Summary of Conference Call Notes Industry Overview - The discussion revolves around the **healthcare industry**, specifically focusing on the implications of the **Biosecure Act** and related legislative amendments affecting Chinese Contract Development and Manufacturing Organizations (CDMOs) [1][3][5]. Key Points and Arguments 1. **Legislative Context**: - The **S.Amdt 3236** amendment is not specifically targeting Chinese CDMOs, unlike the previous **Biosecure Act** which highlighted several Chinese companies, including Wuxi [1][3]. - The **Biosecure Act** was the only anti-China legislation that did not pass in the US Senate in 2024, primarily due to resistance from the US pharmaceutical industry seeking cost flexibility amid pricing pressures and patent expirations [1][3]. 2. **Softening Political Stance**: - **Gary Peters**, a key sponsor of the Biosecure Act, has adopted a softer tone in the current amendment, leaving Wuxi companies out of the discussion this time [4][5]. 3. **Manufacturing Localization Goals**: - The ultimate goal of the amendment is to promote localized manufacturing and supply chains, aligning with previous proposals by the Trump administration [5]. - The use of Chinese CDMOs is seen as a cost-saving measure for US pharma, potentially reducing costs by **30-60%** [5]. 4. **Wuxi Bio's Competitive Advantage**: - Wuxi Bio is highlighted as a top pick due to its expected fundamental inflection in 2025 from three CMO projects debuting, and its high customer stickiness as US pharma companies prefer cost-effective solutions from China [6]. - Wuxi Bio's single-asset turnover is projected to be **2-4 times** that of global peers, with significant capacity expansion planned in New Jersey [5][6]. Additional Important Insights - The amendment is attached to the **2026 NDAA**, indicating a long-term strategic approach towards manufacturing and supply chain localization [5]. - The report emphasizes the light investor participation in Wuxi Bio's stock, suggesting that long-only investors may reduce their underweight positions to capitalize on the anticipated rally in the China biotech sector [6]. Conclusion - The healthcare industry, particularly companies like Wuxi Bio, is navigating a complex legislative landscape that could impact their operations and market positioning. The focus on cost efficiency and localized manufacturing presents both opportunities and challenges for investors and stakeholders in the sector [1][5][6].

Investment Rating - The industry investment rating is "Attractive" [6]. Core Insights - The resumption of H20 chip sales to China is viewed as a positive catalyst for BAT (Baidu, Alibaba, Tencent) as it is expected to accelerate hyperscalers' capital expenditures in the second half of the year, driven by cloud growth [3][6]. - Tencent is highlighted as the top pick in the industry due to its strong revenue and earnings growth, particularly in AI applications and adtech upgrades [4][5]. - Alibaba is recognized as the best AI enabler, with expectations of cloud revenue growth accelerating to 22% in Q2 compared to 18% in Q1 [5]. Summary by Sections Industry Overview - The report indicates that China's AI adoption is increasing, evidenced by an 18% growth in Alicloud in Q1, with expectations for further acceleration in the coming quarters [3]. Company Specifics - Tencent has announced a capital expenditure of approximately Rmb95 billion for fiscal year 2025, while Alibaba plans to invest Rmb380 billion over the next three years [3]. - The report emphasizes Tencent's early monetization through AI adtech upgrades, which have shown consistent double-digit growth in advertising revenue [4]. - Alibaba's current share price does not reflect the value of its cloud business, which is expected to be a significant growth driver [5]. Stock Preferences - Tencent is preferred due to its robust growth in consumer-facing AI applications and limited competition risks [4]. - Alibaba is positioned well to capture rising AI demand through its cloud services, despite recent market focus shifting towards food delivery and quick commerce [5].

