Minsheng Securities: Industrial enterprise profits in August exceeded expectations with high growth. Who is the "behind-the-scenes" driver?

Minsheng Securities released a research report stating that in August, industrial enterprise profits went from negative to a substantial increase of 20.4%, marking the highest growth since December 2023. However, after excluding the impact of the low base, the growth rate of enterprise profits in August showed a marginal slowdown. Behind the facade of high profit growth in August, the real narrative is how the "anti-involution" policy is reconstructing the logic of profit distribution. The profit "report card" for August also provides some key clues. Looking at the breakdown of quantity, price, and profit margin, the situation in August was "higher quantity, lower price, and increasing profit margin." This represents a clear reversal from the previous situation - the support of "quantity" (industrial added value) is weakening, while the drag from "price" (PPI) is decreasing. More critically, the growth rate of revenue profit margins in August showed significant improvement, which was the main reason for the high growth of industrial enterprise profits in August. Although the cost expenses of industrial enterprises in August accounted slightly lower as a proportion of revenue, the significant improvement in profit margins was more related to the low base. Minsheng Securities' main points are as follows: Industrial enterprise profits exceeded expectations in August. Who is the "behind-the-scenes driver"? In August, industrial enterprise profits went from negative to a substantial increase of 20.4%, marking the highest growth since December 2023. However, after excluding the impact of the low base, the growth rate of enterprise profits in August showed a marginal slowdown (if using the two-year average compound growth rate to eliminate the impact of the base effect, the growth rate of industrial enterprise profits decreased from 1.3% in July to -0.5% in August). Behind the appearance of high profit growth in August, the real narrative is how the "anti-involution" policy is restructuring the logic of profit distribution. After dissecting the August profit data, some clues regarding changes in profit distribution also emerged. The low base explains the significant improvement in revenue profit margins. Looking at the breakdown of quantity, price, and profit margin, the situation in August was "higher quantity, lower price, and increasing profit margin." This represents a clear reversal from the previous situation - the support of "quantity" (industrial added value) is weakening, while the drag from "price" (PPI) is decreasing. More critically, the growth rate of revenue profit margins in August showed significant improvement, which was the main reason for the high growth of industrial enterprise profits in August. Although the cost expenses of industrial enterprises in August accounted slightly lower as a proportion of revenue, the significant improvement in profit margins was more related to the low base. Rather than the high profit growth in August, it is more important to focus on the reshaping of the profit landscape. Apart from uncertainties in foreign trade affecting the profitability of some enterprises, the August economic data shows that the effects of the "anti-involution" policy are beginning to emerge - although it may cause disruptions to the production rhythm in some industries, its impact on prices is immediate. Behind this, a silent reshaping of the industry profit landscape is quietly unfolding, and after peeling back the layers of the August industrial enterprise profit data, some clues about changes in profit distribution also emerge. Looking at the August quantity-price data offers a clearer picture of the industry's "anti-involution." If we observe the marginal changes in industrial added value and PPI in August, we can divide the dynamics of various industries "anti-involution" into four categories: - Quadrant 1 (both quantity and price rising): The ultimate form of "anti-involution." These industries have not only escaped the low-price competition but have also opened up incremental space through innovation, leading to healthy expansion. Currently, there are fewer industries in this category. - Quadrant 2 (quantity rising, price falling): Still in the "involution." These industries are still in a vicious cycle of "increasing production without increasing revenue," experiencing intense competition, with pharmaceutical manufacturing and petroleum and natural gas extraction currently in this phase. - Quadrant 3 (both quantity and price declining): Temporary industry contraction under "anti-involution." Due to intense internal competition eroding profits, these industries have an oversupply compared to demand, with a high probability of loss. The latest data for August shows that industries such as electrical machinery and automotive manufacturing are still in this quadrant, indicating that these industries are still in a phase of depleting existing resources, and the recovery of prices is still suppressed. - Quadrant 4 (quantity decreasing, price rising): Early signs of "anti-involution," optimizing the supply side. Through active or passive elimination of excess production capacity, the structure of these industries is optimized, leading to the repair of prices and corporate profitability. Currently, more upstream industries are concentrated in this quadrant, including black metal ore mining and smelting, non-ferrous metal ore mining, and more. Overall, under the current "anti-involution" framework, the policy effects are showing differentiation. The adjustment in upstream industries is rapid and effective, while downstream industries may either have insufficient execution or still be deeply entrenched in structural difficulties left over from excessive competition. Therefore, interpreting the profit "report card" for industrial enterprises in August is not difficult. Considering the profit "report card," the improvement in profits in upstream industries is the most notable. Since the implementation of the "anti-involution" policy, the response speed of upstream industries, mainly state-owned enterprises, has been faster, leading to a continuous improvement in the profit performance of these industries. In August, most upstream industries saw an improvement in profits, with the overall profit margin of upstream industries narrowing further to -1.9% (from -12.7% in July), marking the best performance in upstream industry profits this year. In contrast, in August, the middle-tier profit growth, after excluding the utility sector, was more about stability (9% in July and 10.3% in August). Among downstream industries, the profit growth of pharmaceutical manufacturing and automotive manufacturing, which were once the "main force," was lackluster. In addition, the performance of different types of enterprises in profits provides another path to understanding the effectiveness of the "anti-involution." In August, the year-on-year profit growth rates of state-owned enterprises and private enterprises were 50.0% and 13.2% respectively (considering the two-year average compound growth rate, they were 11.0% and -5.5% respectively). As mentioned earlier, the response of upstream industries, primarily state-owned enterprises, to the "anti-involution" has been more positive, resulting in a clear improvement in the profit margins of state-owned enterprises.