2025 A-share strategy: strong market, new logic

Introduction: A-share market in 2024 experienced twists and turns. However, with clear policy reversals and significant market gains since the end of September, a new round of broad and grand market rally is in sight. Looking ahead to 2025, how will the market evolve? What is the market space like? Which directions are worth paying attention to? For details, please refer to the report. I. The core logic of the reversal in direction Since September 24, a series of heavyweight meetings have been held, with various policy easing measures intensifying, leading to a reversal in market logic. On September 24, the Financial Support for High-Quality Economic Development conference sounded the policy dividend charge. On September 26, a political bureau meeting clearly conveyed a new direction "Facing difficulties, strengthening confidence, and enhancing the sense of responsibility and urgency in economic work. Focus on key points and take proactive actions." On October 8, the National Development and Reform Commission (NDRC) announced that it would implement a suite of incremental policies, including enhancing the implementation of macroeconomic policies and further expanding domestic demand. On October 12, the Ministry of Finance announced that it would introduce a series of targeted incremental policy measures, including supporting local governments in resolving government debt risks, issuing special national bonds to support large state-owned commercial banks in supplementing core tier-one capital, allowing special bonds to be used for land reserve, supporting the acquisition of existing housing for use as affordable housing in various regions, and increasing support for key groups. On October 17, the Ministry of Housing and Urban-Rural Development and four other departments launched the "442" combination of incremental policies to stabilize the real estate market (four cancellations, four reductions, two increases). On November 8, the Standing Committee of the National People's Congress arranged a one-time increase of 6 trillion yuan in the local government debt ceiling + an annual arrangement of 80 billion yuan from 2024 from the new local government special bonds each year for five consecutive years specifically for debt conversion + repayment of 2 trillion yuan of implicit debts for the renovation of shantytowns due in 2029 and beyond according to the original contract. On December 9, a political bureau meeting required the strengthening of unconventional countercyclical adjustments and the implementation of a policy "combination blow." Among these, the reversal of capital market policies is the core. 1) On September 24, the central bank announced the creation of new structural monetary policy tools, highlighting the stock market as the focus of this round of policy measures. More importantly, it creatively opened up a new channel for the central bank to support the capital market, which will effectively support the revaluation of the Chinese stock market in the future. 2) The political bureau meeting on September 26 once again emphasized efforts to boost the capital market, vigorously guiding the entry of medium and long-term funds, and unblocking the entry points for social security, insurance, and financial funds. Support for mergers and reorganizations of listed companies. 3) On October 8, the NDRC clearly stated that "boosting the capital market" is one of the five major directions of incremental policies. 4) On October 18, the People's Bank of China officially launched the operation of stock, fund, and insurance company exchange convenience (SFISF), and established stock repurchase and reloan facilities. 5) On November 15, the China Securities Regulatory Commission officially released the "Guidelines for the Supervision of Listed Companies No. 10 - Market Value Management." Looking back at the more than 30 years of A-share history, each market reversal has carried a historical responsibility. Whether it be the 5.19 market rally that helped relieve state-owned enterprises and facilitate corporate financing, the bull market from 2005 to 2007 that started with the share reform, or the bull market from 2013 to 2015 dedicated to promoting financing and upgrading transformation, the technological war with the United States under the current U.S.-China tensions, as well as the demand-driven necessity to solve domestic corporate financing problems, and the structural bull market led by the registration system reform and the entry of institutional funds from 2019 to 2021 each historical market reversal in A-shares has carried a significant historical burden. For this round, in recent years, with pressure on the domestic economy, especially the highlighting risks of real estate and local debt, the capital market has once again taken on the responsibility. The difference of this round lies in the changing logic of boosting the stock market. The capital market is becoming the core platform to guide resource allocation: 1) One of the new logics of boosting the stock market: optimizing resource allocation to promote the development of new productive forces. Since September 24, as of December 3, the STAR 50 Index and the Growth Enterprise Board Index respectively surged by 56.3% and 46.7%, far exceeding the 22.9% increase in the Shanghai Composite Index during the same period. Stronger market performance and higher valuations will drive social resources towards new productive forces, promoting development and transformation. 