Industrial: How will China's asset revaluation spread?

1. Focus on the essence of the current market: Revaluation of Chinese assets led by technological breakthroughs Since the end of February, after experiencing a continuous rise since the Spring Festival, there have been voices in the market suggesting that the overall market, especially the technology sector, is due for a correction. However, after a brief adjustment at the end of February and the beginning of March, the Shanghai Composite Index reached a new high for the year this week, with technology growth represented by AI, Siasun Robot & Automation leading the market. The market performance can be said to have exceeded the expectations of many investors. Why has the AI sector, including AI, shown resilience beyond expectations recently? We believe that one of the most important factors is that the essence of this current market trend is the revaluation of Chinese assets led by technological breakthroughs. However, the current market still lacks a broad and deep understanding of this point, as many investors continue to operate based on thematic investing strategies. Since our report on January 19th proposing a "new wave of upward movement" and "AI as the first choice in structure," taking advantage of breakthroughs in AI technology represented by DeepSeek and advancements in areas like Siasun Robot & Automation, coupled with multiple positive catalysts in the industry chain, market confidence in the prospects of Chinese technology and economy has been reshaped, driving the market to continue rising. Even during the market turbulence at the end of February, we continued to emphasize that, despite short-term concerns about a high valuation and disruption from overseas tariffs affecting risk appetite leading to an adjustment in the TMT sector, AI remains the main theme in the market in the medium to long term. Similar to the Internet boom of 1999-2001, the mobile Internet boom of 2013-2015, and the "new semi-conductor army" trend of 2019-2021, this year, with the rapid increase in AI penetration rates across various industries and the accelerated implementation of more vertical applications, there are strategic growth opportunities in a wide range of industries from AI to AI+. This forms the foundation of the current upward trend in the Chinese market. Drawing from historical experiences, this process could continue for several years. Simultaneously, the recent government work report has set a positive tone, further laying a solid macroeconomic environment for the revaluation of Chinese assets: In terms of macro policies, the economic targets remain positive, and fiscal policies have been stepped up as planned. The 2025 GDP growth target remains around "5.0%"; the fiscal policy has become "more proactive" with a combination of "4.0% deficit ratio + 4.4 trillion local special bonds + 1.8 trillion special national bonds," each item showing significant improvements from last year; the monetary policy retains its "moderately loose" stance, with clear instructions to "adjust the reserve requirement and interest rates in a timely manner, keep ample liquidity," not only for stabilizing growth but also to support market risk appetite. "Boosting consumption vigorously" remains a top priority this year. The report for the first time emphasizes "strengthening the people-oriented macroeconomic policy" and introduces special measures from three angles of improving consumption capacity, increasing quality supply, and improving the consumption environment, with a focus on stabilizing and expanding employment with greater intensity, shifting policy focus more towards people's lives and demand. Developing new productive forces is a key task for high-quality development this year and in the future. The report calls for nurturing and strengthening emerging industries, future industries, and the continuous promotion of the "AI+" action, indicating that subsequent financial, tax, and financial policies will continue to increase support for technological innovation. "AI+" will become a focus. Currently, with the release of DeepSeek as a milestone, breakthrough progress in the domestic AI field, comprehensive exploration of domestic application scenarios, increased capital spending by major companies driving the continuous release of computing power demand domestically, various links in the industry chain are still rapidly iterating and renewing, which will continue to support AI as the main theme in the medium to long term. The overall policy towards the capital market has become more positive. In this report, in addition to the continuation of the policy tone set at the government's financial press conference on September 24, and the January 23 "Promoting the entry of long-term funds into the market" meeting, there was an addition in the monetary policy section highlighting the need to "optimize and innovate structural monetary policy tools, and promote the healthy development of the real estate and stock markets with greater effort." This is the first time that the government's work report explicitly identifies the "real estate and stock markets" as a key task for the central bank. The capital market, as a crucial tool for easing China's current economic transition challenges, has continuously elevated its strategic importance, and policy support is expected to continue, becoming one of the most important logic supporting the current market trend. We believe that if the easing policies since September last year have provided the "bone" for the reversal logic of this current market trend, the AI technological breakthroughs represented by companies like DeepSeek at the beginning of 2025 have provided the fundamental logic for this current market trend, giving the "soul" of a "technology bull market." Therefore, the