CICC: Which industries in Hong Kong stocks have more opportunities?

CICC released a research report stating that industry overall profits are expected to first decrease and then increase by 2024, with an overall estimated growth of 13.2%. Sectors such as insurance, automotive, and household appliances are expected to show significant performance improvement due to policy catalysts and market recovery. Nominal GDP growth is close to expectations, with profits slightly adjusted upwards due to policy support. For 2025, growth is expected to be 2-3%, with internal growth momentum being insufficient but structural advantages better than A-shares, and profit recovery depending on macroeconomic and policy factors. In terms of the market, after the Spring Festival, Hong Kong stocks have strengthened but structural trends remain dominant, short-term sentiment is overextended, and the development of the AI industry is of great significance to the market. The overall market is expected to remain in a volatile pattern, with a recommendation for a combination of "stable returns + structural growth" in terms of allocation. Key points from CICC are as follows: Annual performance preview: profits are expected to decrease and then increase by 2024, with insurance and automotive household appliances catalyzed by the old-for-new policy as highlights Overall, profits are expected to grow by 13.2% in 2024, faster than the 6.6% year-on-year increase in the first half of the year. In terms of Chinese yuan, based on the summation of CICC industry analysts' forecasts for individual stocks in the coverage range, Hong Kong-listed and Chinese concept stocks' profits are expected to first decrease and then increase in 2024 (13.2% for the whole year vs. 6.6% in the first half, implying a nearly 20% year-on-year increase in the second half). The automotive sector catalyzed by the old-for-new policy, insurance benefiting from the capital market recovery, and maritime sectors related to the export chain are expected to show significant performance improvement. Nominal GDP growth in 2024 is 4.2%, close to previous expectations, but support from policies such as the old-for-new policy in the second half of the year and the capital market recovery provide some support for corporate profits. Therefore, from a strategic perspective, we have slightly raised the overall profit growth of overseas Chinese stocks in 2024 to 5-6%, still below the market consensus of 9% and the 13.2% expected by sample companies. This is mainly because the net profit of leading companies is maintained at a high level of growth. In terms of sector analysis, insurance and the automotive household appliances catalyzed by the old-for-new policy are highlights. 1) In the financial sector, profit growth in 2024 is expected to be 8.4%, better than the 3.0% in the first half of the year. Bank interest margins continue to shrink, leading to zero profit growth in 2024, slower than the 3.0% in the first half of the year. Diversified financial services are expected to decline in profit by 2% year-on-year. Insurance is expected to show a notable improvement in performance with a profit growth of 54% in 2024 (compared to 3% year-on-year growth in the first half of the year). 2) Upstream energy profit is expected to grow by 17%, in line with the first-half year-on-year growth rate; raw materials profit is expected to grow by 21%, an improvement from the 13% year-on-year growth in the first half of the year. Among them, the metal and mining industry benefits from maintaining a high level of metal prices, with a profit growth of 43%, slowing down from the 91% year-on-year growth in the first half of the year, while building materials profits decline by 14%, significantly narrowing from the 72% year-on-year decrease in the first half of the year. 3) The midstream sector has improved mainly with support from the export chain. Industrial profit is expected to grow by 26% in 2024 (compared to a 10% year-on-year growth in the first half of the year), but the support mainly comes from companies in shipping and ports benefiting from improved exports. Maritime is expected to grow by 103% year-on-year (compared to a 3% year-on-year growth in the first half of the year), with shipping and logistics maintaining a fast growth rate of over 30% in 2024. 4) Downstream consumer growth is slowing down but with internal differentiation. Profit in discretionary consumption is expected to increase by 43% (compared to 61% year-on-year growth in the first half of the year), while essential consumption is expected to grow by 12% (compared to 11% year-on-year growth in the first half). Retail growth is expected to slow down, with a profit growth of 37% (compared to 93% year-on-year growth in the first half of the year); leading companies continue to experience high growth but with declining profit growth due to increased external competition. Automotive growth is boosted, with profits of leading and export-oriented car companies maintaining significant growth. With support from the old-for-new policy, domestic demand is expected to improve, leading to an overall profit growth of 192% (compared to 134% year-on-year growth in the first half of the year), while household durable goods are expected to see a 20% year-on-year profit growth (compared to 8% year-on-year growth in the first half of the year), with some targets benefitting from the support of the old-for-new policy and export-driven growth. 5) Defensive sectors are expected to see a profit growth of 8.6%, higher than the 2.3% year-on-year growth in the first half of the year. Healthcare is expected to have a profit growth of 8% (compared to 6% year-on-year growth in the first half), while utilities are expected to have a profit growth of 13%, turning positive from a 2% year-on-year decline in the first half, with cost reductions in power companies leading to improved performance. CICC industry analysts' forecasts exceed the market consensus. Specifically, CICC industry analysts are more optimistic than the market for sectors including insurance, transportation and infrastructure, technology hardware, and semiconductors, but have lower profit expectations for sectors including automotive and building materials compared to market consensus. From a future growth perspective, growth is expected to be 2-3% in 2025, still requiring policy support, but overall better than A-shares. From a top-down strategic perspective, the baseline scenario envisions a profit growth of 2-3% in 2025 (non-financial sector 6.5%, better than the 5.5% of 2024, financial sector -1%, lower than the 5% of 2024), lower than the market consensus of 6%. Internal growth momentum for profit recovery remains insufficient, mainly due to two factors: 1) an increase in external demand supporting GDP, but there is a risk of export grabbing and weakening in 2025 under external tariff uncertainties. 