Earnings Watch, rally dynamics, and Chinese gaming restrictions Earnings Watch, rally dynamics, and Chinese gaming restrictions Earnings Watch, rally dynamics, and Chinese gaming restrictions

Earnings Watch, rally dynamics, and Chinese gaming restrictions

Equities 8 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  In today's equity note we take a look at earnings this week from Fortescue Metals Group, Zoom, Meituan, and NetEase, with the latter two defying investors' nervousness over the potential impact from the ongoing changes of regulation in China of the private sector. The MSCI World has been on a remarkable run this year shrugging off everything and the current rally is now the second-longest since 1999 in terms of having a drawdown of 5% or less. These type of rallies have all the ingredients to end abruptly under the right conditions.


The earnings season has tapered off, but this week’s earnings have still been interesting. Take Fortesque Metals Group reporting yesterday annual (ending 30 June 2021) adjusted net income of $10.3bn, which is more than NVIDIA’s $7.1bn and on par with Visa’s $10.9bn. Keep in mind that this is for digging iron ore out of the ground, the lowest global value chain business activity. While iron ore prices are expected to ease somewhat, the Australian miner is still valued at a 2-year forward free cash flow yield of 10%. Whether it is the ESG trend that is causing this valuation, it is grossly out of line with the reality of the green transformation and urbanization in the developing world.

Zoom Video Communications that rose to fame during the pandemic reported FY21 Q2 revenue and earnings that were better than expected, but the guidance for the current quarter was in line with analyst estimates. However, investors were disappointed sending the stock down 16% in today’s session showing growth investors that there is a limit after all for growth stocks. The main question for investors is still whether Video can expand its business as Microsoft is going after its business.

Source: Saxo Group

Meituan and NetEase rally on result despite regulation

Meituan reporting 1H result yesterday defied investors’ nervousness over the impact of Chinese regulation and objective of ‘Common Prosperity’ showing revenue above estimates but still operating at a loss. At the same time the company said publicly that it agreed with all the of the governments initiatives, but essentially also saying it do not know the impact on its business. The new data privacy law and the upcoming monopoly law are the two most important laws that could severely impact Meituan. Nevertheless, investors bid up shares in today’s Hong Kong session.

Source: Saxo Group

NetEase showed in today’s earnings release that for now its gaming business is not impacted with revenue in line with estimates, but the new Chinese gaming rule of three hours of gaming per week for minors will have a negative effect going forward. NetEase is getting 74% of its revenue from gaming and China could impose stricter rules on gaming for other age groups as well. Despite two good earnings reports from Meituan and NetEase, we most likely see a path going forward with more regulation as outlined in our recent research note on Chinese technology stocks. Global investors should expect more regulation and uncertainty until next year’s Party Congress in October 2022.

An unstoppable rally or not?

Global equities have defied everything this year from the Delta variant, more signs of inflation, a slowdown in China, the first rate hike in Asia, and a Fed preparing to taper bond purchases. The MSCI World is now in its second longest rally since 1999 with a drawdown of 5% of less with today’s session increasing the count to 216 trading days. This type of market dynamic tends to lead to position concentration, investors becoming blind of risks, and increased leverage. These dynamics tend to get unraveled in a forceful manner under the right conditions. We do not know what the trigger will be but with more countries in Asia under pressure from Covid-19 the world might experience even more supply issues forcing prices higher.

In our recent research note on tail hedging portfolios with market makers we argue that market makers are worth considering as an alternative to long VIX futures or put options which both have negative expected value over time, whereas there are good arguments for why market makers come with positive expected returns and tail hedging characteristics. However, the recent comment from the SEC Chairman that banning ‘payment-for-order-flow’ is on the table in the current discussions about the US market structure, is a negative for Virtu operating in US markets whereas Flow Traders are less impacted. Hence why tail-hedging with market makers has to be diversified across both market makers.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.