revaluation of Chinese assets led by technological breakthroughs will be a logic change that the market needs to strengthen its understanding of and pay more attention to for a long time to come. 2. The revaluation of Chinese assets is expected to spread across various sectors Looking ahead, after undergoing a period of adjustment, the technology sector represented by AI has alleviated some of the pressure from crowded directions, and with recent developments like Alibaba's algorithm bidding, the release of AI intelligent body Manus, and other industrial catalysts, various aspects of the industrial chain continue to iterate rapidly. In the short term, the AI market is expected to remain vibrant through internal rotation. On the other hand, as the market enters a traditional window of increasing effectiveness in fundamental and policy factors in March and April, against the backdrop of positive signals in macroeconomic policies and the accelerated implementation of various stimulus measures, the revaluation of Chinese assets is expected to further spread towards low positions that benefit from policy support and marginal improvements in economic conditions. First, in March and April, the market will gradually shift towards a more "reality-oriented" stage and consciously seek out low positions with policy and performance support. As the two sessions approach, and with the release of key economic data for January and February, as well as the annual reports and first-quarter reports of listed companies, the market is gradually entering a traditional window of increasing effectiveness in fundamental and policy factors. Secondly, as the intensity of industry rotation has marginally increased recently, pointing towards a wider market dispersion and opportunities across various sectors, the market is starting to seek opportunities in all sectors. We have constructed an industry rotation strength index by summing up the absolute changes in rankings of industry gains and losses over the past five days to quantify the speed of market rotation. Since the beginning of the year, as the market consensus continues to consolidate around the AI theme, the speed of industry rotation has started to slow down, and recently, this index has bottomed out.Recovery, or indicating that the market is beginning to seek opportunities in various sectors.Finally, taking the Hong Kong stock market as a reference, we have also observed recently that both domestic and foreign funds are reevaluating Chinese assets and the reevaluation is spreading to pro-cyclical sectors. Since the Chinese New Year, global funds have resonated with Hong Kong stocks, with the AI sector represented by TMT and the Internet being a significant consensus among southbound funds and foreign funds. Recently, sectors such as pharmaceuticals, consumer goods, and real estate are experiencing increased allocations from southbound funds and foreign funds. With macro policies being strengthened and expectations of economic recovery rising, the reevaluation of Chinese assets by domestic and foreign funds is spreading from technology to pro-cyclical sectors. III. What directions are currently the focus of attention? (A) AI: Short-term focus on directions with relatively low positions and performance support For the current AI sector, it is important to find directions that are relatively low in position and offer value for money. The AI sector itself is a vast industry chain covering upstream computing power hardware, midstream software services, and downstream applications. With the catalysis of various aspects of the industry chain, the market is expected to become active again. Directions that are relatively low in position and have performance support are worth actively paying attention to and investing in. Considering both the business climate and crowding, among the top 50 sub-directions of the AI industry chain, it is currently advisable to focus on relatively low positions and cost-effective segments such as optical modules, servers, fiber optics, PCB, and operators. 1. Business Climate With breakthroughs in the AI industry and domestic demand recovery, many sub-sectors of AI are expected to see improved business climates this year. According to market consensus, most sub-directions of AI are expected to experience accelerated business activity or a reversal of adversity this year. When looking at the number of stocks with upward revisions of expected net profit in 2025 among the top 50 sub-sectors of AI this year, directions such as fiber optics, servers, smart home, RF components, IoT, AI smartphones, optical modules, deep search, digital media, IDC (Compute Power Leasing), and PCB are relatively prominent. 2. Crowding After a recent adjustment, crowding in some directions of the AI industry chain has greatly subsided in the short term, including optical modules, AI chips, PCB, servers, fiber optics, and operators. (B) Domestic Consumer Demand: Boosting consumption is the primary task of this year's economic work, focusing on commodity consumption and new-format service consumption benefiting from the "dual new" policy expansion On the demand side, boosting consumption is the primary task of this year's economic work, and the domestic consumer demand sector is expected to see fundamental improvement and valuation recovery. With potential disturbances in external demand due to new tariffs, economic growth will increasingly depend on domestic demand. The focus of this round of policies is shifting towards the people's livelihood and the demand side. At the economic thematic press conference on March 6, the work ideas for expanding consumption were further refined, and the "Special Action Plan to Boost Consumption" will be implemented soon. Fiscal policy and structural monetary policy will also significantly increase