JD.com Delivers Strong Topline Results, Hong Kong-Listed Internet Stocks Rebound

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JD Q2 Earnings Update:

JD.com reported Q2 financial results this morning that beat on topline revenue growth though the bottom line was weak as expenses increased. This was mentioned by the company in its Q1 earnings call. The company is investing in expanding its business. Today’s earnings call saw the company stating that it adheres to internet regulation and will be implementing several new laws this fall. JD Retail, JD’s e-commerce unit which accounts for the vast majority of revenues, had a strong quarter driven by the June 618 shopping event. The event saw 236 brands achieve sales of over RMB 100mm, as transaction volumes increased 28% from last year’s event.

  • Revenues increased 26.2% to $39.9B/RMB 253.8B versus estimate RMB 248. 47B
  • JD Retail revenue increased to $36.018B/RMB 232B from Q2 2020’s RMB 189B
  • Annual active customer accounts increased to 531mm from Q2 2020’s 417mm
  • Cost of revenues increased more than 2X to RMB 170B, Research/Development also more than 2X and General/Administrative up more than 3X
  • Adjusted Net Income $0.7B/RMB 4.6B versus Q2 2020’s RMB 5.9B
  • Adjusted EPS RMB 2. 90 versus analyst estimate RMB 2. 12
  • Cash on the books increased RMB 31.9mm over the last twelve months to $27.6B/RMB 178.1B

Key News

Asian equities had a strong day as the markets and sectors hit hardest on Friday rebounded strongly. Hong Kong saw strong performance led by clean technology companies and Chinese internet companies.

After the close, Tencent announced it purchased 230k shares today in a sign the company believes its stock is cheap. Tencent reported net buying by Mainland investors via Southbound Connect trading on the second day in a series.

Alibaba HK was the exception to the downside. This was due to reports Zhou Jiangyong (the former chief of Hangzhou) was arrested for corruption. Chatter about his arrest suggests it could have been connected to Ant’s IPO. However, the company has denied this rumor. Investors prefer to ask questions later than shoot first. The market action today is positive because the news did not impact the whole sector like it has in the past.

We also have the new internet user data law, called the Personal Information Protection Law, which will go into effect on November 1st while the Data Security Law goes into effect in September. We are getting closer to ending the uncertainty surrounding internet regulation.

Hong Kong was lifted on news of the launch of MSCI MSCI China A Connect 50 Index futures, which we discuss further below. The clean technology sector, including solar, wind and electric vehicles, also lifted the Mainland. Volumes showed a slight increase on the Mainland, but volumes in Hong Kong were slightly lower. Investor sentiment is improving today because of reports that efforts to eliminate the Delta variant were successful.

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MSCI China A 50 Connect Index futures

Hong Kong Exchanges and Clearing (HKeX) and MSCI announced that MSCI China A 50 Connect Index futures will launch on October 18th. The first China A-shares derivative product to be listed in Hong Kong is the Connect Index futures. The index selected is mutually beneficial to both HKeX and MSCI, as FTSE has a China A 50 future listed on Singapore Limited (SGX). Both MSCI and HKeX can take the index to their arch-rivals. MSCI China A Index futures programs will likely be listed soon, since MSCI’s definitions of Shanghai and Shenzhen stocks eligible for the Stock Connect program are the MSCI China A Index.

The futures launch removes one obstacle that prevented MSCI from including China A-shares in broader indexes like the MSCI Emerging Markets Index. China A-shares settlement is on trade date, rather than the global standard of two day settlement. Another issue is the inconsistency between Hong Kong and Mainland China’s holiday calendars.

H-Share Update

The Hang Seng opened higher but slid off its highs to close +1. 05% as volume declined -16. 95% from Friday which is 101% of the 1-year average. The 209 Chinese companies listed in Hong Kong within the MSCI China All Shares gained +0. 98% led by utilities +4. 81%, healthcare +4. 71%, tech +3. 16%, industrials +3. 11%, energy +2. 99%, materials +2. 66%, communication +1. 91% while discretionary and real estate -1. 08% and -1.07%. Tencent +1 was Hong Kong’s most traded stock by value. 97%, Alibaba HK -3. 67%, Meituan +1. 03%, Hong Kong Exchanges +5. 66%, Xiaomi +3. 84%, BYD +4. 79%, Geely Auto -0. 58%, Kuaishou Technology +2. 57%, Wuxi Biologics +7.1% and China Merchants Bank +4.4%. Southbound Stock Connect volumes were moderate as Mainland investors bought $54mm of Hong Kong stocks as Southbound trading accounted for 12.3% of Hong Kong turnover.

A-Share Update

Shanghai, Shenzhen, and STAR Board opened higher and kept going closing +1. 45%, +2. 35%, and +2. 29% as volume increased +6. 74% which is 143% of the 1-year average. The 522 Mainland stocks within the MSCI China All Shares gained +1. 87% led by communication +3. 51%, industrials +3. 18%, energy +2. 98%, tech +2. 74%, healthcare +2. 37%, materials +1. 79%, discretionary +1..73%, utilities 1. 69%, staples +1. 45% and financials +0. 41% while real estate -0.35%. Qinghai Salt Lake Industries +5 was the most traded on the mainland by value. 45%, Northern Rare Earth +9. 53%, Kweichow Moutai +1. 43%, Tianqi Lithium +1. 27%, Wuliangye Yibin -0. 16%, BYD +1. 65%, CATL +5. 62%, Chongqing Changan Auto +0. 71%, Ganfeng Lithium +2. 64% and Cosco Shipping +6.7%. Northbound Stock Connect flows were moderate as foreign investors bought $282mm of Mainland stocks as Northbound trading accounted for 5.5% of Mainland turnover.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6. 48 versus 6. 49 Friday
  • CNY/EUR 7. 60 versus 7. 59 Friday
  • Yield on 10-Year Government Bond 2. 87% versus 2. 84% Friday
  • Yield on 10-Year China Development Bank Bond 3. 250% versus 3. 18% Friday
  • Copper Price 1. 49% overnight

Brendan Ahern, Senior Contributor
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