Industrial: Upstream resources are gradually becoming the market's main focus. Bullish on resources, military industry, and technology as the three major sectors.

Industrial released a research report stating that upstream resource products are gradually becoming the market's main focus. With the increasing attention to "anti-inner circular" policies, there is an expectation for the acceleration of the tightening of resource supply and a consequent price increase. Looking at various industries, the directions with higher success rates in July are mainly focused on the growth sectors represented by the military industry and new energy, as well as resource products such as steel, chemicals, and non-ferrous metals. Behind these are factors such as peak season, performance, and policy expectations driving them collectively. The technology sector is currently positioned relatively low, and sectors with strong short-term performance certainty may still be the direction with higher success rates, mainly concentrated in upstream computing power. Industrial's main views are as follows: 1. Focus on structural main lines This week, the Shanghai Composite Index continued to reach a new closing high since October 8th of last year, led by heavyweight sectors such as banks. The market sentiment continues to be strong under structure. Upstream resource products are gradually becoming the market's main focus. Looking ahead, although the index level is close to a new high, looking at crowd density and stock price distribution among various industries, there are still many structural opportunities in the market that can be actively explored: In terms of crowd density, most industries still have crowd densities at historical medium or low levels. Looking at stock price distribution, the new high of the Shanghai Composite Index is mainly contributed by banks, and the differentiation among various industries remains pronounced, especially in the TMT, new energy, automotive, and machinery sectors, where many stocks have not surpassed their highs from before March 18th. In addition, July itself has entered a stage of a relatively strong market pattern, providing the market with more structural guidelines. With the disclosure of mid-year performance forecasts, major conferences approaching, and the arrival of the summer heat season, the impact of performance and seasonality on market structure is significantly enhanced, providing more structural guidance for the market. Therefore, there are still many structural opportunities in the current market, and the guidance of performance and seasonality on market structure has been enhanced, making it even more important to grasp the main lines in the future. 2. How to grasp the direction of the main lines in the future? With the gradual disclosure of mid-year performance forecasts, July is one of the months where performance is most closely watched throughout the year. The market will pay more attention to tangible transactions, focus on the realization of fundamentals, and effective investment in prosperity. The bank has statistically measured the correlation between market returns and performance growth rankings in each month throughout the year, indicating an enhancement of effective investment in prosperity between June and July. In the first half of July, the market's focus on current performance was only second to the second half of April (annual reports & first quarter reports). In the coming period, performance may once again become the key to excess returns. In terms of individual stock performance, the impact of performance on individual stock performance during the period of consecutive releases of interim and flash reports is significant. Over the past two years, the leading stocks in June and July mostly have higher growth rates in their interim and flash reports, creating an environment where alpha can be explored from the bottom up in the market in the coming period. Looking at various industries, the directions with higher success rates in July are mainly concentrated in the growth sectors represented by military industry and new energy, as well as resource products such as steel, chemicals, and non-ferrous metals. Behind these are factors such as peak season, performance, and policy expectations driving them collectively. 3. What structural mainlines to focus on? a. Resource products: "anti-inner circular" + peak season + price increase July-August are traditionally high-win windows for resource products such as steel, chemicals, and non-ferrous metals, supported by the certainty of peak season and price increases. The recent deployment of "anti-inner circular" policies is expected to further strengthen this logic. Firstly, with the summer peak electricity consumption and the approaching traditional consumption and production peak season in the second half of the year, the cyclical resource products will enter a traditional peak season in the third quarter, giving the industry a temporary advantage in prosperity due to the improvement in demand. In July, with the impact of high temperatures, China enters a peak electricity consumption period, and resource products such as coal and petroleum chemicals also experience a peak in demand. At the same time, the start-up rate on the supply side may be affected by high temperatures, and there may even be restrictions on production due to limited power supply, often resulting in a situation of strong demand but tight supply. After September, with the improvement in weather, China will enter the traditional peak season for the economy, with concentrated release of downstream demand for real estate and infrastructure projects during the Golden September and Silver October period, as well as large-scale consumer promotion activities such as "Double Eleven" and "Double Twelve", which will all contribute to the direct stimulus of demand for upstream cyclical resource products such as chemicals, non-ferrous metals, and steel. After the passage of the "BEAUTIFUL Acts", the global demand expectations for traditional energy have been further strengthened. The passage of the "BEAUTIFUL Acts" will increase the U.S. debt ceiling by $5 trillion and is expected to increase the basic deficit by $3.4 trillion in the next 10 years. At the same time, it also supports traditional energy industries, further reinforcing the demand expectations for traditional energy. Secondly, with continued tight supply and marginal demand improvement, non-ferrous metal and chemical products have been experiencing price increases in the second quarter, which is expected to bring about a certainty in performance realization. In the