2) The second new logic of boosting the stock market: boosting market confidence through the wealth effect. The wealth effect of the stock market boosts consumer confidence, as evidenced in previous market rallies. If the stock market continues its recovery and profit-making effects persist, the wealth effect will further drive economic recovery. 3) The third new logic of boosting the stock market: debt conversion, revitalizing quality assets, and promoting balance sheet repair. In recent years, investors have been concerned about two major difficulties in China: the debt risks in the real estate sector and the debt risks of local governments, as well as the deterioration of the three tables the household balance sheet, the local government asset-liability sheet, and the corporate asset-liability sheet brought about by these difficulties. Currently, during the release period of the incremental policy dividend aimed at resolving debt and expanding domestic demand, encouraging high-quality listed companies to engage in capital operations, acquiring and restructuring high-quality scientific and technological assets and specializing in new enterprises that have not yet gone public, can achieve multiple benefits: On the one hand, it will strengthen the fundamentals of listed companies stock prices and enrich the foundation of the stock market's "slow bull trend"; On the other hand, it effectively revitalizes various state-owned capital venture capital or government sovereign funds and is conducive to repairing the local government's asset-liability sheet and the corporate asset-liability sheet. By promoting mergers and reorganizations of its subsidiaries, the local government can revitalize existing assets, a vital pathway to high-quality debt conversion and assisting companies in transforming and overcoming difficulties. This approach can optimize resource allocation through the integration of resources and help troubled companies transform and improve economic efficiency, driving the development of the real economy. Moreover, since 2024, we have seen a series of events from the China Securities Regulatory Commission holding a symposium to support mergers and reorganizations at the beginning of the year, to the State Council's release of the new "Guojiu Article" on the capital market in April further encouraging mergers and reorganizations, and to the recent release of the "STAR 8" and "M&A 16" by the China Securities Regulatory Commission. Various provinces and cities have also successively issued documents to support mergers and reorganizations and held training sessions on mergers and reorganizations. The country attaches great importance to the critical role of mergers and reorganizations in promoting high-quality development.Active mergers and acquisitions and restructuring markets are thriving.In addition, unlike the 2013-15 merger and restructuring cycle, a prominent feature of the current merger and restructuring market is the increased participation of local state-owned assets, which are becoming an important dominant force in this round of merger and restructuring market. On one hand, as of the end of November this year, at least 34 listed companies have seen a shift in their controlling shareholder from individuals or non-controlling entities to local state-owned assets, indicating an accelerated acquisition of listed companies in the capital market. On the other hand, we also see that the proportion of merger and restructuring cases led by local state-owned enterprises has significantly increased to 40.4%, making local state-owned enterprises more active in merger and restructuring activities. Behind this trend is the reflection that the capital market is becoming the core platform for guiding resource allocation by local governments. In the past, local governments competing through preferential policies such as land, taxes, and subsidies to attract investments not only increased local fiscal pressure but also led to wastage of resources and redundant industrial construction. By acquiring controlling stakes in listed companies to introduce high-quality projects, this "introduction with investment" approach will position the capital market as the core platform for allocating capital elements, directing funds towards more profitable and promising sectors, accelerating the formation of innovative capital, and creating a virtuous cycle between the capital market and the real economy. The "Hefei Model" may become a typical example. By government-led establishment of industry venture capital funds to attract investments in emerging industries, Hefei successfully introduced several industrial clusters such as integrated circuits, emerging displays, and new energy vehicles, thereby contributing to economic growth, employment, and industrial upgrading. After realizing asset appreciation, state-owned equity orderly exits and continues to invest in the next project, forming a virtuous cycle between the capital market and the real economy. Hefei has currently established three specialized state-owned capital investment and financing platforms, effectively leveraging state-owned funds to assist in high-quality economic development. The "Hefei Model" has become a typical case that has run ahead, leading industrial upgrading through local government