Haitong: High-end manufacturing is expected to become a main theme in the A-share market in the medium term.

Key conclusion: The interim report has three major clues worth paying attention to: one is the good profit performance of the high-end manufacturing sector under the resonance of domestic and external demand. The upstream resource sector benefiting from the increase in global commodity prices and the marketization reform of domestic factors has significantly improved profitability. The consumer sectors such as agriculture, forestry, animal husbandry, and fishery, as well as social services, have been boosted by the rise in pork prices, service consumption improvement, and favorable profit, and Stable growth policies are driving fundamental improvement, combined with overseas loose liquidity, is expected to push the market center up, with Chinese advantage manufacturing becoming the main theme. Finding Allocation Clues from the Interim Report With the completion of the interim report disclosures, investors are paying close attention to structural highlights, as changes in fundamentals can provide a basis for exploring market opportunities. In the previous report "Weak Rebound in A-share Profits under Low Base -24Q2 Financial Report Comments-20240831," we have conducted preliminary analysis. This report further explores the structural highlights of this interim report and the reasons behind them, and discusses the guidance role of the interim report for the subsequent market based on this. Overall, A-share profits in 24Q2 achieved a weak rebound under a low base. From the perspective of year-on-year cumulative growth, the net profit attributable to all A-shares in 24Q2 increased slightly to -3.2% from the low base, compared to -4.8% in 24Q1. Excluding financials, the cumulative growth rate of net profit attributable to all A-shares in 24Q2 was -6.0%, compared to -5.5% in 24Q1. Looking at the quarter-on-quarter growth rate, the same-store growth rate of all A-shares improved more significantly, with the quarter-on-quarter net profit growth rate in 24Q2 increasing to -1.4% from -4.8% in 24Q1. After excluding financials, it was -6.4% and -5.7%, respectively. If we further examine the reasons for the changes in profit, we primarily look at the impact on the growth rate of net profit attributable to the parent company from three dimensions: operating income, gross profit margin, and the three expense ratios. Looking at the year-on-year cumulative growth rate of revenue, for all A-shares in 24Q2, it was -0.6%, slightly down from 0.2% in 24Q1, and excluding financials, it was -0.6% in 24Q2 and 0.6% in 24Q1. This shows a slight decrease in revenue growth. In terms of gross profit margin, it was 17.8% in 24Q2, compared to 17.7% in 24Q1 for all A-shares, and excluding financials, it was still 17.8% and 17.7%, respectively. Looking at the three expense ratios, for all A-shares in 24Q2 it was 9.7%, compared to 9.9% in 24Q1, and excluding financials it was 7.3% and 7.5%. It can be seen that the slight rebound in profits in Q2 for all A-shares mainly comes from the cost side leading to an increase in profit margin. The slight rebound in corporate profits in 24Q2 reflects the ongoing economic recovery. In the first half of this year, China's macroeconomy achieved a moderate recovery, with a year-on-year GDP growth rate of 5% in the first half of 24, with 5.3% in Q1 and 4.7% in Q2. The growth rate in Q2 slowed down compared to Q1, and short-term macroeconomic recovery faces certain pressures. However, we can still see some bright spots in the overall economic performance: in terms of exports, the cumulative year-on-year growth rate of China's exports denominated in RMB from January to July reached 6.7%, significantly higher than the 0.6% growth rate for the entire year of 2023, indicating strong support from external demand for the macroeconomy; in terms of prices, the year-on-year CPI for July was 0.5%, the highest since February this year, and the PPI for July was -0.8%, continuing the trend of bottoming out since April this year, indicating that price drag on actual growth may be weakening. The three major structural highlights worth noting are high-end manufacturing, energy materials, and consumer sectors. As mentioned earlier, against the background of the overall weak rebound in A-share profits in the first half of this year, digging into structural highlights is more important for investors. We believe that specific attention can be focused on the following three aspects: First, the high-end manufacturing sector has performed well in profit performance under the resonance of internal and external factors. The high-end manufacturing sector, represented by electronics in the technology manufacturing and mid-to-high-end manufacturing, has a significant impact on A-share profits. In terms of technology manufacturing, benefiting from the global semiconductor cycle recovery and AI technology driving terminal innovation, the net profit attributable to the electronics sector in 24Q2/Q1 increased by 39.1%/54.4%, contributing 0.6 percentage points to the net profit growth of all A-shares in 24Q2. In terms of mid-to-high-end manufacturing, the relevant sectors have seen strong activity this year, with strong exports of mid-to-high-end manufacturing such as automobiles (with cumulative export growth of 18% from January to July, the same below) and home appliances (15%) supported by external demand. In addition to the recent policies