovery will take time, but they believe there is a strong resolution from the government to revive the economy. They also pointed out that the Chinese people’s work ethic and engineering talent pool are also why they are optimistic about economic revival. In response to a question on shareholder value, management alluded to continued buyback and potential dividend payments based on the company’s strong cash flows.
Hat tip to management for a great quarter!
- Revenue increased 8% YoY to RMB 167.2 ($23.9B) versus estimate RMB 167.9B and Q3 2023 154.6B
- Adjusted Net Income increased +33% to RMB 59.813B versus estimate RMB 54.369B versus Q3 2023 RMB 44.92B
- Adjusted EPS increased +36% RMB 6.34 versus estimate RMB 5.71 versus Q3 2023 RMB 4.66
- Repurchased approximately 94.9 million shares on the Hong Kong Stock Exchange for a consideration of approximately HKD 35.9 billion.
Key News
Asian equities were mixed overnight despite the US dollar falling versus most currencies, as Mainland China, Singapore, and Malaysia outperformed while South Korea, Japan, India, and the Philippines underperformed.
Chinese investors were in a good mood as the government said they would add two more vacation days in 2025 versus 2024. After the close, yesterday’s rumor of the real estate transaction tax being lowered became reality as several government agencies lowered the tax to 1% for apartments with less than 140 square meters from the previous level of 90 square meters, lowered to 1.5% for those larger than 140 sq meters, Tier 1 cities of Beijing, Shenzhen, Guangzhou and Shenzhen will be exempted from tax when selling an apartment owned for more than two years and reduced the land tax paid by real estate companies by 0.5% which ranged from 2% in the big coastal cities, 1.5% in the center of the country and 1% out west.
Like yesterday, it is hard to know what’s driving the weakness: the strong US dollar, concerns about the Trump cabinet, or another factor. South Korea’s downdraft is driven by Samsung stock’s fall, which is leading to concerns about margin calls. Hong Kong didn’t follow nearly as much US ADRs were hit very hard yesterday following a poor Hong Kong’s down draft. The Hang Seng, Shanghai, and Shenzhen hit intra-day lows of -1.2%, -0.51%, and -1.81%, though they managed to close -0.12%, +0.51%, and +0.16%. The National Team’s favored ETFs had below-average volumes (again). Hong Kong’s most heavily traded by value were Tencent flat, Meiutan -0.17%, Alibaba flat, Xiaomi +1.58%, and Ping An +1.2% as we roll into earnings season.
Southbound was a net seller due to large sell in the Hong Kong Tracker ETF though growth stocks were net buys. Mainland media noted that China’s M2 money supply/bank deposits increased +0.07% in October to RMB 309 trillion, which indicates that households didn’t park as much money in bank accounts in October. Where did it go? Speculation is the stock market! CATL had a strong day, up +3.29%, as Chairman and Founder Robin Zheng told Reuters the company intends to open a battery factory in the US, if the US government will let them. He stated that when he previously asked, they said no, which is interesting. Again, Mainland investors are far more pragmatic than foreign investors. JD.com reports tomorrow post the Hong Kong close.
Whenever I hear the term “overcapacity,” it makes me cringe, as it isn’t an economic term that we can look at data to understand. Capacity utilization is an economic term. Ever wonder what China’s auto capacity utilization is compared to the US? The result might surprise you!
The Hang Seng and Hang Seng Tech fell -0.12% and -0.03% on volume -21.18% from yesterday, which is 146% of the 1-year average. 169 stocks advanced, while 294 declined. Main Board short turnover increased -34.29% from yesterday which is 122% of the 1-year average as 13% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Value and large caps fell less than growth and small caps. Top sectors were tech +1.3%, industrial +0.17%, and communication +0.15%, while healthcare -2.22%, real estate -0.87%, and utilities -0.65%. The top sub-sectors were telecom services, technical hardware, and consumer durables, while pharmaceuticals, healthcare equipment, and consumer services were the worst. Southbound Stock Connect volumes were almost 2X the average as Mainland investors sold -$585mm of Hong Kong stocks and ETFs with the Hong Kong Tracker ETF and China Enterprise ETF large net sells, Tencent, Ping An, Alibaba and Xiaomi were moderate net buys and Meituan were small net sell.
Shanghai, Shenzhen, and STAR Board fell +0.51%, +0.16%, and +1.03% on volume -21.21% from yesterday, which is 214% of the 1-year average. 2,447 stocks advanced, while 2,499 declined. Value and large caps outperformed growth and small caps. The top sectors were communication +4.06%, utilities +1.54%, and industrials +1.48%, while real estate -0.12% and healthcare -0.26%. The top sub-sectors were telecom, cultural media, and education, while catering, daily chemicals, and household products were the worst. Northbound Stock Connect volumes were high, just over almost 2X the average. CNY and the Asia dollar index rose versus the US dollar. Treasury bond prices fell. Copper fell, and steel rose.
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Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.21 versus 7.23 yesterday
- CNY per EUR 7.65 versus 7.67 yesterday
- Yield on 10-Year Government Bond 2.09% versus 2.07% yesterday
- Yield on 10-Year China Development Bank Bond 2.14% versus 2.15% yesterday
- Copper Price -1.45%
- Steel Price +0.48%