equity investments, and realizing a virtuous cycle between the capital market and the real economy, sparking widespread discussion and attention. Second, in terms of pace, oscillation upwards, going further Since the end of September, policy reversal has brought about valuation recovery. As of now, valuation restoration is quite sufficient. Vertically, A-share valuation and equity risk premium have surpassed the level of Q1 23, close to the level at the end of 2021. Horizontally, from the perspectives of PB-ROE and PE-G, the valuation of Chinese assets is already comparable to other capital markets globally. Looking at the numerator, the "earnings bottom" has probably occurred, and the direction of fundamental recovery is clear. However, data verification still requires time, and expectations and reality will take turns leading the market. In October, macro data pointed to the economy adding several bright spots on top of solidifying the September recovery. In November, PMI continued to rise by 0.2 percentage points to 50.3%, for three consecutive months, and for two consecutive months operating in the expansion zone. Both supply and demand have rebounded, with production index and new order index at 52.4% and 50.8%, respectively, up 0.4 and 0.8 percentage points from the previous month. The Chinese stock market and economy are gradually entering a virtuous cycle. With subsequent deployment of stock policies and introduction of incremental policies, the credit cycle is expected to improve, prices are expected to rise to positive growth in the second half of next year, thereby driving profit recovery for companies. However, considering the time needed for policies to be implemented and transmitted to the real economy, especially against the backdrop of more "stubborn" price deflation pressure in this round, the improvement of listed companies' fundamentals will still require time. Therefore, in the absence of sufficient data support for clear direction in both fundamentals and market, expectations and reality will alternately lead the market, highlighting the importance of grasping market rhythms. In addition, after Trump took office, the US-China trade war may still cause disruptions. Trump advocated raising tariffs on all US imports by 10% - 20% during his campaign, with at least a 60% tariff on imports from China; and the Republican Party's 2024 party platform also proposed canceling China's Most Favored Nation status and gradually stopping imports of essential goods. With Trump announcing victory on November 6 and the Republican Party becoming the majority party in both the Senate and the House, the potential impact of the new round of Sino-US trade war on the economy and A-shares next year cannot be ignored. Overall, next year the market is likely to oscillate upwards. However, what needs to be emphasized under the logic of reversal is to focus on how long this wave of market trends will last. Under the logic of reversal, for the Chinese stock market and economy to form a positive virtuous cycle, a longer market trend is needed. Within the framework of reversal logic, a positive virtuous cycle between the capital market, balance sheet, and the Chinese economy requires a longer market trend, rather than short-term gains. The recovery of the Chinese economy will not happen overnight, and this upward trend may consist of several stages of "rapid rise, large fluctuations," gradually lifting the bottom and progressing step by step. The turbulence and differentiation after the rapid rise in stages are actually waiting for a healthy interaction between the stock market and the economy. Only through an oscillating upwards market can we go further. Looking ahead, both expectations and reality will likely drive the market higher. According to the DDM three-factor model, in the current situation where valuation recovery is already quite sufficient, further market growth requires more optimistic expectations (increasing forward P/E ratio and risk preference) or improvements in earnings. Two key points to focus on in the future: 1) The first point: The window for validating the fundamental turnaround in the March-April of next year. On one hand, as the details of US sanctions against China gradually finalize, external disturbances will "unfold." More importantly, in early March, the Two Sessions further clarify economic goals and the strength of incremental policies, including the deficit rate, injecting a "strong heart tonic" into the market. After two quarters of counter-cyclical policy interventions, the 2024 annual report and the first quarter of 2025 are likely to validate improvements in corporate fundamentals, further strengthening market confidence. 