CITIC SEC: Confidence restoration spreads to the economic sector, focusing on core assets in China.

CITIC SEC released a research report stating that looking ahead to spring, as policies progress and intensify in three major areas, confidence repair will gradually spread from the technology sector to the economic sector; new tracks are emerging in China, with new core assets with the potential for a market value of billions of US dollars expanding, and about 30% of the leading companies in traditional sectors are seeing operational turning points; the Hong Kong stock market is still in its early stages, while core assets in the previously stagnant A-share market are accelerating their divestment. In the future, GARP strategies or extreme resilience strategies may be relayed, and China's core assets are expected to welcome spring. Therefore, the bank recommends selecting a "New Core Assets 30" portfolio from the technology, industrial, and consumer sectors from the perspectives of promoting industrial value reconstruction through technological innovation, guiding industry supply and demand clearance through supply-side reforms, and releasing consumer potential through institutional optimization. This portfolio should be the focus of investment allocation in spring. After full confidence repair, the differentiation between "good companies" and "ordinary companies" will far exceed the differentiation between "good industries" and "ordinary industries". CITIC SEC's main points are as follows: Recently, the market's direction has been diversifying from high to low, and investors are more actively adjusting their attitudes. In the last week of February, the market showed a clear shift from "high volatility" to "low volatility". However, this shift did not simply occur in defensive sectors like dividends. The sectors that saw a low-level rise were mainly in consumer, some cyclical, and steel industries that may benefit from supply-side policies aimed at preventing internal competition. This week, sectors like consumer (food and beverage, textiles and clothing, retail), lithium batteries, and steel actually outperformed sectors represented by banks, electricity, and utilities. Clearly, the market has transitioned from a bear market mentality to a bullish market mentality. The strategy of the "barbell" to deal with confusion among investors has shaken as each rebound in dividend stocks has seen adjustment selling, and there has not been a corresponding strong performance. Looking ahead to spring, confidence repair will gradually spread from the technology sector to the economic sector. 1) The competition between China and the US in technology has entered a new stage, and the private enterprise forum has bolstered micro subjects. DeepSeek's popularity globally has changed investors' long-term macro narrative about China. Currently, investors tend to view concerns about policies, consumption, and real estate as short-term cyclical issues. The valuation systems for A-shares and Hong Kong stocks are gradually returning to global normal levels. From the perspective of PB-ROE framework, the Hang Seng Index, Hang Seng Tech Index, and Shanghai-Shenzhen 300 Index have basically returned to the normal distribution range of PB-ROE of major global stock indices since the recovery since September. In addition, the valuation discount of private enterprises has also been continuously repaired. The excess returns of the state-owned enterprise 50 indexes of A-shares and Hong Kong stocks compared to the private enterprise 50 indexes rose to 47.1% and 60.2% at their highest in 2022, and have now fallen to 25.9% and 23.3%. 2) Policies of the Two Sessions in March are expected to advance in the fields of technology, supply side, and consumption promotion. After the valuation system normalizes over the past few months, the market can no longer rely simply on macro narratives to sustain growth. The sensitivity of micro subjects' confidence to macro narratives will also decrease, and it will be necessary to continue landing policies tailored to solve economic and structural problems. The bank expects the Two Sessions in March to advance in three major areas: technology innovation, supply-side anti-internal competition, and expansion of demand-side internal demand. Industrial policies in the technology sector may involve the "AI+" action, Siasun Robot & Automation, and low-altitude economy; supply side policies may have four directions, including dual carbon constraints, procurement upgrades, partial export tax refunds cancellation, and encouragement of mergers and restructurings; overall demand-side policies may include improving social security, expanding consumer subsidies to the service industry, and stabilizing the real estate and stock markets. Increased US restrictions may be the biggest challenge in spring and also the litmus test for full confidence repair. Uncertainty in US policies may significantly increase starting from April. Key risks to watch out for include the release of the results of the "Memo on US Priority Trade Policy" in early April, the implementation of the "Memo on US Priority Investment Policy," and possible further export bans and restrictions in the semiconductor sector. The bank reviews the pullback situations of the Hong Kong stock market after a significant 25% surge since 2017, external factors that triggered adjustments include Federal Reserve tightness, geopolitical risks, and unmet policy expectations. Looking at historical situations, if only considering trade frictions, tariffs will lead to a pullback of about 10% after they are announced. Restrictions in the semiconductor sector will have a greater impact on sentiment, but given that the market is already well prepared and anticipates such controls, the impact of this round of enhanced controls will be limited; strict investment bans may cause significant market volatility, but the likelihood of their short-term introduction is currently low. New tracks are emerging, and traditional tracks are seeing operational turning points. 