Investment Rating - The report maintains an "Overweight" rating for Tencent Holdings Ltd. and reiterates it as a "Top Pick" with a price target raised to HK$650.00 from HK$630.00, reflecting a 31% upside potential from the current price of HK$496.60 [6][8][24]. Core Insights - The report anticipates solid revenue growth of 11% and non-IFRS operating profit (OP) growth of 14% for 2Q25, driven by strong performance in online games and advertising sectors, while also noting a slight recovery in FinTech and Business Services (FBS) [1][2][4]. - Online games are expected to grow by 16% in 2Q25, with international game growth outpacing domestic growth, supported by strong grossing receipts from previous quarters [2]. - Advertising revenue is projected to grow by 18% year-over-year, bolstered by AI-driven ad technology improvements and enhanced user engagement through Weixin Search [3]. - FBS is expected to see a 6.5% year-over-year increase, with solid business service growth of 15% and gradual expansion in international cloud services [4]. - The report highlights a narrowing leverage between revenue and operating profit growth due to increased AI-related costs, while gross profit is expected to reach Rmb98 billion, up 15% year-over-year [5]. Summary by Sections Revenue and Profit Estimates - Total revenues for 2Q25 are estimated at Rmb179.018 billion, reflecting an 11.1% year-over-year increase, with gross profit expected at Rmb98.314 billion, a 14.5% increase [12]. - Non-IFRS operating profit is projected at Rmb66.580 billion, up 13.9% year-over-year, with an operating margin of 37.2% [12]. Financial Projections - For the fiscal year ending December 2025, revenue is estimated at Rmb732.526 billion, with a projected net profit of Rmb207.054 billion [8][40]. - The report also provides a detailed breakdown of expected earnings per share (EPS) growth, projecting Rmb22.11 for 2025 and Rmb26.29 for 2026 [8]. Valuation and Price Target - The price target of HK$650 is derived from a sum-of-the-parts valuation, including a DCF value of HK$569 per share for core businesses and HK$81 per share for associate investments, applying a 30% discount to the investment value [20][24].

Tencent Holdings Equity Research Summary Company Overview - **Company**: Tencent Holdings Limited - **Industry**: Internet and Online Services in the People's Republic of China (PRC) - **Segments**: Internet value-added services, mobile and telecommunications value-added services, online advertising, and others [23][24] Key Financial Metrics - **Revenue Growth**: Expected total revenue growth of approximately 9.7% YoY to about RMB 177 billion in 2Q [2][15] - **Online Games Revenue**: Anticipated increase of about 12% YoY to approximately RMB 54.4 billion, driven by evergreen titles [2][15] - **Marketing Services Revenue**: Expected to grow about 17% YoY to RMB 35 billion, supported by traffic growth from video accounts and AI improvements [2][15] - **Fintech and Business Services (FBS)**: Estimated revenue growth of 7% YoY to RMB 54 billion [2][15] - **Non-IFRS Operating Profit**: Projected to grow 13% to about RMB 66 billion [2][15] - **Non-IFRS Earnings**: Expected to reach about RMB 62.5 billion, largely unchanged [2][15] Core Insights and Strategies - **AI Strategy**: The company maintains a robust AI strategy across various segments, which is expected to enhance operational efficiency and revenue generation [2][3][15] - **Gaming Strategy**: Focus on rejuvenating existing games and developing new franchises, with Delta Force achieving a record peak DAU of 12 million in April 2025 [2][3][15] - **Advertising Outlook**: Multiple growth drivers identified, including increased ad loads on Video Accounts and improvements in click-through rates (CTR) due to AI [2][3][15] - **Fintech Focus**: Emphasis on risk management within fintech operations, with a positive outlook on commercial payment trends [3][15] Investment Thesis - **Rating**: Buy - **Price Target**: HK$ 665, representing a potential upside of 34% from the current price of HK$ 497.60 [6][15] - **Valuation Methodology**: Based on a sum-of-the-parts (SOTP) valuation approach [15][24] - **Risks**: Include unsuccessful launches of new games, slower-than-expected growth in online ads, and aggressive investments in new initiatives [18][24] Sustainability and Corporate Responsibility - **Carbon Neutrality Goal**: Pledged to achieve carbon neutrality across operations and supply chains by 2030 [12][13] - **Data Security and Employee Engagement**: Prioritizing data security and employee diversity as key material issues [12][13] Conclusion Tencent Holdings is positioned for solid growth driven by its diverse revenue streams, strong gaming portfolio, and strategic investments in AI and fintech. The company’s commitment to sustainability and risk management further enhances its long-term investment appeal.