2) The second point: August 2025, the window for price normalization with second-quarter economic prosperity validation. If the first-quarter report next year shows no clear turning point in the improvement of fundamentals, the next observation time point can beIt may have to wait until the second half of 2025. Referring to history, from 2012 to 2024, the Citigroup China Surprise Index gradually rose from July to December each year, indicating that the second half of the year is often a window for slow recovery as expected. At the same time, according to the calculation of the macro team of Xingzheng Securities, as the slowest indicator to improve in this current economic downturn cycle, the PPI year-on-year is expected to return to positive until July 2025. With the rise in the prices of production materials, the probability of enterprise confidence and performance recovery will also become more significant. In addition, the performance forecast in July and the interim report in August are another opportunity to test the business climate.Three, where does incremental funding come from? Looking back on the history of the A-share market, as long as the direction changes, money has never been a problem. The key is the pace of capital inflow. From a medium-term perspective, the current market needs to abandon bearish thinking, firmly hold a bullish mindset, and not limit the time and space of the market, because the momentum of capital is still flowing constantly. First, under asset scarcity, the current round of strength comes from the asset allocation of residents or is relatively strong. Currently, domestic residents have deposits exceeding 148 trillion yuan, representing a huge potential for equity asset allocation. Since the end of September, the market has risen sharply, and individual investors have been the main source of incremental funds, with a surge in account openings. In October, the number of new account openings was only second to the historical peak in 2015. Looking ahead, the proportion of stocks and funds in the total asset allocation of residents is still low. With the trend of residents' wealth and industrial capital re-allocating to the Chinese stock market, the A-share market is expected to receive a continuous influx of incremental funds. Second, in terms of ETFs, as one of the most important sources of incremental funds in recent years, they are expected to continue to contribute major increments next year, with estimated net inflows exceeding 650 billion yuan. ETFs have been one of the most important sources of incremental funds in the A-share market this year. Cumulative net inflows have exceeded 960 billion yuan since the beginning of the year, and the holdings continue to reach new highs. Looking ahead to next year, with the expansion of the ETF product matrix and the continuation of issuance inertia, it is conservatively assumed that the share change next year will be slightly lower than the average level of the past two years, adding about 400 billion shares, with an average net asset value increase of about 5%, corresponding to a net inflow scale exceeding 650 billion yuan. Third, in terms of insurance funds, the increase in absolute scale combined with the market recovery is expected to drive a further significant inflow of insurance funds, with a potential contribution of over 400 billion yuan next year. As of the end of October 2024, this year's insurance company premium income has accumulated a year-on-year increase of 12.41%. At the same time, according to data from the China Banking and Insurance Regulatory Commission, the balance of insurance fund utilization at the end of the third quarter increased by 14.06% year-on-year, bringing a large demand for insurance fund allocation. Among them, property insurance + life insurance (accounting for 96.7% of the total insurance fund size) collectively increased their holdings of stocks and funds by 391.8 billion yuan and 246.9 billion yuan, respectively, compared to the beginning of the year, becoming a rare source of incremental funds in the market this year. Looking ahead to next year, under a neutral assumption, the balance of insurance fund utilization is expected to maintain a growth of around 9% in 2025, and the proportion of equity investment will actively rise to 13.5%, making insurance funds expected to contribute over 400 billion yuan in increments to the market throughout the year. Fourth, in terms of public funds, issuance is expected to rebound, with incremental funding expected to be between 2000-3000 billion yuan next year. Since the beginning of this year, the issuance of active equity funds has been mainly constrained by performance factors, with monthly issuances mostly staying below 10 billion yuan. Looking ahead to next year, considering that the scale of new issuance of public funds usually has a strong positive correlation with the performance of the major holding stocks in the previous quarter, as the market continues to recover and profit-making efficiency returns, the fund's returns are expected to gradually improve. The issuance of equity funds is expected to increase to 20-30 billion yuan per month, with an expected total increment of 2000-3000 billion yuan throughout the year. Fifth, in terms of foreign capital, this time it is expected that there will be more positioning on the right side. Foreign capital's allocation to A-shares is still at historical lows. With the recovery of the Chinese stock market, improvement in economic expectations, and gradual stabilization of fundamentals, the natural pursuit of profit will drive the continuous inflow of foreign capital into China. Sixth, in terms of private equity, with the market heating up, the risk appetite of private equity funds is expected to gradually improve, and the uplift in positions next year is also expected to contribute incremental funds to the market. According to calculations by Huacruisi Trust, as of the end of October 2024, the equity positions of private equity funds were at 56.31%, also at historical lows. Private equity, as absolute return investors, often see position increases