CMSC: Thoughts on stock selection and the impact of anti-"internal competition" on A-shares under mid-year performance forecast

CMSC released a research report stating that the A-share market continued to set new highs for the year recently. With the arrival of the earnings season, attacking in the direction of exceeding the mid-year report expectations is a high probability choice. Overall, the performance of A-share mid-year reports is better than the same period last year, although the overall improvement in profitability may be limited, the direction of structural improvement is still worth paying attention to. It is recommended to focus on high-growth TMT sectors, globally competitive midstream manufacturing sectors, domestic demand sectors, and other sectors expected to have good earnings performance. Regarding the issue of anti-"involution", it is necessary to pay attention to the policies to resolve structural contradictions in different industries in the future. The main points of CMSC are as follows: Selection strategy based on mid-year performance forecasts and the impact of anti-"involution" on A-shares. As of the end of this week, the rate of improvement in mid-year performance in A-shares has increased compared to the same period last year, with industries such as non-bank finance, beauty and personal care, food and beverage, agriculture, forestry, animal husbandry and fisheries, and communication industries exceeding expectations. However, overall, it is expected that the improvement in profits of A-shares in the mid-year report in 2025 may still face pressure. It is suggested to focus on several directions with high expected growth or improvement in mid-year performance speed: 1) high-growth TMT sectors such as semiconductors, software development, and games; 2) midstream industries with global competitive manufacturing advantages such as automotive parts, automation equipment, defense industry, etc.; 3) sectors such as household appliances, beauty and personal care, agriculture, forestry, animal husbandry, and fisheries which continue to be catalyzed by expanding domestic demand policies; 4) other sectors expected to improve performance such as precious metals, minor metals, securities, chemical pharmaceuticals, etc. Regarding anti-"involution", it is necessary to pay attention to the policies that dissolve structural contradictions in different industries. The overall trend of the A-share market this week is relatively strong, mainly due to: (1) the continued upward trend of the US stock market, with leading technology companies setting new highs, which has driven the rise of assets related to the A-share industry chain; (2) the strong performance of sectors highly correlated with the index direction, such as non-bank finance, pushing the index higher; (3) policy actions to counter anti-"involution" are being implemented, and specific details are expected to gradually be implemented, which will help alleviate domestic price pressures. In June, the year-on-year increase in the CPI turned positive, and the year-on-year increase in automobile sales volume expanded. The sectors showing improvement this week mainly include: 1) some resource products, with coal prices rising, and prices of molybdenum and iron reaching nearly one-year highs; 2) TMT continues to show high growth as the global semiconductor sales in May saw an expanded year-on-year increase; 3) prices of some lithium raw materials and cobalt products have risen, and the year-on-year increase in automobile and passenger car sales volume in June has expanded; 4) retail sales of air conditioners, refrigerators, washing machines, and colored TV sets have seen an expanded year-on-year increase, and box office revenue is on the rise. In the future, sectors with higher or improving economic conditions such as coal, minor metals, photovoltaics, household appliances, media, and semiconductors should be monitored. There was a net inflow of financing funds and ETFs. The total net inflow of financing funds in the first four trading days was 20.45 billion yuan; 32.9 billion shares of new equity mutual funds were established, a decrease of 0.96 billion shares compared to the previous period; ETFs had a net inflow of 830 million yuan. Financing funds had a net buying position in electric power equipment, pharmaceutical and biotechnology, electronics, etc.; there were more subscriptions for military industry ETFs and more redemptions for pharmaceutical ETFs. The scale of net reductions by major shareholders decreased, and the planned scale of reductions increased. The Grok-4 large model was officially released, establishing a new benchmark for xAI AI. On July 9th local time, Musk's xAI company shook the world by releasing the latest generation of large language model Grok-4 and livestreaming globally on the X platform. Grok-4 is called "the strongest AI model in the world" by Musk and its architecture is based on a new MoE (Mixture of Experts) system. The number of expert models has significantly increased from 8 in Grok-3 to 64, significantly enhancing its ability to handle complex tasks. Its reasoning ability has increased tenfold compared to the previous generation and has surpassed competitors such as OpenAI, Google Gemini, and Anthropic Claude in multiple benchmark tests. This week, the overall valuation level of A-shares has risen, with the WIND Full A Index PE (TTM) at 15.94, which is at the 57.1st percentile of historical valuation levels. Most index valuations rose this week, with valuations of the computer, real estate, and media sectors leading the way in increases, while the coal, automotive, and household appliance sectors led in declines. Risk warning: Economic data falling short of expectations, incomplete policy understanding, and unexpected tightening of overseas policies.