China Market Update: Tencent’s Terrific Q1 Earnings

Tencent Earnings Review

Tencent (700 HK) reported Q1 financial results after the Hong Kong close today that beat analyst expectations on the big three: revenue, adjusted net income, and adjusted EPS. Unfortunately, due to a flight, I wasn’t able to catch the earnings call. Looks like a solid beat! Party on, Garth! Party on, Wayne!

Revenue increased by +13% to RMB 180 billion ($25.1 billion) from RMB 159.5 billion versus expectations of RMB 175.6 billion.
Revenues from Value Added Services increased by 17% year-over-year (YoY) to RMB 92.1 billion in the first quarter of 2025.
Domestic Games revenues were RMB 42.9 billion, representing a 24% YoY increase from a low base in the same period last year.
International Games revenues were RMB 16.6 billion, reflecting a 23% YoY increase.
Revenues from Marketing Services were RMB 31.9 billion for the first quarter of 2025, reflecting a 20% YoY increase. “This growth was primarily due to robust advertiser demand… Marketing Services revenues increased across most major industry categories during the quarter.”
Revenues from FinTech and Business Services increased by 5% YoY to RMB 54.9 billion for the first quarter of 2025. FinTech Services’ revenue growth was due to higher revenues from consumer loan services and wealth management services.
Adjusted Net Income increased by +22% to RMB 61.3 billion ($8.5B) from RMB 50.3 billion and versus expectations of 59.7 billion.
Adjusted EPS was RMB 6.58 from RMB 5.26 and versus expectations of RMB 6.39.
During the first quarter of 2025, the Company repurchased approximately 43 million shares on the Hong Kong Stock Exchange for a consideration of approximately HKD 17.1 billion.

Key News

Asian equities had a strong session, led by Hong Kong, Indonesia, Vietnam, Taiwan, and South Korea. There was considerable market chatter about the strength of the Chinese yuan (CNY) versus the US dollar, possibly driven by the People’s Bank of China (PBOC), which runs counter to the prevailing narrative.

Regulators intervened to prevent “industry chaos” caused by “vicious competition” following JD.com’s entry into the food delivery business with significant subsidies, which threaten Meituan’s core business. This echoes previous episodes of aggressive competition in sectors such as solar, ride hailing (Uber versus DiDi), and, more recently, electric vehicles and hybrids, which have benefited consumers but negatively impacted company balance sheets. Regulators summoned JD.com and Meituan to ensure compliance with laws, emphasizing their focus on “curbing low-price competition and homogenized competition.” They stated JD.com’s entry should “avoid touching the regulatory red line” regarding subsidies and commission policies. JD.com rose 3.36% after posting better-than-expected first quarter results, while Meituan gained 1.46%, as regulatory scrutiny could benefit its position.

Insurance and brokerage/capital markets stocks had an exceptional day on speculation that onshore mutual funds may become buyers due to their current underweight positions. Shipping companies also performed well, buoyed by positive developments in US-China trade talks and the launch of a 90-day truce.

Hong Kong saw strong trading volumes and broad market participation, led by growth stocks, even as financials outperformed. Mainland investors were net buyers via Southbound Stock Connect, though several growth stocks were net sells, likely as a funding source for the upcoming CATL Hong Kong initial public offering (IPO). Mainland China’s markets were more mixed compared to Hong Kong.

April aggregate financing year-to-date was RMB 16.43 trillion, just below expectations of RMB 16.577 trillion and up from March’s RMB 15.18 trillion. New loans year-to-date reached RMB 10.06 trillion, below expectations of RMB 10.474 trillion and up from March’s RMB 9.78 trillion. Alibaba Group, NetEase, and KE Holdings are scheduled to report results tomorrow.

Index Changes and Market Structure

My favorite investment book? Without question, it is the MSCI Global Investable Market Indexes Methodology. Those 207 pages dictate the allocation of USD 16.3 trillion in active and passive assets. MSCI released its pro-forma for the end of the month: the United States’ weight in the index has declined to 61.7% from 63.7% at the end of April and from 66% just a few months ago. China’s market share within emerging markets has increased to 29.8%, although 17 companies will be deleted versus 6 additions, bringing China’s numerical weight to 47% (568 of 1,206 emerging market stocks). Remember, MSCI limits Mainland-listed Chinese stocks to only 20% of their potential index weight.

India’s rise continues, but its size and scale remain relatively small compared to China, at 19.4% of the emerging markets index with 157 stocks. If US-China trade talks progress positively, could an easing of the geopolitical narrative prompt MSCI to resume China A-share inclusion? Currently, Chinese A shares represent only 20% of their potential market capitalization in indices; full inclusion would significantly increase China’s weight, likely approaching 50% of the MSCI Emerging Markets Index. While it is early days, the market may be underestimating how a trade deal could lead to President Trump sidelining China hawks within the GOP. Would Trump allow American Depositary Receipt (ADR) delisting to jeopardize a major trade deal? I doubt it. Again, it is early, but something to consider.

What is your favorite investment book?

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