lagging behind in the market's right-hand side. Referring to 2019, private equity positions began to rise significantly in the second quarter after a two-quarter rebound in the market. Four, structurally, focus on two directions from the perspective of odds and winning rate 1. From the perspective of odds, focus on new quality productivity and mergers and acquisitions. New quality productivity: The new quality productivity field is the combination point of long-term promotion of economic momentum shift and short-term policy bottoming. Focus on AI, semiconductors, creative industries, Siasun Robot & Automation, low-altitude economy, etc. Mergers and acquisitions: As an important lever for high-quality debt and high-quality development, this round centered around the three major merger and acquisition reform clues led by local governments is expected to increase the winning rate. Focus on the three major clues of integrating high-quality local resources, acquiring controlling rights of listed companies, and supply-side clearing in the upcoming year. 2. From the perspective of the winning rate, focus on domestic demand and advanced manufacturing optimization of the supply pattern. Domestic demand: With potential new tariff disturbances to foreign demand next year, economic growth will increasingly rely on domestic demand. As expanding domestic demand is a key focus of this round of policy strategies, it will also be an important lever for stable growth next year. Focus on service consumption sectors in the consumption sector such as education, catering, medical treatment, duty-free services, as well as traditional consumption areas such as food and beverage, home appliances, industry leaders and core assets (paying attention to dividend distribution, increase holdings, repurchase and cancellation behavior); in addition, focus on construction and real estate chain leaders that are expected to benefit from debt-for-equity policies. Advanced manufacturing optimization of the supply pattern: Look for industries where capacity expansion has significantly slowed down in the past few years, adequate clearance, and a high probability of a turnaround in capacity utilization next year. Combined with mergers and acquisitions, the industry's competitive landscape is expected to accelerate optimization. Focus on leaders in advanced manufacturing industries such as new energy and military industries. 4.1. Odds perspective: Focus on new quality productivity The field of new quality productivity is a key point for long-term promotion of economic momentum shift and short-term policy bottoming. In particular, the uncertainty brought by the U.S. election about policies towards China has increased the necessity of self-control, coupled with the development of domestic new quality productivity. Fiscal budgets are expected to further tilt towards the "safety" trend. On the one hand, the development of new quality productivity in China requires upgrades in industrial chain supply chain, the direction of development of emerging industries and future industries, which coincides with the critical areas of technology where China is currently facing challenges. Self-control is not only a strategic means in the context of great power competition but also an intrinsic requirement for developing new quality productivity. On the other hand, with clear signals of increased fiscal efforts next year, there is also hope for the issuance of special ultra-long-term national bonds to support.Direction with high strategic importance such as technological innovation, and industrial chain security, assisting in achieving high quality autonomy and controllability.Focus on AI, semiconductor, information creation, Siasun Robot & Automation, and low-altitude economy. 1. AI: The demand for computing power driven by the upward cycle of AI is still the most certain industry logic for current technological growth, and is expected to enter a new stage next year. The global arms race for computing power among manufacturers continues, with record-high capital expenditures by large manufacturers in North America in the third quarter. As the innovative speed of large models iterates faster, the demand for computing power hardware represented by AI chips is expected to remain high. At the same time, the continuous development of multimodal models is driving innovation in edge AI and applications, and next year, commercial closed-loop and application landing is expected to accelerate, further propelling the high prosperity of the AI computing power sector. 2. Semiconductor: With increasing external uncertainties, the importance of "self-controllable" continues to be highlighted, coupled with domestic policy efforts to promote and counter-cyclic expansion of wafer factories, the process of domestication is expected to accelerate. In recent years, domestic semiconductor equipment manufacturers have made breakthroughs in many areas, but the domestication rates in many aspects are still low, such as etching, thin film deposition, lithography, measurement monitoring, etc., leaving significant room for domestic replacement. With the continuous escalation of the US semiconductor sanctions against China and the counter-cyclic expansion of domestic wafer factories, coupled with policy support (issuance of special treasury bonds for technology self-reliance in important areas, establishment of large funds in the third phase, etc.), the semiconductor equipment industry is expected to continue to prosper. The prosperity of equipment components and semiconductor materials is also expected to bottom out and rebound. 