NetEase Beats On Bottom Line, Foreign Flows Return

NetEase Q2 Earnings Overview

Game developer NetEase reported Q3 earnings before the open in the US this morning. The company missed on top line but had a strong beat in its bottom line. The company’s results were powered by four new game releases in June, including a Harry Potter franchise game, released globally. The net profit beat was mostly attributed to the payment of fewer royalties due to the termination of certain partnerships with other game developers. This also led to top line revenue coming in below estimates.

Non-GAAP (Adjusted) year-over-year

• Revenue increased +3.7% to RMB 24.0 billion versus an estimated RMB 24.8 billion
• Net Income RMB 8.2 billion versus an estimated RMB 6 billion
• Net Margin 34% versus 21% in Q2 2022
• Earnings per Share RMB 9.7

Key News

Asian equities were mostly higher overnight as Hong Kong outperformed on higher volume.

The move higher in China and the region can be attributed to multiple factors. These include technical rebounds, strong results from companies in the region, and Nvidia’s optimistic guidance on AI chip demand, which powered Taiwan Semiconductor Manufacturing (TSMC) and South Korea’s Samsung higher overnight.

We also heard some positive news on the stimulus front. In Guangzhou, local banks have lowered their short-term deposit rates, piggybacking on last week’s rate cut and forcing capital to go towards the stock market or other investments. Meanwhile, the city of Zhuhai announced that properties can be sold at a -50% discount to their original listing price. While prices had already come down, city governments encouraging property sales is also a good sign.

After two weeks of straight net selling, foreign investors bought a net $412 million worth of Mainland stocks via Northbound Stock Connect, in a striking reversal. However, remember that not all foreign selling is money gone as some investors have been switching to futures from physical stocks. Nonetheless, the turnaround in Northbound flows is a positive signal.

It was reported that Stellantis, the maker of Chrysler and Fiat, could be pursuing a partnership with a China-based electric vehicle (EV) company that has yet to be named. The EV ecosystem was mostly higher on the news.

Health care also jumped in Hong Kong and Mainland China on a positive earnings release from Wuxi Biologics.

The Hang Seng and Hang Seng Tech indexes both closed higher by +2.05% and +3.72%, respectively, on volume that increased +20% from yesterday. Short sale volume also increased by +5%. Mainland investors bought a net $567 million worth of Hong Kong stocks overnight via Southbound Stock Connect. All sectors were higher though the top-performing sectors overnight were Health Care, which gained +4.65%, Consumer Discretionary, which gained +3.52%, and Information Technology, which gained +3.17%. Meanwhile, the worst-performing sectors were Utilities, which gained +0.23%, Energy, which gained +0.33%, and Financials, which gained +0.60%.

Shanghai, Shenzhen, and the STAR Board all closed higher by +0.12%, +0.49%, and +0.68%, respectively, overnight on volume that increased +12% from yesterday. Foreign investors bought a net $412 million worth of Mainland stocks via Northbound Stock Connect. The top-performing sectors were Consumer Staples, which gained +2.32%, Health Care, which gained +2.14%, and Consumer Discretionary, which gained +1.54%. Meanwhile, the worst-performing sectors were Real Estate, which fell -1.10%, Utilities, which fell -1.00%, and Energy, which fell -0.65%.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.28 versus 7.28 yesterday
• CNY per EUR 7.90 versus 7.90 yesterday
• Yield on 1-Day Government Bond 1.45% versus 1.45% yesterday
• Yield on 10-Year Government Bond 2.55% versus 2.55% yesterday
• Yield on 10-Year China Development Bank Bond 2.66% versus 2.66% yesterday
• Copper Price -0.33% overnight
• Steel Price -0.94% overnight