KGI Asia Commentary

2023.08.02 09:00

HSI fell 68 points on Tuesday

The Hang Seng Index fell 68 points or 0.3% to 20,011 on Tuesday. HSTECH fell 12 points or 0.3% to 4,538 and HSCEI fell 45 points or 0.6% to 6,854. Daily market turnover was HK$135.2bn.

S&P starts August down slightly

The S&P opened lower in August as investors focused on a slew of corporate earnings reports and assessed a slew of new economic data. The S&P 500 lost 0.27% to close at 4,576.73 and the Nasdaq Composite lost 0.43% to close at 14,283.91. The Dow Jones Industrial Average rose 71.15 points, or 0.2%, to 35,630.68. Shares of Norwegian Cruise Line Holdings Ltd. fell 12% after the company reported lower-than-expected third-quarter guidance that overshadowed better-than-expected second-quarter earnings. The company forecast third-quarter adjusted earnings of 70 cents a share, below expectations of 80 cents a share, raising investor concerns about demand. The weaker guidance weighed on other cruise stocks such as Carnival Corp. Pfizer reported a mixed quarter, with earnings peaking but revenue missing expectations. The company also lowered its full-year revenue forecast, warning of "near-term revenue challenges." Meanwhile, Merck & Co. reported second-quarter revenue that topped analysts' expectations, boosted by a strong performance from its cancer drug Keytruda. Shares of Uber closed down more than 5% on Tuesday after it reported second-quarter earnings that missed analysts' expectations but provided upbeat guidance. This week is the busiest for the S&P 500 to report second-quarter results, with more than 160 companies due to report results. More than half of the companies in the broader index have reported earnings, with 82% of them topping earnings estimates, according to FactSet. That has fueled hopes among some that the economy will be able to avoid recession as inflation shows signs of cooling.

Job market showing signs of weakness

On the economic front, the labor market appeared to ease as the number of job vacancies fell more than expected in June to 9.58 million from 9.61 million in May. The number is still well above historical norms but down from a peak of more than 12 million in March 2022, according to the Job Openings and Labor Turnover Survey (JOLTS) released Tuesday. Signs of weakening demand for jobs are likely to be welcomed by the Fed and boost expectations that the central bank is unlikely to resume raising interest rates.

Hong Kong Stock Connect had a net outflow of HK$9.4bn on Tuesday, of which Tracker Fund (2800) had the largest net inflow, reaching HK$6.31bn; followed by HSCEI ETF (2828). Tencent (700) recorded the largest net outflow at HK$1.0bn, followed by Meituan (3690).

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Tencent
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The politburo meeting reaffirmed the need to promote the healthy and sustainable development of platform companies, and the market responded positively. As a heavyweight stock in the index and a leader in the platform economy, Tencent has the potential to edge higher. The revenue of Tencent in the first quarter was RMB149.986bn, representing an increase of 11% yoy and 3% qoq, higher than the market expectation of RMB146.29bn. The group's payment business benefited from the recovery of domestic consumption. During the period, the games revenue improved, and the advertising revenue remained rapid growth, driving solid overall revenue growth. The Non- IFRS profit in the first quarter was RMB32.5bn, a yoy increase of 27% and a qoq increase of 10%, which was lower than market expectations of RMB33.22bn. The Company is having improved games revenue visibility, and potential growth from the overseas expansion of games. Advertising revenue continues to accelerate, benefiting from the new budget of advertisers and the increase in ad inventory. The prospect for the fintech and business services sectors is also positive. The management is confident in the fundamental strength of the main business lines. It is expected that the company's profitability and gross profit margin will continue to improve this year, and it expect AI to be a growth multiplier. Overall, we think the outlook of Tencent remains positive despite the lower-than-expected earnings for the quarter. Target price: $460; Stop- Loss price: $300.

Wen Kit Kenny is a SFC licensed person accredited to KGI Group to carry on regulated activities (for details, please refer to:https://apps.sfc.hk/publicregWeb/indi/AJF244/details). He and/or his associate do not have any financial interest in the recommended issuer or new listing applicant.

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