Asia Tea Time - Cup 23 ☕

August 18, 2023 • Estimated Reading Time: 7 minutes

This week, I cover news on Hong Kong's bear market, Tencent, REITs, and VinFast.

Macro in Asia

Hong Kong shares head for a bear market as Chinese markets wobble

Hong Kong’s Hang Seng Index briefly entered a bear market – defined as a drop of more than 20% from a recent high – as it declined 21% from its January high.

Meanwhile, in China’s onshore stock markets, the gains seen since the country’s July politburo meeting have all but evaporated.

Why it’s happening

  • China’s economy is kind of in a mess, with worries over property prices and its indebted developers putting investors off.

  • China’s stock markets are selling off on the back of any little bit of bad news on China’s economy. Even a recent interest rate cut by China’s central bank wasn’t enough to stem the red tide.

  • After rebounding sharply following the surprise opening-up of the country late last year, the Chinese economy has run out of steam as consumers hold back from spending.

Why it matters

  • China’s stock markets – Hong Kong, Shanghai, and Shenzhen – are collectively the largest in Asia.

  • The announcement of “measures” to support the private sector by the Chinese government was meant to reassure investors but, instead, all it’s done is make them more nervous – that’s because there have been no actual details on that support.

What’s next?

  • Investors will be looking to see how this property crisis plays out and whether the Chinese government really will let Country Garden – one of the biggest developers in China at one point and which is now close to default – go bust.

Tim’s Take

  • China’s property developers have been feeding off a constant stream of debt for years and now it seems like that is coming back to bite them.

  • Persistent oversupply in cities and a stalling in Chinese property prices have seen property developers' sales crater exactly at the same time as their debts have ballooned. That’s not a great recipe for success.

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More broadly, all this impacts China because property makes up a massive chunk of the world’s second-largest economy – somewhere in the region of 25% of GDP, which is huge for any country.

Country Garden’s inability to make coupon payments on its debt has resulted in questions being asked about its financial stability and whether a failure would result in contagion in the property sector.

In the stock market, even “orders” from the Chinese government for funds to be net buyers of China’s onshore stocks haven’t stemmed the bleeding.

It seems like it's going to take more than acts of "national service" to change investors' minds.

Company spotlights

Tencent results miss estimates on domestic gaming weakness

Tencent Holdings Ltd (SEHK: 700), one of the world’s largest gaming firms and operator of China’s WeChat, saw net profit rise by a third but this still missed analysts’ estimates.

Why’s it news?

  • As one of China’s largest listed tech firms with interests in everything from payments and advertising to social media and gaming, Tencent is watched as a bellwether for the Chinese economy.

  • While results were flattered by Covid-19 comparisons to last year, Tencent’s domestic gaming revenue in China disappointed investors.

  • Overall revenue growth of “only” 11% also disappointed as it came in below what investors were hoping for.

Why it matters

  • Tencent hopes to rejuvenate its business and the previous government clampdown on tech firms seems to be easing.

  • But now Tencent is confronted with an even bigger issue – a slowing Chinese economy where spending on gaming and cloud computing could slow, impacting Tencent’s various businesses.

What’s next?

  • Watch out for other large Chinese tech companies that will be reporting their earnings next week – including delivery and travel giant Meituan Dianping (SEHK: 3690) – for clues on the health of the Chinese consumer.

Tim’s Take

  • Tencent has been on a tough path over the past couple of years as management grappled with a crackdown on the gaming industry in China along with operating in a “Covid economy”.

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There does seem to be some light at the end of the tunnel for some of the firm’s business segments, though, despite the negative sentiment following its latest earnings.

A positive rebound in online advertising revenue – which grew 34% (its fastest pace in five years) – helped offset some of the weakness in domestic gaming.

Investors also tend to forget that Tencent has a sizeable international gaming business, which expanded by 19% year-on-year in Q2 2023 to RMB 12.7 billion. Yet the international gaming segment still remains only 40% of the size of its domestic gaming business.

Bigger questions do remain about Tencent’s longer term relevance, given the competitive threat of large online firms like ByteDance.

Tim’s money tip of the week

When we invest in REITs – including Singapore REITs – a lot of us tend to focus on the dividend (distribution) yield.

That’s partially understandable as REITs are primarily seen as an income or dividend investment.

However, we shouldn’t lose sight of the capital that we have invested as well. That comes through the appreciation of the share price.

The problem with focusing on the dividend yield with REITs is that we might get attracted to REITs that have dividend yields higher than 7%.

Unfortunately, that’s typically a warning flag that something is wrong. Just take a look at Singapore-listed Manulife US REIT (SGX: BTOU).

The REIT had a 12% dividend yield as of July 2022 – the last time it declared a distribution. Since then, shares have lost 85% of their value as low vacancies in US office space have materially impacted its business.

So, with REITs, which are essentially “buy and hold” investments, you need both capital appreciation and dividend growth.

Story of the week

The US stock market attracts global companies. One such firm that made headlines this week was Vietnam’s electric vehicle (EV) start-up VinFast.

After going public in the US via a special purpose acquisition vehicle (SPAC), VinFast shares soared 255% to finish its first day and the company was briefly worth more than Ford or General Motors.

The fact that its market capitalisation topped US$85 billion was shocking enough. But VinFast’s founder owns around 99% of its shares, meaning only a tiny amount could be traded.

As with all “hype” stocks, this quickly came back down to earth. On Thursday, VinFast shares fell around 33%.