efforts to stimulate consumption, including expanding the scale of replacing old products with new ones, increasing social security and subsidy levels, etc. Commodity consumption (automobiles, household appliances, consumer electronics, etc.) and service consumption (film and television media, tourism, etc.) may be important focal points for promoting consumption. Commodity Consumption (automobiles, household appliances, household goods, consumer electronics): By 2024, the consumer goods replacement policy is expected to drive high sales growth in automobiles, household appliances, and related products. In 2025, the "dual new" policy will further expand, increasing subsidies not only on existing products such as automobiles and household appliances but also extending to consumer electronics such as mobile phones. Sales of related products saw a significant increase during the Chinese New Year, and the issuance of larger-scale ultra-long-term special national bonds will further support the expansion of domestic consumption. Service Consumption (film and television media, tourism, and other multi-format): On one hand, explosive growth in entertainment consumption such as film and television media represented by "Valley Economics" and "Nezha 2", gradually shifting from single content consumption to "IP + derivative" mode, as a consumer sector with strong appeal and great growth potential, is expected to bring more new growth engines to consumption in the future. On the other hand, service consumption, as a major direction in line with consumption upgrading and expansion, is expected to become an important driver and major source of incremental consumption in this round of expanded consumption. In the consumer industry, directions with high domestic demand and expected profit improvement next year are mainly concentrated in the service consumer sector, which, with potential policy support, has a basis for profit recovery. (C) Advanced Manufacturing: Supply-side optimization is an important clue at the industrial level in this round, focusing on military industry and new energy leaders benefiting from optimized supply patterns On the supply side, advanced manufacturing with optimized production capacity patterns is another important direction for the fundamental reversal in this round. In December 2024, the Central Economic Work Conference clearly identified "comprehensively rectifying 'overly competitive' competition, regulating local government and corporate behavior" as one of the key tasks for 2025. In this year's government work report, emphasis was again placed on "removing obstacles in market access, factors allocation, and other aspects that hinder economic circulation, comprehensively rectifying overly competitive competition" and "strengthening the overall layout of the industrial sector and monitoring and early warning of production capacity, promoting orderly industrial development and healthy competition." This year, the optimization process of various industries' supply side is expected to accelerate. Focus on industries where capacity expansion has significantly slowed down in recent years, where clearance is relatively complete, and where there is a high probability of a turning point in capacity utilization rate by 2025. Coupled with mergers and reorganizations, the competition in the industry is expected to accelerate, and clues of industrial reversal are expected to become clearer in the annual reports and first-quarter reports. Military industry and new energy leaders are particularly focused on. Military Industry: With disturbances such as mid-term adjustments in the early stages of the "fourteenth five-year plan" and delays in order placement, inventory and capacity utilization in the industry have both dropped to historically low levels. 2025 is the closing year of the "fourteenth five-year plan" and the starting year of the "fifteenth five-year plan." As a new round of order cycles begins, overall industry prosperity is expected to improve. At the same time, the military industry is expected to experience multiple catalysts this year: on the one hand, with ongoing global turmoil and geopolitical risks, the military industry remains the main battlefield for major power games, and domestic military spending is expected to maintain a relatively high growth rate. On the other hand, with the market entering an active period of mergers and restructuring, the pace of mergers and asset injections in the military industry is expected to accelerate, which could be an important catalyst for the military industry in 2025. New Energy: In recent years, the industry's supply has undergone accelerated clearance, with signs of inventory replenishment in segments such as batteries, wind power components, photovoltaic silicon materials, and inverters. By 2025, the capacity utilization rate may see a turning point, leading to early performance stabilization and recovery. With policies promoting mergers and reorganizations and the elimination of inefficient practices, these industries may see an acceleration of their competitive landscape optimization and the basis for industrial reversal.Support for excess capacity is increasing, and it is expected that the industry's competitive landscape will further improve this year, with industrial integration becoming a key focus. In addition, with the trend of cost reduction and efficiency improvement in the industry, new technologies such as solid-state batteries are empowering the industry, and it is expected to usher in a second growth pole.Risk warning: Economic data fluctuations, looser policies lower than expected, Federal Reserve rate cuts lower than expected, etc. This article is reprinted from the WeChat public account "Yao Wang Hou Shi", author: Xingzheng Strategy Team; GMTEight Editor: Xu Wenqiang.