1) New core assets with the potential for a market value of billions of US dollars are expanding. DeepSeek brings an AI equality industrial trend. The bank, based on industrial logic, has reviewed fields such as cloud providers, domestic computing power and AIDC chains, edge AI, AI software, physical AI, etc., and has further screened out emerging niche tracks with the potential to give birth to billion-dollar market value companies from a perspective of market space and pricing power. These new core assets include cloud computing chipsets, edge computing chipsets, storage chipsets, advanced processes, advanced packaging, semiconductor equipment, data centers and communication network equipment, cloud providers, AI software, high-energy density batteries, and sensors, identifying corresponding companies from them. The bank believes that the sustainability of future growth in A-shares must be based on these new core assets continuously impacting the "billion-dollar" scale. 2) Around 30% of companies in traditional core assets have emerged from operational turning points. The bank has developed a set of tracking indicators based on the marginal changes in ROE to reflect the cyclical position of the industries where core assets are located, revealing the stages where different industries and companies within traditional core assets (represented by the Maotai Index + Ning combination of 49 companies) are positioned. The results show that 31% of companies have emerged from the bottom of the cycle, 45% are still in a downward cycle, 14% continue high prosperity, and 10% are stable growth companies. The Hong Kong stock market is still in its early stages, while stagnant A-share core assets are accelerating their divestment.The leading companies in the new track still have a huge valuation repair and growth space. Currently, Hong Kong stocks account for only 5.2% of the total global market value, ranking at the 23.6 percentile since 2004. At the peak of the mobile Internet boom in April 2015, Hong Kong stocks were able to account for 9.1% of the total global market value. Over the past 20 years (2004-2024), Hong Kong stocks have been able to contribute 5.5% of the global incremental market value, ranking second only to the United States (57.8%) and mainland China (11.5%), but only 0.2% in the past 5 years. In terms of specific industries, Hong Kong's Internet companies still have a valuation discount compared to leading US stocks as a whole, there is a huge market value gap in semiconductor and AI application companies, and automotive companies have significant valuation differences compared to Tesla. 18A innovative drug companies have continuously expanded their pipeline advantages and completely cleared their chip structures. As Hong Kong technology companies gradually catch up with the tidal waves of AI, new energy, and biotechnology, and a large number of excellent A-share blue-chip companies are gradually listed on Hong Kong stocks, from the current perspective, Hong Kong stocks have only taken the first step towards repair.Some A-share allocation-oriented positions continue to shift towards Hong Kong stocks, and the core asset chips have been cleared in the final stage. A-share core assets have begun to show some attractive allocations, with the valuation percentile of Ning Portfolio being comparable to the Hang Seng Tech Index, while the valuation percentile of the Maotai Index and the Wind Golden Store 100 Index is significantly lower. In the valuation digestion process of the past few years, trading-oriented positions may have already left the core assets of A shares, and allocation-oriented positions have also shown a gradual migration towards Hong Kong stocks in the past six months. As of the end of last year, actively managed mutual funds with investment quotas in the Hong Kong stock connect already held 28.5% of Hong Kong stocks in total stock holdings. From this perspective, when long-term allocation-oriented positions have completed a balanced allocation of A-share and Hong Kong core assets, it basically means that the chips of A-share core assets have been cleared in the final stage, and the marginal changes in fundamentals will bring huge upward valuation elasticity. GARP strategy or Extreme Resilience Strategy, core assets usher in spring In the style judgment framework of the bank, when the GARP strategy (also can be seen as a strategy of high-quality growth stocks) is dominant, the market usually needs to have five conditions: policy support, economic highlights, profit growth, incremental funds, and rational emotions. At present, the bank believes that even if these conditions are not fully met yet, they have been gradually realized: policy has a clear depiction and solution to structural issues, and it only needs time, and the market is more patient with this than the past two years; the economy is starting to turn structurally, especially the real estate sector has shown localized stabilization and rebound; emerging industry prosperity continues to erupt, and the inflection point of core assets of some traditional industries has already appeared; incremental funds continue to flow in and emotions are gradually shifting towards rationality from overly pessimistic to extreme exuberance requires time, but the clearance of high-quality growth stock positions is nearing completion, even if entering on the left side, the experience will improve. Technology ignition, supply-side push, consumption fill the gaps, focus on "New Core Assets 30" The technology sector values extreme innovation leading to new demand, focusing on four areas: domestic computing power, edge AI, high-energy density energy carriers, and innovative drugs; supply-side push is to accelerate the elimination of low-quality production capacity through five policy means, promoting the return of profits and the reshaping of valuations for high-quality production capacity, focusing on aluminum, steel, and panels, as well as closely monitoring the implementation progress of optimization measures in the new energy field; consumption fill the gaps is to unleash potential through counter-cyclical regulation and structural reform measures, focusing on the consumer internet with both offense and defense capabilities, dairy products and mass catering sectors expected to stabilize first, and opportunely allocating to industries with clear pro-cyclical characteristics such as catering supply chains and hotels. Based on industry analysts' recommendations, the bank has selected the "New Core Assets 30" stock pool from bottom-up screening, including 14 companies in the new technology track and 16 in traditional core assets. Risk factors Intensification of friction in areas such as US-China technology and trade; domestic policy strength, implementation effects, and economic recovery falling short of expectations; escalation of external disturbances such as regional conflicts beyond expectations.