to encourage consumer goods replacement and large-scale equipment updates to stimulate domestic demand and the resonance of internal and external demand, the profitability of mid-to-high-end manufacturing sectors such as automobiles and home appliances has maintained rapid growth. The net profit attributable to automobiles in 24Q2/Q1 increased by 22.2%/18.5%, and home appliances by 7.8%/10.0%, with the automotive and home appliances sectors contributing 0.4 and 0.2 percentage points respectively to the profit growth of all A shares in 24Q2. Second, the profitability of the upstream resource sector driven by the logic of rising prices has significantly improved. The energy and materials sector saw a continuous increase in profit growth in 24Q2, with a year-on-year net profit growth of 0.7%/-4.3% in 24Q2/Q1, mainly due to the price increases in the relevant sectors. On one hand, the petrochemical and non-ferrous metal industries have benefited from the increase in global commodity prices, with prices of international commodities such as crude oil rising this year. For example, the settlement price of WTI crude oil futures in the first half of this year increased by 14%, leading to a significant improvement in the profitability of relevant sectors. For the Petrochemical sector, the cumulative year-on-year net profit growth rate in 24Q1/Q2 was 11.1%/10.4%, with the Petrochemical sector contributing 0.7 percentage points to the profit growth of all A shares in 24Q2. On the other hand, the utilities and transportation sectors have benefited from the marketization reform of domestic public utilities, with prices of water, electricity, gas, and railways rising nationwide. The cumulative growth rate of net profit attributable to the utilities in 24Q2/Q1 was 16.9%/26.2%, and for transportation it was 11.2%/25.9%. Utilities and transportation in 24Q2 contributed 0.5 and 0.3 percentage points respectively to the profit growth of all A shares. Third, the consumer sector has been boosted by the rise in pork prices, improved service consumption, and has seen steady profit growth. In 24Q2/Q1, the net profit attributable to the parent company increased by 12.2%/10.4%, with agriculture, forestry, animal husbandry, hunting, and fishing, as well as social services making significant contributions to the profit rebound. In particular, in agriculture, the sector has benefited mainly from the rise in pork prices.The average wholesale price increased by 18%, driving the net profit growth of the agriculture, forestry, animal husbandry, and fisheries sector in Q2/Q1 24 to 184.0%/60.9% year-on-year. Q2 24 contributed 0.7 percentage points to the overall A-share profit growth. In the social services sector, the cumulative year-on-year growth of restaurant and catering income in social consumer goods retail from January to July this year was 7.1%, higher than the overall growth rate of 3.5%. The faster recovery in service consumption has led to an improvement in the profitability of the social services sector. The net profit growth of social services in Q2/Q1 24 was 91.5%/55.1% year-on-year. Q2 24 contributed 0.1 percentage point to the overall A-share profit growth.With the end of the mid-year reporting season in the 24th year, investors are paying close attention to the guidance provided by the mid-year reports on the market for the second half of the year, such as how the full-year profitability performance of A-shares will affect market trends. Which industries are expected to continue to see high growth in profits? Below, we will analyze this from both a total and structural perspective. Overall, the improvement in the mid-term fundamentals combined with loose overseas liquidity is expected to drive the market center higher. The recent weakening of the macro environment has dampened investor sentiment in A-shares, and the market has continued the consolidation and accumulation trend seen since late May of this year. Looking forward, improvements in both domestic and overseas macroeconomic fundamentals and liquidity are expected in the second half of the year, which may push the market index higher than in the first half of the year. In terms of fundamentals, the implementation of growth-stabilizing policies is expected to boost the improvement in macroeconomic fundamentals. As mentioned earlier, the mid-year reports this year showed a weak rebound in overall A-share profits from a low base, reflecting the ongoing pressure on macroeconomic recovery. However, recent efforts to stabilize economic growth are gradually increasing, with the issuance of special bonds speeding up and local governments issuing over 500 billion yuan in special bonds in August, the highest monthly issuance scale this year. On September 5, the director of the banking and currency department of the central bank stated that there is still room for reserve ratio reductions in the future. Recent demand-side policies have also been gradually introduced, with many places including Beijing and Shanghai releasing policies to encourage the exchange of old consumer goods for new ones. Looking ahead, we believe there are three main hopes that will help drive the improvement in fundamentals and expectations: First, fiscal policies are expected to boost domestic demand. The current Chinese fiscal expenditure still has room to grow. The Political Bureau meeting in July proposed to "reserve and release a batch of incremental policy measures as soon as possible", and future changes in