CITIC Securities: Going Global by Chinese Enterprises is the most important fundamental clue for A-share. Keeping a close eye on industry chain security and new clues such as edge AI.

CITIC SEC has released a research report stating that the biggest structural fundamental clue in the current A-share market is still Chinese companies going global. When China and the US fall back into a state of conflict without breaking, it may continue to affect the market's pricing of going global. The post-April TACO experience combined with China's increased confidence has led to many investors hesitating when adjusting their positions, providing an opportunity for sector rotation to capture excess returns. However, this is merely rotation based on old logic, not a new main theme. The new clue is China's long-term and systemic strategic intent to secure resource, supply chain, and leading technology safety, and after the rotation of dividends ends, it is necessary to closely monitor new clues that may span the next year, including supply chain security and edge AI. CITIC SEC's main points are as follows: The biggest structural fundamental clue in the current A-share market is still Chinese companies going global The firm has repeatedly emphasized in previous reports: 1) Chinese companies going global is currently the most important fundamental clue and market clue, with companies with overseas exposure having more bright spots in their fundamentals; 2) The core logic of China's manufacturing leader going global is to transform its market share advantage into pricing power and profit margin improvement; 3) Profits come from domestic supply and demand, which is an important medium to long-term clue for the future. Stocks with overseas revenue exceeding 20% have seen a cumulative increase of 26% in an equal-weighted portfolio since June, compared to a 15% increase in an equal-weighted portfolio of other non-financial stocks. According to the 2025 interim report, companies with overseas revenue exceeding 20% account for as high as 31% and 38% of non-financial revenue and profit in the entire A-share market, respectively, with their market capitalization ratio rising from 34% in early June to the current 36%. Until the economic outlook of companies relying on domestic demand changes significantly, Chinese companies going global and globalization will remain the most important structural fundamental clues for A-shares. The re-escalation of tensions between China and the US, or continuous influence on the market's pricing of going global Recent developments in the China-US trade dispute have become more complex, with the probability of both sides quickly resolving differences and returning to a balanced period between June and August decreasing. China's recent measures include retaliatory actions against the US and export inspections of items such as rare earths and lithium batteries based on long-term strategic deployments to protect industrial security and national interests, which are fundamentally different from the pressure tactics used by the Trump administration before negotiations. However, if the US generalizes such measures, or uses them as negotiating conditions or bargaining chips, it may further exacerbate the differences between the two sides in their negotiation positions. If the APEC meeting holds the expected summit between the US and China, it may avoid the risk of the situation spiraling out of control and set clear boundaries for the competition between the two sides, but the probability of an immediate clear outcome is decreasing. The Trump administration has a psychological bottom line in its game with China by the end of the first quarter of next year, after which its focus will shift more to medium-term election affairs. As this time approaches, the US is likely to use various chips to pressure China for negotiation gains, with demands that cannot be met possibly being shelved, meaning that friction within the controllable range between China and the US may gradually increase over the next two months. However, the probability of a repeat of the escalation of tensions seen in April is low. The TACO experience after April combined with China's increased confidence has led to many investors hesitating when adjusting their positions Due to the existence of the TACO trading experience, investors overall have high expectations for the rapid softening of the Trump administration's stance and the quick resolution of differences between China and the US, so reallocating their positions during a market cooldown is not very evident. As of the week of October 17, the market as a whole had accumulated the highest trading loss since March, with four out of the recent five trading weeks showing negative effects on the market as a whole. The reading of the MA10 investor sentiment index constructed by the firm is 69.2 (with values ranging from 0 to 100, with 80-100 indicating overexcitement), falling below the overexcitement zone and hitting its lowest value since mid-August. However, the firm has not seen a clear reduction in positions. In terms of active funds, according to CITIC SEC channel surveys, as of October 10, the average position of active private fund samples was 84.5%, lower than the previous six weeks but still at a historically high level. As of October 16, the market's margin balance stood at 2.441 trillion yuan, with an increase of 145 billion yuan after the leveraged funds replenished their positions before the holiday week last week, and the margin balance continued to increase this week (as of Thursday). Overall, while market sentiment indicators are cooling down, sample private fund positions remain at high levels and margin balances continue to rise amid recent market adjustments, indicating an overall optimistic attitude among investors. The dividend sector is a phase of high cutting and low direction, but it is just rotation based on old logic Looking at the sector rotation chart constructed by the firm, the sectors that have gradually declined from leading positions include AI, new energy, Siasun Robot&Automation, with the resource sector being the only one that was strong but has not shown obvious declines yet; among all sectors, the dividend sector is the only one showing marginal improvements in relative strength and momentum. The rebound of the dividend sector may be more of a muscle memory for investors. With confidence fully restored and the potential of Chinese companies going global gradually recognized, the narrative of a long period