Investment Rating - The report indicates a strong performance in the Asia EM equity strategy, particularly highlighting Japan's earnings as a standout with a net beat ratio of +25 percentage points [2][7]. Core Insights - The earnings results for 1Q25 showed a strong performance across the Asia EM region, with Japan leading at +23.3%, followed by Korea (+20.3%), Singapore (+11.9%), and Thailand (+10.5%) [2][3][26]. - Emerging Markets (EM) overall reported a moderate earnings beat of +4.7%, while Asia Pacific ex-Japan (APxJ) saw a slightly higher beat of +6.0% [2][12]. - The report notes that the strong earnings in Japan are attributed to corporate and consumer activities that were brought forward ahead of tariff announcements in early April [1]. Summary by Region - Japan reported a remarkable earnings surprise of +23.3% with a net beat ratio of 25%, marking the second consecutive quarter of strong performance [7][26]. - Korea and Singapore also performed well, with earnings surprises of +20.3% and +11.9% respectively, while Thailand reported +10.5% [3][26]. - In contrast, Brazil experienced significant misses with an earnings surprise of -7.8%, and Turkey reported a substantial decline of -29.1% [3][26]. Summary by Sector - Major sectors showing strong earnings beats include Industrials (+16.6%), Communication Services (+11.6%), and Health Care (+10.3%) [4][32]. - Consumer Staples and Materials sectors reported slight misses, with Consumer Staples at -1.6% and Materials at -1.1% [4][32]. - The Capital Goods and Telecom Services industries were particularly strong, with earnings surprises of +24.4% and +21.5% respectively [4][32]. Stock-Level Surprises - The report highlights key stock-level surprises, focusing on companies rated Overweight (OW) that are expected to see increases in 12-month consensus estimates following strong earnings beats [5]. - Conversely, Underweight (UW) rated companies are anticipated to experience downgrades due to earnings misses [5]. Revenue Surprises - Revenue results across the region showed slight beats, with EM at +1.3%, APxJ at +1.1%, and Japan slightly missing at -0.1% [2][3]. - The report emphasizes that revenue surprises were generally positive, contributing to the overall strong earnings performance in the region [2][3].

June 18, 2025 09:00 PM GMT Jonathan.Garner@morganstanley.com +65 6834-8172 China Equity Strategy | Asia Pacific M Idea Focus List Changes – China/HK We add PICC P&C (2328.HK) to our China/HK Focus List and remove Pop Mart (9992.HK) from the list Adding PICC P&C (2328.HK): PICC P&C is China's biggest P&C player with >30% market share. Morgan Stanley China insurance analyst Rick Zhao believes the company will maintain competitiveness in the market due to: 1) a strong balance sheet and healthy book value growt ...

Investment Rating - The investment rating for Tencent Holdings Ltd. is "Overweight" with an attractive industry view [5][70]. Core Insights - The report indicates a modest upside and a modest revision higher in the earnings forecast, strengthening the overall investment thesis [2][7]. - Tencent's total revenues for 1Q25 reached RMB 180.022 billion, representing a year-over-year increase of 12.9% and beating consensus estimates by 2.6% [3][7]. - The gaming segment showed significant growth, with online games revenue increasing by 23.7% year-over-year, surpassing consensus by 7.6% [3][7]. - Gross profit rose by 19.8% year-over-year, with a gross margin of 55.8%, an increase of 3.2 percentage points compared to the previous year [3][7]. - Non-IFRS net profit increased by 22% year-over-year, also exceeding consensus expectations by 4% [3][7]. Financial Performance Summary - **Revenue Breakdown**: - Value-Added Services (VAS) revenue was RMB 92.133 billion, up 17.2% year-over-year, with online games contributing RMB 59.5 billion [3]. - Online advertising revenue was RMB 31.853 billion, reflecting a 20.2% increase [3]. - FinTech and Business Services revenue was RMB 54.907 billion, a 5% increase [3]. - **Profitability Metrics**: - Operating profit (Non-IFRS) reached RMB 69.320 billion, an 18.3% increase year-over-year [3]. - The diluted EPS for 1Q25 was RMB 5.1, a 16.9% increase year-over-year [3]. - **Future Projections**: - The fiscal year 2025 revenue is projected to be RMB 726 billion, with an expected EPS of RMB 23.30 [5][70]. Valuation and Price Target - The price target for Tencent Holdings Ltd. is set at HK$630.00, indicating a potential upside of 21% from the current price of HK$521.00 [5]. - The valuation methodology includes a discounted cash flow (DCF) approach with a 10% discount rate and a 3% terminal growth rate [8][9].

