(Aug 21): US stocks traded firmer this past week, lifting the Dow Jones Industrial Average past the 22,000 threshold. This came as minutes of a recent US central bank policy meeting suggested wariness about raising interest rates in the face of sluggish inflation data.

On Aug 16, the DJIA closed at 22,024.87, up 25.88 points, or 0.12%. The Standard & Poor’s 500 rose 0.14%, or 3.5 points, to 2,468.11. The Nasdaq Composite Index added 12.1 points, or 0.2%, to close at 6,345.11. Most sectors, except energy and financial, made gains.

“After the release of the minutes, the probability of a September Fed hike stayed unchanged at a lowly 5.6%, while the chance of a November hike actually edged higher to 10.3% [from an earlier projection of 8.3%]. But the probability of a December hike fell lower to 40.2% [from an earlier projection of 43.8%],” says Alvin Liew, a UOB senior economist, in a flash note on Aug 17.

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Even if interest rate hikes are not an immediate concern, the market could turn their attention to when the Fed will unwind its US$4.5 trillion ($6.1 trillion) balance sheet. The Fed has said it will begin the wind-down “relatively soon”.

Liew expects the plans for this to be unveiled at the next Fed meeting on Sept 19 and 20, with implementation beginning in October. Goldman Sachs is projecting yields on 10-year Treasury bonds to rise by 0.2 percentage point this year and 0.15 percentage point in 2018 as a result of the Fed’s balance sheet reduction.

Another risk for the US market is apparent growing discontent with US President Donald Trump, after he refused to condemn white supremacists who gathered in Charlottesville, Virginia last weekend and sparked violence on the streets. This past week, Trump was forced to disband two economic advisory councils after its members — all CEOs of top US companies — began resigning in droves.

The concern now is that Trump might begin losing members of his cabinet, which could hamper his ability to manage a looming government debt ceiling crunch. Indeed, it might also force the Fed to maintain its accommodative stance a bit longer. “A caveat for the September balance sheet reduction is that the US Senate lawmakers will resolve the US debt ceiling limit issue. Any complication on the debt ceiling front could derail the September balance sheet reduction announcement,” Liew says.

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South Korean stocks enjoyed a relief rally this past week, as North Korea and the US stepped back from the brink of military conflict. On Aug 15, North Korean media said the country’s supreme leader Kim Jong-un was holding back on his earlier threat to launch missiles towards Guam, and was instead waiting to see what the US does. Trump praised Kim for his “wise” decision on Aug 16.

The benchmark Kospi rose for three consecutive days to Aug 17, rebounding from a three-month low. It closed on Aug 17 at 2,361.67, up 13.41 points, or 0.57%, for the day. The biggest gainers were technology stocks, mirroring gains by technology stocks on other Asian bourses.

Analysts are bracing for more volatility this coming week as the US and South Korea begin annual joint military exercises, which could enrage North Korea’s Kim and elicit more provocations from him. However, they are not expecting any lasting damage to the economy or market sentiment.

“I still believe [South] Korea has strong economic fundamentals to sustain the current Kospi gains,” says Sanghyun Park, a South Korean equities analyst who provides insights on Smartkarma. “What we have to pay close attention to is the government’s balanced growth policy, which will give preferential treatments to small- and mid-cap equities.”

Tencent up on stellar performance

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Tencent Holdings reported its best quarterly results on Aug 16, beating market forecasts, thanks to higher online advertising, mobile gaming and payments revenue. Investors sent the counter up 2% to HK$329.40 on Aug 17. Shares in Tencent have risen more than 70% this year.

For 2QFY2017 ended June 30, the media and entertainment firm reported a 70% y-o-y rise in earnings of RMB18.23 billion ($3.7 billion). This was its biggest earnings gain in seven years. Revenue rose 59% y-o-y to RMB56.6 billion.