of "asset shortage" is wavering, limiting the dividend sector's ability to continue to outperform. The current rebound may simply be a mean reversion correction to the negative excess returns relative to the index over the past four months. From July to the present, the relative excess returns of coal, insurance, thermal power, banks, publishing, and highways compared to the Wind-All A index have been -1%, -7%, -10%, -12%, -18%, and -23%, respectively, suggesting potential momentum reversals in trading. The new clue is China's long-term and systemic strategic intent to secure resources, supply chain, and leading technology safety It is important to closely monitor recent export inspection measures in China, which have expanded beyond strategic resource products such as rare earths to include export approvals for lithium batteries, critical materials, and equipment with energy densities greater than or equal to 300Wh/kg issued on October 9. This export control is the first "technology level" review implemented by China in the field of new energy manufacturing equipment. While export controls do not mean a ban on exports, in areas related to national security and manufacturing technology advantages, it is not just a commodity but also a lifeline for industries and China's relative competitive advantage that should not be easily "cheapened" or unconditionally transferred overseas. Despite China's strong advantages in many manufacturing sectors, in the face of a trend of deglobalization, even if European and American countries do not directly invest in traditional manufacturing, countries such as India, Vietnam, Indonesia, the US, and South America are willing to increase their investments in these sectors sooner or later, which China will inevitably face competition from these overseas supply chains. Therefore, in addition to strategic resource products, the "shovel" of manufacturing industries also needs protection. In key areas, whether representing traditional manufacturing like resources and chemicals or emerging manufacturing like lithium batteries, solar panels, electric vehicles, and drones, establishing a robust export inspection system is essential to ensure long-term security of the supply chain, promote the survival of the fittest among companies, facilitate mergers and reorganizations, and transform Chinese companies' market share and technological advantages into substantial profits to support the continued strengthening of top-tier companies using innovation (rather than deglobalization) to build a strategic moat. During the execution of this long-term strategy, numerous investment opportunities in manufacturing industries may emerge, where companies generally have low profit margins and valuations are relatively low in the market, making it a new investment clue that cannot be ignored in the future. After the dividend rotation ends, closely monitor new clues that may span next year, including supply chain security and edge AI 1) Short-term considerations for high cutting and low-value dividend types. The main fundamental clue in the current A-share market still comes from the growth of overseas revenue and profits as Chinese companies globalize, forming the foundation of the A-share market. However, this requires a relatively stable economic and trade environment between China and the US, with China's direct exports to the US continually decreasing. The continuous "struggle" between China and the US in the economic and trade sectors will affect the market's sentiment and pricing of going global, as well as the pace of the market. Therefore, in the short term, it may be advisable to use dividends as a transitional high cutting and low-value strategy, focusing on sectors like coal, insurance, thermal power, banks, and white goods, which have shown significant negative excess returns in the past four months. However, this is a typical pursuit of relative returns in a stage based on old consensus logic, with limited space and time, only leading to a high probability of correcting the negative excess relative to the index in the past four months, rather than a continuous market trend. When China and the US return to a stable balance, and the market shows new investment clues, this high cut and low strategy is expected to end. 2) Supply chain security and edge AI may become new clues that span next year. On the manufacturing end, the firm sees China's long-term and systemic strategic intent to secure resources, supply chain, and leading technology. Some industries in China with global share and technological advantages, as well as those related to national security, may further improve their export inspection systems to ensure the long-term security of the supply chain, direct profits from overseas markets towards compliant companies with strong global operations, promote the survival of the fittest among companies, and facilitate mergers and reorganizations. The firm needs to closely monitor industries in China with sufficient supply advantages, including strategic resources like rare earths and phosphorus, industries with strong shares and technological advantages like lithium battery and solar panel equipment (to avoid cheap technological exports, especially in emerging areas like solid-state batteries), and industries with competitive advantages like pure electric passenger cars and consumer electronics panels, but also tendencies towards deglobalization. On the technological end, after a return to a phase of stable balance in the China-US dispute, the firm needs to closely monitor the industry trend of edge AI, with major companies increasing their investments objectively, but behind it lies the need for a large amount of user data on the edge to train and establish personalized AI applications, with data volumes far exceeding what is available on the cloud side for training. The firm may continue to see competition for the entry of major firms in edge hardware, as well as the comprehensive outbreak of edge AI applications in the future, with Chinese companies having greater potential in the edge compared to the cloud side, whether in hardware or applications. Risk warning: Escalation of friction in China-US technology, trade, and finance sectors; domestic policy strength, implementation effects, or economic recovery falling below expectations; excessive tightening of domestic and international macro liquidity; further escalation of conflicts in Russia, Ukraine, and the Middle East; slower-than-expected digestion of real estate inventory in China.