Research Reports and Commentaries

Daily Commentary

20 Aug 2018

Market Outlook
HSI might fluctuate at around 27,300 and 27,700 points today.

The Hang Seng Index opened higher by 288 points last Friday and then increased 350 points at most to reach its intra-day high of 27,450 points. Afterwards, the market narrowed its gains and grew 156 points in the morning. During the afternoon session, HK stocks further narrowed its gains and once only increased 1 points. However, the index regained its upward trend in the morning. The HSI finally closed at 27,213.41 points, up 113.35 points or 0.42%. Market turnover amounted to HKD100.306 billion. As a review of last week, the HSI dropped 1,153 points or 4.1% in total. The negotiators of the United States and China are formulating a road map for negotiations, trying to end the trade war before the APEC Papua New Guinea 2018 in November where the Presidents of the U.S. and China conduct bilateral talk. The ADR proportional HSI index closed overnight at 27,523 points with 309 points or 1.1% higher than closing price on last Friday. Dow was up by 110 points or 0.43% to 25,669 points. HSI may fluctuate at around 27,300 to 27,700 points today.

Today’s A-share Snapshot

Company’s Profile:JZJC (000799.SZ) specializes in the manufacture and distribution of liqueur products.

Brief Comments:For 1H2018, the Company’s revenue rose 41.26% YoY to RMB524 million while its net profit hiked 38.30% YoY to RMB114 million. For 1H2018, the Company’s main product posted a decent performance. In particular, its revenue for Neican Liquor and Jiugui Liquor grew 42% and 48%, accounting for 20% and 67% of the total revenue, with GPM of 94% and 81%, respectively.The Company stated it will further optimize structure of the product to ensure the continuously growth of the sales revenue.

Stock Pick

Tencent’s short term share price weakness with long term fundamental intact

Tencent(00700) reported 2Q18 results on last Wed (17/8) with revenue growing 30% YoY to Rmb73.7bn, 5% below street. Non-GAAP net income grew 20% YoY to Rmb19.7 bn, 2.8% ahead of consensus.

We think Tencent’s gaming revenue still has strong growth potential. Deferred revenue -9.5% QoQ, overall gaming revenue may experience a weak 3Q. But among new game launches in 3Q18, Free Fantasy Online, MT4 (launched in July, high-ARPU MMORPG genre), and Saint Seiya (launched in August) have performed well at top 10 grossing rank. Looking forward, the company highlighted daily active users and time spent for smartphone games to maintain upward trend, reflecting the solid foundation of its mobile games business. Currently, Tencent has about 15 games in the pipeline with approval obtained on monetization. We think (1) overseas expansion (Arena of Valor with >13mn DAUs and >USD30mn monthly grossing in 1H18 outside China, mobile PUBG with >14mn DAUs and generated >USD20mn grossing in July), (2) strengthening monetisation of existing games, as well as (3) release of new titles with higher ARPU, are the future growth engines to drive smartphone games.

On the other hand, in respect of online advertising, online video ad grew YoY growth due to sponsorship ad from variety shows such as Produce 101, also popular programs like Legend of Fuyao, while news ad revenue declined single digit YoY on high base last year. We think the future catalysts include: (1) sequels of Produce 101 will generate more future revenue after proven success in 2Q; (2) IP-based original content in drama, variety show and Chinese anime can continue to drive this segment; (3) reducing discounts to agencies aims to improve margin, and (4) news feed inventory sequentially increased after a completion of ad system revamp. In the long run, better algorithm (driven by the data from Mobile QQ Browser and KanDian) and enhanced content offering enabled Tencent to increase hit rates of recommended feeds stream, enhancing advertising revenue.

Investors are advised to buy at or below HKD320, with target price of HKD400 and stop loss of HKD290.