【Column by Yuan Zhifeng】Tencent (700) Quarterly Earnings Slightly Beat Expectations

Today's Pick - SMIC (981, $67.4), Target Price $74.0, Stop-Loss Price $64.0

1) Market Outlook

Hong Kong stocks declined on Wednesday, with both trading volume and short-selling ratio remaining low. Southbound funds continued net selling. Since the beginning of this month, the Hang Seng Index has risen above 26,000 points three times, only to retreat on the same day each time. The index is expected to trade sideways in a narrow range between 25,000 and 26,000 points in the near term.

2) Summary of Mainland and Hong Kong Market Conditions on the Previous Day

On Wednesday, the Hang Seng Index opened 154 points lower, which turned out to be the day's high. It then plunged sharply, falling as much as 329 points intraday. The decline narrowed in the afternoon, closing at 25,440 points, down 212 points or 0.8%. Daily turnover increased 3% from the previous day to HK$216.8 billion, compared to an average daily turnover of HK$307.2 billion in July.

Southbound funds via Stock Connect recorded net selling of approximately HK$2.9 billion. Minimax (100), Tencent (700), and SMIC (981) saw net buying of HK$710 million, HK$680 million, and HK$460 million respectively. Alibaba (9988), Kingboard Chemical (1888), and Hua Hong Semiconductor (1347) experienced net selling of HK$1.46 billion, HK$980 million, and HK$500 million respectively. Cumulative net buying since August has been around HK$7.7 billion, compared to net buying of approximately HK$62.9 billion in July.

The Hang Seng Index fell 0.8%, with 26 gainers, 65 decliners, and 2 unchanged among constituent stocks. Longfor Group (960) and Tingyi (322) surged over 8% and 7% respectively, making them the top-performing blue chips. China Resources Land (1109) and China Overseas (688) rose over 6% and 4% respectively. Galaxy Entertainment (27) gained over 3%. China Resources Mixc Life (1209) and Chalco (2600) rose over 2%. Sun Hung Kai Properties (16), China Hongqiao (1378), Zijin Mining (2899), and Sands China (1928) all rose over 1%. NetEase (9999) dropped over 5%, the worst performer among blue chips. Hansoh Pharma (3692), New Oriental (9901), and Alibaba (9988) fell over 3%. PetroChina (857), China Shenhua (1088), Anta Sports (2020), Shenzhou International (2313), and WH Group (288) declined over 2%. CNOOC (883) fell over 1%.

The Hang Seng Tech Index dropped 1.0%, closing at 4,776 points, with 11 gainers, 18 decliners, and 1 unchanged. All major tech stocks declined: Tencent (700), Meituan (3690), and Xiaomi (1810) fell over 1%; JD.com (9618), Kuaishou (1024), and Baidu (9888) fell over 2%; Alibaba (9988) and NetEase (9999) fell over 3% and 5% respectively. Minimax (100) and Hua Hong Semiconductor (1347) surged over 8% and 7%, the best performers among constituents. SMIC (981) rose over 3%. Horizon Robotics (9660) and BYD Electronics (285) gained over 2%. Lenovo (992), Zhipu (2513), and Sunny Optical (2382) rose over 1%. Tencent Music (1698) plunged over 12%, the worst performer. Bilibili (9626) fell over 3%. Alibaba Health (241) and Haier Smart Home (6690) declined over 2%.

By sector, artificial intelligence, semiconductors, mainland property developers, property management, and Macau gaming stocks rose against the broader market trend. Minimax (100) and Zhipu (2513) rose over 8% and 1% respectively. Hua Hong Semiconductor (1347) and SMIC (981) rose over 7% and 3% respectively. Longfor Group (960), Greentown China (3900), and China Resources Land (1109) rose 7%-10%. China Resources Mixc Life (1209) and Vanke Property Services (2602) rose 3%. Galaxy Entertainment (27) and Wynn Macau (1128) rose over 3% and 2% respectively.

Large tech, coal, and oil stocks underperformed the market. NetEase (9999) and Alibaba (9988) fell over 5% and 3% respectively. China Shenhua (1088), China Coal Energy (1898), and Yankuang Energy (1171) fell over 2%. PetroChina (857) and CNOOC (883) fell over 2% and 1% respectively.

On Wednesday, the Shanghai Composite Index opened flat, dipped 0.2% early, then gradually recovered, rising as much as 0.4% in the afternoon. It closed at 3,946.68 points, up 0.3%. The Shenzhen Component Index rose 1.1%. The STAR 50 Index gained 1.6%. Total turnover in Shanghai and Shenzhen markets was about RMB 2.15 trillion, down RMB 170 billion from the previous day. The average daily turnover in July was about RMB 2.68 trillion.

3) Macro/Industry News

U.S. July Consumer Price Index (CPI) rose 0.1% month-on-month, in line with market expectations; year-on-year increase of 3.4%, also meeting expectations. Core CPI rose 0.2% month-on-month and 2.5% year-on-year, both matching forecasts. (Financial Post)

4) Stock-Specific News

Tencent (700) announced that for the second quarter ended June 30, profit attributable to shareholders was RMB 56.022 billion, up 0.7% year-on-year. On a non-IFRS basis, profit was RMB 68.415 billion, up 8.5% year-on-year, slightly exceeding expectations. Revenue was RMB 204.785 billion, up 11.0% year-on-year. (Financial Post)

CK Infrastructure (1038) reported interim shareholder net profit of RMB 21.252 billion for the six months ended June, up 3.89 times year-on-year, mainly due to substantial gains from the sale of UK Power Networks and UK Rails. An interim dividend of HK$0.75 per share was declared, up 2.7% year-on-year. Turnover during the period was RMB 19.631 billion, down 3.6% year-on-year. (Financial Post)

Power Assets (6) reported interim shareholder net profit of RMB 14.704 billion for the six months ended June, up 3.83 times year-on-year, primarily due to the disposal of interests in UK Power Networks and UK Rails. The interim dividend remained unchanged at HK$0.78 per share. Revenue during the period was RMB 298 million, down 15.3% year-on-year. (Financial Post)

China Resources Land (1109) announced that the group's total contracted sales in July were approximately RMB 14.1 billion, up 6% year-on-year. For the first seven months of this year, cumulative contracted sales amounted to approximately RMB 130.6 billion, up 5.7% year-on-year. (Financial Post)

Galaxy Entertainment (27) announced interim results for the six months ended June, with shareholder net profit of HK$5.28 billion, up 0.8% year-on-year. Basic earnings per share were 120.6 cents, with an interim dividend of HK$0.9 per share, up 28.6%. Revenue during the period was HK$24.231 billion, up 4.2% year-on-year. (Financial Post)

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