In addition to growing fears about Emerging Market contagion (where despite the Turkish Lira’s latest surge, we have seen the Chinese Yuan tumble to fresh one year lows amid a surge in the US Dollar), this morning traders were stunned by Chinese tech giant Tencent, which came out with numbers that were simply awful, missing on the top and bottom line, reporting revenue of CNY 73.7BN, below the CNY 77.7BN expected, More importantly, its profit of CNY 17.867BN was far below the CNY 19.3BN expected, and down from CNY 18.231BN a year ago: Tencent’s first profit drop in a decade.
The news sent Tencent ADRs tumbling to the lowest level since August 2017.
Tencent’s earnings disappointment, which sent the stock plunging and dragged EM futures lower…
…followed an drop earlier in the session in shares of Asian video game companies such as Tencent, Nexon and Nintendo on concerns over delays in new games releases in China, as Beijing halted approvals for game licenses. As Reuters notes, many firms have been awaiting games sales licenses since March after Beijing reformed and reorganized the government bodies that oversee the sectors earlier this year.
Tencent’s plunge hit other Asian tech names in sympathy, with other members of the “Asian Acronyms” tech stocks, either BATs (Baidu, Alibaba, Tencent) and TATS (Tencent, Alibaba, Taiwan Semi, Samsung), sliding sharply.
It also slammed ETFs tracking Chinese equities with significant exposures to Tencent.
- IShares MSCI China ETF (MCHI) fell 4.8%; the fund has $3.4 billion in assets, and has a 16.2% exposure to Tencent
- IShares China Large-Cap ETF (FXI) fell 4.5%; the fund has almost $4 billion in assets, and has a 8.6% exposure to Tencent
- SPDR S&P China ETF (GXC) fell 3.5%; the he fund has $1.1 billion in assets, and has a 14.1% exposure to Tencent
- Vanguard FTSE Emerging Markets ETF (VWO) fell 2.5%; the fund has $59 billion in assets, and Tencent is its largest holding (5.3%)
As Bloomberg Arie Shapira writes, the Tencent debacle “might get the tech and general market bears riled up again, the same ones who came out of hibernation in late July after the Facebook and Twitter earnings blowups led to a three-day mini-panic in the FAANGs.” Furthermore, the recent action in the semiconductors is also helping the bears’ case, with the SOX underperforming yesterday and having now fallen 3.5% in the past four sessions vs the S&P 500 off 0.6%.
The weakness in semis can be partly explained by other earnings disappointments out of Asia, namely China’s Sunny Optical (a ~$13b market cap smartphone lens maker that lost nearly a quarter of its value on Tuesday) and Taiwan’s Hon Hai Precision. Another ugly sign is the persistent decline in Chinese smartphone giant Xiaomi, which slid below its July IPO price to end the day at an all-time low.
And while one can’t exactly call it “contagion”, the Chinese tech giant slump has hit the Nasdaq, with futures sliding well below yesterday’s lows, and killing the Tuesday dead cat bounce in the process.
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