3. Information Creation: With the upcoming new political cycle in the United States, the trend of global technological globalization is facing new changes, making the development of information creation industry increasingly important. This year, focused on promoting the development of the information creation industry, policy dividends continue to be released. With the marginal changes in the international environment and the reinforcement of domestic fiscal policies, the accelerated development of information creation has a strong certainty. Recently, orders for party and government information creation at the county level have been continuously implemented, validating the trend of accelerated development of information creation. Combined with the continuous improvement in product performance of domestic basic software and hardware manufacturers, they are expected to usher in a new round of growth opportunities. 4. Siasun Robot & Automation: Led by giants such as Tesla, humanoid Siasun Robot & Automation is expected to enter the fast lane next year, with domestic giants accelerating their layout, driving benefits for the entire industry chain. Under the long-term trend of cost reduction, domestic core component companies have obvious advantages and are expected to fully benefit from the surging industry demand in the future. 5. Low-altitude Economy: The low-altitude economy spans manufacturing and service sectors and is a comprehensive economic form that can radiate and drive integrated development in related fields. With the deepening and promotion of airspace trials in various regions and the airworthiness promotion of eVTOL and other aircraft, the low-altitude economy is expected to enter the fast lane. Currently, China is at the forefront of airworthiness work for eVTOL, drones, and other low-altitude aircraft worldwide. Local governments are actively promoting low-altitude economic pilot projects, which are expected to drive further development and rapid progress in the application end of low-altitude airspace. As an emerging economic growth point, the low-altitude economy is expected to have broader development prospects, contributing new momentum to the diversified development of the social economy. From the perspective of odds: Focus on merger and acquisition restructuring themes and layout three core clues. With policy support, the pace of mergers and acquisitions by listed companies has significantly accelerated this year. As an important lever for high-quality debt and high-quality development, this round of mergers and reorganizations is expected to become a sustainable industrial trend. In terms of industries, bidding parties are mainly concentrated in industries such as machinery, pharmaceuticals, electronics, chemicals, new energy, and computers, where integration is accelerating, and the transaction amounts in industries such as military, transportation, non-banking, and non-ferrous metals are relatively large. In terms of types, the proportion of industrial integration represented by horizontal integration and strategic cooperation is gradually increasing, continuing to consolidate as the basic pattern of mergers and acquisitions, while cross-border acquisitions, financial investments, and reverse mergers are gradually cooling down. Among them, focusing on merger and restructuring layouts led by local governments is expected to become the main theme of investment opportunities in this round of mergers and acquisitions. As the importance of capital market guiding resource allocation continues to be highlighted, more local governments are beginning to explore paths similar to the "Hefei model" to drive high-quality debt and high-quality development through capital operations. With current mergers and acquisitions becoming the main way of resource allocation in the capital market, local governments are expected to become important drivers in the mergers and acquisitions market. Currently, two models of local government participation in economic development through mergers and acquisitions are becoming increasingly clear: 1) Similar to the "Hefei model", local governments acquire control of listed companies and use them as platforms to integrate high-quality assets in the industrial chain, introduce high-quality projects, extend and improve their own industrial chains, which are important for revitalizing the balance sheet, driving local structural optimization and upgrading of industries; 2) Local governments lead their subordinate enterprises to integrate, improve resource allocation efficiency, provide important support for enhancing the profitability of local companies, expanding and strengthening industrial clusters, and increasing local fiscal revenues. Based on the above two models, three major merger and acquisition restructuring clues led by local governments are worth paying attention to: Clue one: Local governments with abundant high-quality assets and advantageous industries supporting listed companies in transforming and upgrading towards new quality productivity, and strengthening their advantages in industries. Focus on local leading companies in economically developed areas such as Guangdong, Zhejiang, Jiangsu, Beijing, and