Investment Rating - The report maintains an Overweight (OW) rating on Defensives versus Cyclicals, particularly favoring Gold miners, Aerospace and Defense, and Consumer Staples [2] Core Insights - The report indicates a cautious outlook due to the ascendance of Multipolar World trends, with significant slowing in growth anticipated and further adjustments needed in valuations and earnings estimates [1][2] - Preferred markets include domestic Japan (unhedged), India, Singapore, and UAE, while being Equal-weight (EW) on China and Underweight (UW) on Korea and Taiwan [1] - Financials are favored over Semiconductors and Tech Hardware [1] Market Allocation - The report highlights a preference for Japan (30.6% allocation), India (12.9%), Singapore (3.3%), and UAE (1.4%), while being neutral on China (18.0%) and Taiwan (8.9%) [24] - The allocation reflects a strategic positioning in markets expected to perform better in the current economic climate [24] Earnings and Valuations - The report provides base-case earnings forecasts for major indices, with the TOPIX expected to reach 2,600 by December 2025, reflecting a 3% decrease from current levels [10] - The MSCI EM index is projected to decline to 1,050, a 6% drop, while the MSCI APxJ is expected to reach 550, also a 5% decrease [10] - The report outlines a Bull Case scenario for the MSCI APxJ reaching 3,100, indicating a potential upside of 12% [11] Global Economic Forecasts - Real GDP growth forecasts for major economies show a decline, with the US projected at 1.4% for 2025 and China at 4.2% [13] - The report anticipates a general slowdown in growth across Asia, with specific countries like India maintaining relatively higher growth rates [13] Inflation Projections - The report forecasts headline CPI for the US at 3.0% for 2025, while China is expected to remain low at 0.1% [15] - Inflation rates across Asia are projected to vary, with India expected to see a CPI of 4.9% [15] Focus List of Companies - The report includes a focus list of companies with Overweight ratings, such as Bajaj Finance Limited and ICICI Bank, indicating strong performance potential [29] - The focus list reflects a diverse range of sectors, including Financials, Consumer Staples, and Communication Services, with significant upside potential noted for several companies [29]

Core Viewpoint - Prosus N.V., an Amsterdam-based investment firm and major shareholder of Tencent Holdings Ltd., is currently trading at a significant discount to its net asset value, but has a solid plan to reduce this gap [1] Group 1 - Prosus N.V. is the top shareholder of Tencent Holdings Ltd., indicating a strong position in the Chinese tech market [1] - The company is recognized for its strategic approach to narrowing the valuation gap between its market price and net asset value [1]

Market Overview - Wall Street is experiencing significant declines, with the Nasdaq dropping over 4% week to date, while the Dow and S&P 500 have decreased approximately 2.9% and 3.6% respectively, marking their worst week since September 2024 [1][2] - The Nasdaq Composite fell 2.6% on March 6, 2025, entering correction territory, influenced by tariff tensions and competition in the AI sector [5] Tariff Implications - The recent market declines followed the implementation of U.S. tariffs on imports from Canada, Mexico, and China, leading to retaliatory measures from these countries [2] - President Trump announced a one-month tariff exemption for U.S. automakers complying with the USMCA, but this did not alleviate market uncertainty [3] - Treasury Secretary Scott Bessent's support for tariffs has heightened investor anxiety, contributing to market fatigue [4] Economic Outlook - Economic data suggests a potential contraction in Q1 2025, with the Federal Reserve Bank of Atlanta's GDPNow tracker predicting a 1.5% decline in GDP, down from a previous forecast of 2.3% growth [10] - The likelihood of a rate cut by the Federal Reserve in May has risen to 54%, which could benefit growth-focused indices like the Nasdaq [9] Technology Sector Dynamics - An equal-weighted basket of China's seven tech heavyweights, including Alibaba and Tencent, has gained over 40% this year, contrasting with a 10% decline in the Magnificent Seven stocks [7] - Alibaba's introduction of the QwQ-32B AI model, which requires less data than competitors, has contributed to the competitive landscape in the AI sector [6] Investment Opportunities - Analysts suggest potential gains for tech giants like Meta, Apple, and Amazon, despite the competitive pressure from AI advancements [14] - Amazon has announced a $100 billion investment in AI infrastructure for 2025, with a significant portion allocated to e-commerce operations [15] - For investors willing to take risks, Nasdaq-based ETFs such as Invesco QQQ Trust (QQQ) and Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE) are highlighted as potential buying opportunities [16]