past three years, after most resource products experienced destocking, current inventories are at relatively low levels, and capacity is facing pressure to shrink. The overall supply situation tends to be tight, and with the marginal improvement in demand, industrial metals such as copper, aluminum, and most chemical products have experienced price increases in the second quarter, driving them to become segments of an upward revision in performance in the second quarter, with high certainty in interim performance. Recently, with the increasing attention to "anti-inner circular" policies, there is an expectation for the acceleration of the tightening of resource supply and a consequent price increase. "Anti-inner circular" is an important policy theme in this round. Recently, the focus on the policy has been further increased. In April, the State Council Office issued the "Opinions on Improving Price Mechanism Reform", in May, the NDRC again mentioned the need to regulate "inner circular" competition, and in June, the Central Finance and Economic Committee mentioned again the need to govern low-price disorderly competition in accordance with laws and regulations, and promote the orderly exit of outdated production capacity. Among them, iron and steel, building materials, coal, chemicals, and non-ferrous metals have always been areas of key focus for "anti-inner circular" policies. With the recent increase in focus, expectations of price increases as a result of the acceleration of resource supply shrinkage have been further strengthened. In terms of sub-categories, the bank has selected six indicators from the current supply capacity (capacity utilization rate & inventory), supply trend change (expansionary capital expenditure & maintenance capital expenditure), and industry profitability condition (gross profit margin & proportion of loss-making enterprises) to quantitatively assess the supply side status of current resource products, screening for sub-categorized resource product categories where current supply has reached the bottom, the clearance process has entered the later stages, with sub-clearance progressing to the right turn curve. Supply is at the bottom: Firstly, the bank has screened for resource products with capacity utilization rates and inventory levels reduced to relatively low levels, indicating that the industry, after going through destocking and capacity reduction, is currently at the bottom in terms of supply. On this basis, if expansionary capital expenditure-related indicators have also fallen to low levels, it signifies that the industry's future production capacity will be subject to hard constraints, further accelerating the industry's clearance. Currently, these industries mainly include steel (plates), chemicals (textile chemicals, titanium dioxide, pesticides, silicones), building materials (glass fibers, cement, waterproof materials), new energy (silicon materials, silicon wafers), and coal (coke). Supply clearance is on the right turn: Among the industries where supply has bottomed out, the bank will differentiate whether the industry is on the left or right turn side of the curve based on the marginal changes in the capacity utilization rate and gross profit margin. If both capacity utilization rate and gross profit margin show marginal improvements, the industry may have experienced improved demand, and is expected to smoothly emerge from the bottom. Currently, these industries mainly include chemicals (textile chemicals) and building materials (glass fibers, cement). Supply clearance has entered the mid-to-late stages of the left turn: Among the industries where supply clearance is on the left side, looking at the performance of gross profit margin and the proportion of loss-making enterprises, the categories with obvious deterioration in profitability and high probability of supply clearance entering the mid-to-late stages are found. Currently, these industries mainly include steel (plates), chemicals (titanium dioxide, pesticides), building materials (waterproof materials, glass), new energy (silicon materials, silicon wafers), and coal (coke). In the future, close attention needs to be paid to the sustainability of demand recovery and whether there will be an increase in capacity utilization and restocking. The clues for the second quarter performance of resource products are also concentrated in the two major directions of "price increase + supply clearance". By screening for sub-categorized resource product categories with significant performance improvements since Q2, the primary areas include non-ferrous metals (nickel, cobalt, gold, copper, etc.), building materials (paints, glass fibers, cement, etc.), chemicals (fertilizers, pesticides, etc.), and steel (special steel). b. Military Industry: Expectations for the release of orders at the juncture of the "Five-Year Plan" + Approaching of August 1st, Military Parade, and National Day create a policy-intensive catalytic period for the industry The military industry sector has maintained a high success rate in July-August, driven by the ongoing delivery schedule of the "2323" orders, which provides certainty for marginal improvement in performance, and also by the approaching of important industry events such as August 1st, Military Parade, and National Day, creating a dense catalyst of expectations for policies and orders. This year, with the approaching "Five-Year Plan" juncture and the Military Parade event, coupled with China's global competitive strength in weapons, there will be a stronger certainty. On the one hand, with the internal expectation of the release of a new round of orders for the military industry at the juncture of the "Five-Year Plan" and the improvement in global competitiveness, the certainty of military industry performance is increasing: Internally, the military industry, as a strongly planned industry, has an important impact on industry sentiment and market expectations during the five-year plan. Referring to historical experiences, during the time from the start of planning the five-year plan to its first year of implementation, the military industry's excess returns are usually quite significant. This year, as the final year of the "Fourteenth Five-Year Plan" and the preparatory year for the "Fifteenth Five-Year Plan", with the implementation of the military build-up of the "Fourteenth Five-Year Plan" entering a key period of capability integration and delivery, combined with the progress and implementation of the "Fifteenth Five-Year Plan", the industry's development guidance for the next three to five years will gradually become clear, and the pent-up