Shanghai, whose local industry chains are likely to grow larger and stronger through the absorption of various high-quality assets. Clue two: Local state-owned assets acquiring control of listed companies to introduce high-quality projects, extend and improve their own industrial chains. This year, the focus has mainly been on industries such as new energy, electronics, machinery, which align with the goals of local governments for industrial upgrading and economic transformation, as well as traditional advantageous industries in some regions like chemicals and non-ferrous metals. After these listed companies are acquired by local state-owned assets, some companies facing operational difficulties are expected to benefit from government relief measures and have the potential for a turnaround in distress. Additionally, some listed companies showing growth and competitiveness in a certain industry could become the "leaders" in local production chains after being acquired, showing the potential for continued strength. Clue three: Policy-driven integration of traditional industry resources through mergers and acquisitions to achieve supply-side clearance.Referring to the experience of supply-side reform in the years 2016-2017, encouraging the merger and reorganization of key industries with overcapacity to increase industry concentration is a powerful measure to resolve overcapacity, and is expected to become a key focus area for the government to promote industrial integration. Industries that have faced profit pressure in recent years, but still have a scattered competitive landscape or excess capacity, are mainly concentrated in traditional industries (environmental protection, chemical industry, securities, steel, plastics, etc.) and advanced manufacturing industries (new energy, military industry, medical and pharmaceuticals, etc.).4.3 High Win Rate Angle: Focus on the Directions of Domestic Demand and Advanced Manufacturing Industry with Reversal Prospects 1. One of the reversal directions: domestic demand. Next year, external demand will be affected by potential new tariffs, and economic growth will require internal demand to play a greater role. Expanding domestic demand as a key focus of this round of policy combinations will also be an important lever for stabilizing growth next year. It is important to focus on the service consumption sectors such as education, catering, healthcare, duty-free services, as well as industry leaders in traditional consumption sectors (with a focus on dividends, increased holdings, and buybacks and cancellations); in addition, in the counter-cyclical sector, we should pay attention to the leaders in the construction and real estate chains that are expected to benefit from the debt-for-equity policy. 1) Domestic consumption: On one hand, focus on service consumption. The Third Plenum Decision proposed to "improve the development system and mechanism of the service industry," the July Political Bureau meeting emphasized "using service consumption as a key driver for expanding and upgrading consumption," and in August, the State Council issued the "Opinions on Promoting the High-Quality Development of Service Consumption," making service consumption an important driver and major source of incremental consumption expansion. In the consumer industry, the directions with high domestic demand proportions and expected profit improvement next year are mainly concentrated in the service consumption field, and the period of pressure on external demand is usually an important time window for internal demand policy efforts. With potential incremental policy support, there is a basis for profit recovery, with a focus on education, catering, healthcare, duty-free services, etc. On the other hand, select industry leaders in traditional consumption sectors such as food and beverage, home appliances, etc. These industries are mostly mature and stable in terms of profitability, placing greater emphasis on shareholder returns, with strong willingness for dividends, increased holdings, and buybacks. With the stabilization and recovery of domestic demand, they are expected to see improvements in cash flow and balance sheet, mainly concentrated in the construction, decoration, professional engineering, infrastructure, housing construction, engineering consulting services, and other construction and real estate chain industries. 2. The second reversal direction: the optimization of the supply pattern in advanced manufacturing industries. Focus on industries where capacity expansion has significantly slowed down in recent years, clearance is relatively adequate, and next year's capacity utilization rate is likely to reach a turning point of recovery. Coupled with mergers and reorganizations, the competition landscape in the industry is expected to accelerate optimization. Focus on leaders in advanced manufacturing industries such as new energy, defense, etc. 1) New energy: In the past two years, the supply in the new energy industry has undergone accelerated clearance. Sectors such as batteries, wind power components, photovoltaic silicon materials, and inverters have shown signs of inventory replenishment, and next year the utilization rate may reach a turning point first, and performance is expected to stabilize and recover ahead of time. The new supply in the lithium battery, wind power, and photovoltaic industries has significantly