2) In the second half of 2024, policy support has led to internal demand recovery, but there are structural differences and situations of quantity increase and price decrease. However, in 2025, Hong Kong stock profit expectations are slightly higher than A-shares, mainly due to the structural advantages of Hong Kong-listed companies: 1) in terms of industry structure, Hong Kong stocks have a higher proportion of new economy companies and a lower proportion of middle-tier manufacturing; 2) in terms of concentration, the contribution effect of leading companies is more pronounced. As such, the timing and extent of profit recovery largely depend on the speed of improvement in macroeconomics and policy: 1) the baseline scenario is likely to provide a bottom rather than a push high, with an expected profit growth of about 2-3% in 2025, lower than the market consensus of 5%; 2) in the optimistic scenario where fiscal efforts exceed expectations, profits can achieve corresponding growth expectations of 6-7%; 3) in the pessimistic scenario, if policy progress falls short of expectations, profits may decline by 1% compared to 2024. At the sector levels, 1) sectors such as semiconductors, biotech, household and personal items are expected to show significant improvement in growth compared to 2024; 2) sectors such as automotive, technology hardwareConsumer services, household appliances and clothing, media and entertainment, e-commerce and retail, etc. are still maintaining a profit growth of over 10%, showing resilience in performance; 3) Based on the measurement of ROE and PE in terms of cost-effectiveness, sectors such as automotive, software services, e-commerce internet, and technology hardware are more attractive. These sectors are expected to have a higher ROE in 2025 than the past 3-year average, with P/E levels lower than the past 3-year average, indicating that profitability has an advantage over valuation. They are likely to become highlights in the overall moderate growth trend of performance. The release of DeepSeek-R1 by domestic artificial intelligence start-ups may also drive demand for industries related to computing power, chips, data services, and communications. It is recommended to focus on structural investment opportunities in technology and artificial intelligence.Market outlook: Not yet out of the volatile market, but structural opportunities are active In the first week after the Spring Festival, factors such as breakthroughs in the domestic artificial intelligence field during the holiday period and Trump's policy towards China being "milder" than expected boosted sentiment, and Hong Kong stocks showed significant strength. Emotion-driven risk premium decline is the main driving force. In terms of sectors, the narrow range of increases focuses on the technology sector (companies that outperformed the index accounted for only about 23%, much lower than the over 62% of companies that outperformed in the 924 market), with old economy and high dividends lagging behind. This also reflects that Hong Kong stocks are still mainly driven by structural trends. As for why the overall index also shows stronger performance and better than A-shares, it is because: 1) the overall market capitalization of Hong Kong stocks is relatively smaller, so sectors and individual stocks have a stronger effect on the overall index, especially with the weight limits on large-cap companies in the Hang Seng series indices, which magnify the impact of rising mid-cap companies; 2) Hong Kong stocks have a higher proportion of software companies in their industry structure. In terms of funding, long-term foreign capital has not yet seen significant inflows and may still mainly rely on individual and trading funds. In the short term, technical indicators show that sentiment is somewhat overstretched. 1) The relative strength index (14-day RSI) has risen from a low of 32.1% in mid-January to 74%, entering overbought territory; 2) Short selling in Hong Kong stocks has risen instead of falling, reaching 17.7% on February 10, indicating that there is still disagreement among investors about the current rally; 3) The risk premium has dropped to 6.7%, back to the level in May 2024. Looking ahead, the development prospects of the AI industry have important implications for market trends and the revaluation of Chinese assets, and could also support a round of structural trends. However, this trend may still need further verification. At the same time, the recent hot trend in AI does not mean that all macroeconomic issues have been solved, and further policy efforts to consolidate the current recovery effects are still necessary. According to the bank's calculations, to solve the accumulated output gap and credit contraction problems, it may require a one-time (not accumulated over many years) and "additional" (not spending under the same category) general deficit of 7-8 trillion yuan. Currently, the known scale on the same basis is about 3 trillion yuan (if the deficit ratio rises to 4%, it corresponds to about 1 trillion yuan, plus 2 trillion yuan in bond issuance that year). However, whether the easing of tariff pressure, data recovery in quantity during the Spring Festival, and the optimistic situation brought by DeepSeek in the industry may reduce the likelihood of further short-term policy tightening in China. The upcoming Two Sessions are also a variable worth paying attention to. In this situation, the overall judgment is maintained that the market has not yet escaped the volatile pattern. It is recommended to be more proactive when the market is sluggish, but to take profits moderately when it is overexcited. According to the bank's calculations, if the risk premium falls back to the high point of 6.7% in May last year, it corresponds to about 21,600 points for the Hang Seng Index; if the risk premium further drops to 6% at the beginning of October last year, it corresponds to about 23,000 points for the Hang Seng Index, but this may be more challenging. In terms of allocation, based on the analysis of medium-term profit and macroeconomic factors, it is recommended to focus on stable returns (dividends repurchase) + structural growth, such as focusing on the technology sector that has trends and policy support directions such as semiconductors, artificial intelligence, and Siasun Robot & Automation; marginal demand improvement supported by policies, coupled with industries with more comprehensive clearance, such as household appliances and automobiles under the stimulus of replacing old with new, internet, consumer services, and textile and apparel. Conversely, attention should be paid to potential disruptions in certain export industries in the short term.