For the quarter, online advertising revenue climbed 55% to RMB10.2 billion, driven mainly by WeChat advertisements. The messaging app has about 963 million active users. Tencent’s role-playing game Honour of Kings helped boost mobile gaming revenue to RMB14.8 billion, up 54% y-o-y. Payment and cloud services raised the company’s “other” revenue by 177% y-o-y to RMB9.7 billion.

However, Tencent’s gross margin for 2QFY2017 slipped to 50%, from 51% in 1QFY2017 and 57% in 2QFY2016. The reduced profitability was mostly owing to content spending and lower-margin businesses accounting for a larger share of its revenue.

Much of the excitement around Tencent stems from a promise that it could beat the other Chinese internet giants. Analysts also claim that its payment services are far more advanced than Alibaba Group’s Alipay. However, some of these expectations are already baked into its share price.

“We think outperformance against the topline is especially important in a quarter where markets had anticipated strong performance,” says Kirk Boodry, lead internet analyst at New Street Research, to The Edge Singapore. “In particular, the revenue beat in the advertising and other finance segments bodes well for revenue base stability and performance for the rest of the year.”

Boodry has a “buy” call on Tencent, with a price target of HK$371.

Spackman gains on acquisition, contract Spackman

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Entertainment Group said on Aug 14 that it had inked a non-binding memorandum of understanding to acquire Take Pictures, a South Korean motion picture production company founded by veteran movie producer Song Dae-chan. Take Pictures has 10 film projects in the pipeline. It is also co-producing The Priest 2 with Spackman’s subsidiary, Zip Cinema.

On Aug 16, Spackman also said its subsidiary Frame Pictures had secured a contract worth KRW220 million ($263,300) to supply camera systems and equipment for an upcoming movie. Frame Pictures has secured 13 contracts this year.

These new developments could draw renewed interest in Spackman’s beleaguered shares. The stock closed 6.2% higher on Aug 17 at 10.3 cents. But it is down 46% since the beginning of this year.

For 1HFY2017 to June 30, Spackman reported earnings of US$4.4 million ($6 million), versus a loss of US$3.5 million for the same period the year before. Revenue increased 38% y-o-y to US$10.5 million, mainly owing to higher distribution of films.

Jarick Seet, an analyst at RHB Research Institute, is bullish on the stock. In an Aug 16 research note, he said that the acquisition of Take Pictures would allow Spackman to expand its movie production capacity. Seet also expects Spackman’s upcoming film, Golden Slumber, to rake in a profit of US$2.6 million for the group.

However, Seet has reduced his FY2017 earnings forecast for Spackman by 14.5%, owing to higher-than-expected marketing costs for Master, a Korean crime action movie that was very popular when it opened late last year. Shares in Spackman are currently trading at 8.7 times Seet’s FY2017 earnings forecast.

Seet has a “buy” call on the stock, with a price target of 23 cents.

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Direct-selling company Best World International suffered a big selloff this past week following a report by Bloomberg on Aug 15 that China is clamping down on illegal pyramid selling schemes. Shares in the company have fallen 33% since Aug 14. They closed at $1.04 on Aug 17, down 22.8% for the day.

“We believe the fall in share price is due to an overreaction from the market as a result of the latest Bloomberg article published on Aug 15 regarding the crackdown on illegal pyramid schemes in China,” says Huang Ban Chin, COO and executive director of Best World, in an email response to The Edge Singapore. “We expect to make more announcements as we expand the geographical coverage of our direct-selling licence beyond Hangzhou to include more cities.”

DBS Group Research has downgraded its recommendation on the stock to “hold”, and lowered its price target to $1.45. While the research house acknowledges that Best World was recently awarded a direct-selling licence by China’s Ministry of Commerce, it fears the campaign against illegal players could temporarily stunt the company’s growth in China. It has cut its sales growth projection for Best World’s China operations from 80% to 45% this year.

CIMB, on the other hand, is taking the view that Best World is not a pyramid scheme and will not be affected by the crackdown in China. CIMB is maintaining its “add” call on the stock, with a price target of $1.80.

US market rallies after Fed minutes, Kospi makes a comeback

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