slowed down, with expansion capital expenditure sharply declining. The capacity utilization rate in the third quarter has reached historical lows, and supply is accelerating clearance. In the third quarter, signs of inventory replenishment have appeared in sectors such as batteries, wind power components, photovoltaic silicon wafers, and inverters, and it is likely that next year the capacity utilization rate will reach a turning point, with basic fundamentals gradually improving. At the same time, with the elimination of supply, the concentration of leading companies in the lithium battery and wind power industries is gradually increasing. With the strengthening of policies supporting mergers and reorganizations and the elimination of inefficient and excess capacity, the competition landscape in the industry is expected to further optimize next year. In the new energy sector, the revenue concentration of lithium battery and wind power industry leaders has gradually increased in the past two years, while the concentration of the photovoltaic industry is still decreasing, and the pressure of losses in the industry continues to increase. Since the beginning of this year, policies supporting mergers and reorganizations and supply clearing have been strengthening, and next year, industrial integration is expected to accelerate, further speeding up industry clearance and optimizing the competition landscape, strengthening the market position of industry leaders. 2) Defense: The industry's backlog orders are rebounding, and the demand for the 14th Five-Year Plan is expected to accelerate. Previously, due to factors such as adjustments to the mid-term of the 14th Five-Year Plan and delays in order issuance, the defense industry has been under pressure, operating under the "production according to sales" model, with supply adjustments following. Current inventory and capacity utilization have both dropped to historical lows. Next year will be the final year of the 14th Five-Year Plan, with the implementation of the military construction in this period entering a key phase of capacity integration and delivery capability. The demand for orders is expected to accelerate, with the industry's backlog orders (prepaid accounts + contract liabilities) starting to rise in the third quarter, with expectations that demand for orders in the fourth quarter and next year will further recover. At the same time, next year the defense industry will also face multiple catalysts: on one hand, the world situation remains volatile, with frequent geopolitical risks. National defense and military industry is a major battlefield in great power competition, and domestic military expenditure is expected to continue to grow at a relatively high rate. Next year, as the United States enters a new political cycle, under the backdrop of new major power relations, national defense and military industry are crucial for national security and great power competition, with military spending and investment in weapons and equipment expected to remain at a high growth level. On the other hand, referring to historical experience, the five-year plan is usually an important factor affecting the development of the defense industry. Next year, the preparation of the 15th Five-Year Plan will begin, which is expected to drive the overall recovery of the industry as a new order cycle opens, and may promote the recovery of the industry's overall business climate. The defense industry is a strategically planned sector, and the five-year plan has a significant impact on industry operations and market expectations, serving as one of the main driving factors of the defense industry's market trends. Historically, from the start of the five-year plan preparation to its formal implementation in the first year, the defense industry's excess returns are usually quite significant. Therefore, with the advancement and implementation of the 15th Five-Year Plan in the next year, the development guidelines for the defense industry for the next three to five years will gradually become clearer, and with the opening of a new order cycle, the growth prospects are expected to strengthen, potentially leading to a recovery in the overall industry chain's business climate. Finally, as the market enters an active period of mergers and acquisitions, the pace of mergers and acquisitions and asset injections in the defense industry are expected to accelerate, which may also be an important catalyst for the defense industry's market trends next year. Historically, mergers and acquisitions and asset injections have always been important themes in the defense industry and are often core driving factors of sector-level market trends. There are many central SOEs in the defense industry, and the current securitization rate is relatively low, with a large number of high-quality non-listed assets. In recent years, major asset reorganizations of central SOEs in the defense industry have been progressing steadily, and as the market for mergers and acquisitions and reorganizations becomes active, it is expected to support the performance of the defense sector."Bonjour, comment a va?" "Hello, how are you?"Risk Warning Economic data fluctuations, looser-than-expected policies, and the Fed's interest rate cuts falling short of expectations, etc. This article is reprinted from the WeChat public account "Yao Wanghoushi"; GMTEight editor: Wang Qiujia.