China Market Update: Tencent’s Terrific Q4 AI-Nnounced!

Tencent Q4 Earnings Overview

Tencent reported Q4 financial results after the Hong Kong close that beat analyst expectations. The solid quarter was driven by “AI-powered enhancements to our advertising platform, higher engagement in Video Accounts, and growth in our evergreen games,” according to Founder, Chairman, and CEO Ma “Pony” Huateng. The company emphasized AI in their press release with Ma’s quote “we have reorganised our AI teams to sharpen focus on both fast product innovation and deep model research, increased our AI-related capital expenditures, and increased our R&D and marketing efforts for our AI-native products”. The presentation dedicated an entire section to AI, noting the company spent $10.7 billion on AI in 2024, which has a capex of 12% of revenue, up from 2023’s $3.4 billion when capex accounted for 4% of revenue. The press conference and analyst Q&A were dominated by AI talk as well. In a good sign for the company and China’s economy, the company noted, “Advertising spending rose across most major categories during the quarter.” Advertisers don’t spend ad dollars if no one is buying! Hat tip to management for the shareholder-friendly buyback and dividend policies! Here are some highlights:

Revenue increased by +11% to RMB 172.45 billion ($24 billion) from RMB 155.20 billion and versus analyst expectations of RMB 168.74 billion.
Revenue Segments:
- Value Added Services increased by +14% to RMB 79 billion (social networks up +6%, domestic games up +23%, international games up +15%)
- Marketing Services up +17% to RMB 35 billion
- FinTech and Business Service up +3% to RMB 56.1 billion
Adjusted Net Profit increased by +30% to RMB 55.31 billion ($7.7 billion) from RMB 42.68 billion and versus analyst expectations of RMB 53.28 billion.
Adjusted EPS increased by +33% to RMB 5.48 from RMB 4.44 and versus analyst expectations of RMB 5.47.
In 2024, the Company repurchased approximately 307 million shares on the Hong Kong Stock Exchange for HKD 112 billion.
For 2025, we propose to increase our annual dividend by 32% to HKD 4.50 per share (equivalent to approximately HKD 41 billion) and repurchase at least HKD 80 billion worth of our shares.

Key News

Asian equities were mixed overnight on light volumes as Indonesia and Thailand outperformed, and investors waited for today’s US Federal Reserve announcement.

Hong Kong and Mainland China bounced around the room as value stocks outperformed growth stocks in both markets. Utilities were the best-performing sector in both Hong Kong and Mainland China, up +0.92% and +1.26%, respectively, after the NDRC promoted renewable energy. Some media/press attention to BofA’s China strategist calling for a correction by comparing today’s rally to the 2015 rally. I’ve not read the report, but I am skeptical as I find the comparison ridiculous. The 2015 rally was driven by legal and illegal margin debt. As noted yesterday, US flows into US-listed China equity ETFs is less than $1 billion year-to-date (YTD) despite significant outperformance versus US stocks. US-listed European-focused ETFs have received $5.8 billion YTD!

Going back to mid-January 2024’s China equity bottom, the outperformance versus US stocks is very significant, but there are no flows and no love from US investors! The geopolitical headwind and constant negative US/Western media headlines would change with a Trump-Xi meeting. Some chatter that this could occur in June, though nothing definitive yet! Corrections will occur and are healthy, though I suspect dips will be bought.

Today’s Hong Kong dip was bought by Mainland investors with a healthy $1.52 billion of net buying of Hong Kong stocks and ETFs via Southbound Stock Connect. Alibaba and the Hong Kong Tracker ETF were significant large buys. Hong Kong internet stocks were mixed ahead of Tencent’s Q4 results, with KE Holdings down -10.71% post yesterday’s Q4 results.

BYD gained +3.89% in Hong Kong and +3.25% in Mainland China following yesterday’s 5-minute battery recharge release. The Ministry of Transport announced a subsidy for cities to trade in their gas buses for electric vehicle (EV) buses, which is in the company’s sweet spot. The Financial Times has an article stating that BYD was told to tap the brakes on building a plant in Mexico due to the Chinese government’s worry the technology might “leak” to US rivals. I have one minor issue with the article. BYD has an EV bus plant in California! Maybe BYD should wait for Trump and Xi to meet and build an EV car plant in the US!

Interesting that the Hong Kong government CEO criticized CK Hutchison (1 HK), which gained +1.22%, for selling their Panama ports to BlackRock. The company got $19 billion, and the stock ripped higher on the news, indicating they got a good deal. Worth noting that Premier Li signed a State Council decree on “Regulations of the State Council on the Handling of International Intellectual Property Disputes”.

The Hang Seng and Hang Seng Tech diverged +0.12% and -1.05%, respectively, on volume down -4.92% from yesterday which is 167% of the 1-year average. 240 stocks advanced, while 231 declined. Main Board short turnover increased by +12.75% from yesterday, which is 170% of the 1-year average, as 16% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Quality and large capitalization stocks outperformed value, growth, and small capitalization stocks. The top sectors were utilities, up +0.92%, healthcare, up +0.92%, and materials, up +0.87%, while real estate fell -0.98%, consumer discretionary fell -0.86%, and communication services fell -0.4%. The top sub-sectors were consumer services, national defense, and media, while household appliances, real estate management, and telecommunication services were the worst. Southbound Stock Connect volumes were 3x pre-stimulus levels as Mainland investors bought $1.52 billion of Hong Kong stocks and ETFs led by HK Tracker ETF and Alibaba large net buys, XPeng, Xiaomi, and Dobot small net buys, Tencent and SMIC small/moderate net sells, and Meituan a large/moderate net sell.

Shanghai, Shenzhen, and the STAR Board fell -0.10%, -0.40%, and -1.18% on volume -3.53% from yesterday, which is 123% of the 1-year average. 1,448 stocks advanced, while 3,531 declined. Value and large capitalization stocks outperformed growth and small capitalization stocks. The top sectors were utilities, up +1.26%, financials, up +0.61%, and industrials, up +0.48%, while communication services fell -3.77%, technology fell -1.93%, and real estate fell -0.83%. The top sub-sectors were precious metals, banking, and power, while telecommunication services, communication equipment, and electronic components were the worst. Northbound Stock Connect volumes were above average. CNY and the Asia dollar index barely fell versus the US dollar. Treasury bond prices gained. Copper rose, and steel fell.

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