downstream demand is expected to see a substantial release To drive a new round of order cycles, further boosting the overall prosperity of the industry. Externally, the world is facing an unprecedented major change, marking the beginning of a global arms race. With China's weapons demonstrating continued strong global competitiveness, China's market space in international arms trade is expected to further open up. Since February, with the escalation of the tariff wars under the Trump administration, geopolitical tensions in India, Pakistan, and the Middle East have intensified, and governments around the world are increasing their focus on national security. The global arms race is unfolding. With the unveiling of China's sixth-generation aircraft at the end of last year, China's naval ships circling around Australia in March, joint military exercises in the Taiwan Strait in the second quarter, and successful performances of J-10CE in conflicts in India and Pakistan, China's weapons have continued to demonstrate strong global competitiveness. In the context of geopolitical conflicts, the traction of national security drives long-term military trade demand, and China's market space in international arms trade is expected to further expand. On the other hand, historically, events such as military parades have been important catalysts for military industry trends. Military parades, as important moments showcasing the country's military strength, are significant catalysts for driving the rise of the military industry sector. Looking back at the World War II victory parade on September 3, 2015, the military sector began reflecting the expectations of the parade from July 9, and the interval return until August 17 was 78%, with an excess return of 45% compared to the entire A-share market. In the future, the military industry sector may be in a period of anticipation for potential catalysts from events. c. Technology: Current position is still low, with higher performance certainty in upstream computing power Since June, based on various dimensions such as stock price position and industry catalysts, the bank has repeatedly highlighted the recovery of sectors such as AI in the technology sector. Until now, from crowd density, rolling yield differentials, and transaction proportions, AI still remains a sub-sector with low positioning, worth considering for allocation: In terms of crowd density, most directions in the AI sector still have crowd densities at historical medium or low levels. Looking at the rolling yield differential, the TMT sector and the entire A-share market have just reached a rolling 40-day yield differential close to 0, and have not accumulated significant excess returns relative to the market. Looking at the transaction proportion, the current TMT transaction proportion has just returned to around 30%, which is significantly lower than the overheated range of around 45%. Structurally, the direction with higher success rates is in upstream computing power, which has higher certainty in performance. Since June, although the overall AI sector has recovered, there have been clear signs of differentiation within the sector. On one hand, upstream computing power hardware sectors such as PCBs and optical modules are outperforming midstream software services and downstream applications; on the other hand, within the sector of upstream computing power hardware, the North American computing power chain represented by "Easy Flying" is significantly outperforming the domestic computing power chain represented by Semiconductor Manufacturing International Corporation and Cambricon Technologies. The core behind this is performance. With the easing of tariff concerns, combined with major global cloud service providers in North America reaffirming their investments in AI and the gradual clarification of overseas optical module demand guidance for next year, the performance certainty of the optical module and PCB sectors in the North American computing power chain has increased. Since the second quarter, the performance of the North American computing power chain has seen significant upward revisions, while the overall performance of the domestic computing power chain and the downstream AI industrial chain has experienced downward revisions. It can be seen that performance is the main contradiction that determines the internal performance of the AI industrial chain in the short term. Since June, the performance of various sectors within the AI industrial chain has been positively correlated with the extent of their performance upgrades in the second quarter. As the interim report period approaches, the technology sector is starting to price in performance certainty. Therefore, the sectors with stronger short-term performance certainty may still be the direction with higher success rates in AI, mainly concentrated in upstream computing power. By screening for sub-categories in the AI sector that have seen performance upgrades since the second quarter, the main directions include upstream computing power hardware (PCB, GPU, optical modules, IDC), midstream software services (AI agents), and downstream applications (digital marketing, publishing, humanoid Siasun Robot & Automation, drones). As the market shifts to focus less on immediate performance and begins to price in medium to long-term industry trends, there may be better opportunities for domestic computing power and applications: In terms of domestic computing power, the long-term trend of increasing capital expenditure by domestic internet companies continues. With the completion of the introduction of the B30 graphics card by NVIDIA in the third quarter, concerns over capital expenditure by internet companies are expected to diminish, and with the catalysis of the expected IPOs of domestic chip companies such as SiPure Technologies and Biren Technologies in the second half of the year, the certainty of the domestic replacement logic in the industrial chain remains strong. In terms of applications, with DeepSeek empowering the democratization of AI, more vertical applications are expected to accelerate. It is a major trend for the market to shift from upstream to downstream in the third quarter. In the third quarter, there are several potential catalysts for midstream and downstream, including the progress of the GPT-5 and DeepSeekR2 large models, and the upcoming release of Meta's AR glasses in September, which are expected to bring new catalysts to AI applications and terminal markets. Risk warning Economic data fluctuations, policy easing lower than expected, and rate cuts by the Federal Reserve are below expectations.