external factors may provide opportunities for China to boost fiscal spending. Second, China's medium-to-high-end manufacturing, supported by supply and demand advantages, is expected to bring new growth points to the external circulation. Third, reforms are expected to boost expectations and unleash dividends. Currently, China's economy and stock market lack confidence, but economic and capital market reforms are underway and hold promise for the future. As stabilizing growth policies are implemented and the above three factors experience positive changes, China's macroeconomic fundamentals are expected to stabilize. According to Huatai macro forecasts, China's real GDP growth in the 24th year is expected to reach 5%. At the micro level, we expect the year-on-year growth rate of net profits attributable to shareholders in the entire A-share market in the 24th year to reach 2%. In terms of funds, after the Fed's rate cut, foreign capital is expected to return in stages. Based on historical trends, improvements in overseas liquidity may lead to short-term foreign capital inflows into A-shares. In terms of structure, high-end manufacturing with better fundamentals is expected to become a main theme in the stock market in the medium term. With the improvement in fundamentals and funds in the second half of the year, China's high-quality manufacturing with better fundamentals is expected to become a main theme in the stock market in the medium term. In terms of high-end manufacturing, industries related to high-end manufacturing with support from external demand have better fundamentals currently, and in the future, the demand for high-end manufacturing is expected to continue. In terms of demand, both internal and external demand in related fields are expected to continue: In terms of external demand, China's exports of home appliances and automobiles have maintained high growth this year, with cumulative year-on-year growth rates of 18.1% and 25.9% respectively from January to July in RMB terms. Coupled with strong demand from emerging markets with high dependence on China, this may lead to increased Chinese exports in the future. In terms of internal demand, long-term government bonds worth 300 billion yuan issued at the end of July support large-scale equipment upgrades and the exchange of consumer goods for new ones. On August 24th, the Ministry of Commerce and four other departments issued a notice on further improving the work of replacing old home appliances with new ones, officially launching a new round of home appliance replacement. According to the National Development and Reform Commission, the annual demand for replacement of vehicles and home appliances in China is at a level of trillions of yuan, and under stimulus measures, consumption in areas such as automobiles and home appliances is expected to be boosted. In terms of supply, China's high-end manufacturing has advantages in industrial clusters, engineering talent, and technological accumulation. In addition, the current uncertainty of the U.S. election has caused concerns in the market about the impact of future Sino-U.S. trade relations. Since the market correction in May, the adjustment of the high-end manufacturing sector has been significant. We believe that certain areas within the sector are less affected by disturbances in Sino-U.S. relations and have a higher cost-benefit ratio that can be hedged through the European Union, ASEAN, and other areas. Areas to focus on include home appliances, car parts, and other mid-range manufacturing sectors. In terms of technology manufacturing, under the dual drive of policy support and technological innovation, future technology manufacturing-related fields are expected to benefit further. Specific areas to focus on include: AI technology empowering the revival of consumer electronics. The application of AI technology is continuously giving rise to innovations in AI smartphones, AI PCs, and other terminals, leading to a gradual recovery in the consumer electronics industry. Apple has announced that it will release its first AI smartphone on September 9th, which may boost global smartphone sales. IDC predicts that China's AI smartphone shipments will reach 40 million units in 24th year and rise to over 150 million units in 27th year with a penetration rate exceeding 50%. The AI wave driving the semiconductor cycle up. The advancement of AI technology's performance has a promoting effect on the demand for key semiconductor components. Currently, the global semiconductor cycle is already in a phase of upsurgence. Looking ahead, with improvements in overseas liquidity and the stabilization of fundamentals under the push of growth-stabilizing policies, foreign capital is expected to flow back into A-shares.In an obvious upward trend. The third is the field of digital infrastructure related to the fiscal efforts background. Recently, demonstration projects of "integrated vehicle and road cloud" have been launched in major cities across the country, and the construction of related roadside infrastructure is expected to accelerate under favorable policies. According to the forecast of the Prospective Industry Research Institute, the market of the vehicle-road collaborative industry in China will reach 244.8 billion US dollars by 2028, with a compound annual growth rate of 13% from 2023 to 2028.This article is selected from the WeChat official account "Strategy of Haitong Research", edited by GMTEight: Chen Yufeng.