CMSC: The A-share free cash flow upward trend is established, with improvements in Q3 revenue and profit.

CMSC released a research report stating that as of the morning of October 31, the performance of A-share listed companies for the third quarter of 2025 has been basically disclosed (disclosure rate of 99.9%). Benefiting from the low base effect, improvement in the supply and demand structure of certain industries, and price increases driving growth, overall A-share profits and revenue improved in the third quarter. Among the major industries, the information technology sector has relatively leading growth, while profitability has improved in the resource and financial sectors. It is recommended to focus on areas with relatively high growth in performance, continued improvement in free cash flow, and improvement in supply and demand. The main points of CMSC are as follows: Profit side: The year-on-year growth rate of net profit of listed companies for the third quarter expanded. According to consistent comparable calibers and overall calculations, the quarter-on-quarter net profit growth rates for 2025 Q1/Q2/Q3 of all A-shares were 3.2%/1.2%/11.6%, with cumulative growth rates of 3.2%/2.3%/5.2% respectively. For non-financial petroleum and petrochemicals, the quarter-on-quarter net profit growth rates for 2025 Q1/Q2/Q3 were 4.5%/-0.1%/5.3%, with cumulative growth rates of 4.5%/2.3%/3.0% respectively. Revenue side: The quarter-on-quarter revenue growth rates for all A-shares continued to improve. The quarter-on-quarter revenue growth rates for 2025 Q1/Q2/Q3 of all A-shares were -0.3%/0.4%/3.6%, with cumulative growth rates of -0.3%/0.1%/1.1% respectively. For the non-financial petroleum and petrochemical sectors, the quarter-on-quarter revenue growth rates for 2025 Q1/Q2/Q3 were 0.5%/0.9%/3.5%, with cumulative growth rates of 0.5%/0.8%/1.6% respectively. The main reasons for the expansion of A-share profit growth in the third quarter of 2025 are: 1) Under the promotion of policies such as "anti-indoctrination", the supply and demand structure continues to optimize, industrial prices show signs of stabilization and rebound, and prices of some resource products such as steel and non-ferrous metals remain strong, while prices in the new energy industry chain continue to rise, making a significant contribution to overall profit growth. 2) Strong demand in the technology sector becomes a key driving force, with rapid development in the application of artificial intelligence driving demand and performance in related industrial chains such as semiconductors and optical modules. 3) Stable growth in exports provides incremental profit for enterprises, accelerating breakthroughs in military trade, and resonating between domestic and foreign demand in some industries. 4) In the third quarter, the daily trading volume of A-shares compared to the previous year increased significantly, with the Shanghai Composite Index repeatedly hitting new highs, directly driving performance in the non-banking sector and contributing significantly to overall profitability. Looking ahead, against the background of technological self-reliance and the continuous promotion of anti-indoctrination, coupled with the easing of Sino-US relations, the performance of TMT, resource sectors is expected to continue to grow at a relatively high rate, supporting overall A-share profitability, and profit in industries with export advantages is also expected to improve. The non-financial sector is expected to benefit from the continued repair of low bases in the fourth quarter. Comparison of sectors: Both the main board, the growth enterprise market (GEM), and the science and technology innovation board have all shown significant improvements in profitability, benefiting from industries such as TMT, new energy, and defense industry with higher growth rates. The innovation board's profit growth rate has expanded and surpassed other boards. On the revenue side, all have shown signs of improvement, with the main board turning positive in the third quarter of 2025, and the GEM and the innovation board both showing expanded year-on-year revenue growth. The profit growth rates for the main board/GEM/innovation board in the third quarter of 2025 were 10.4%/34.9%/63.4%, with revenue growth rates of 10.4%/34.9%/63.4%. Core index profit comparison: The year-on-year growth rates of net profit for major indices in the third quarter of 2025 have all improved, with the Shanghai and Shenzhen 300, CSI 500, and CSI 1000 all showing expanded profit growth rates. The third-quarter profit growth rates for the Shanghai and Shenzhen 300/CSI 500/CSI 1000 were 11.0%/16.6%/3.3%. Among the major industries, profitability has improved in the resource, information technology, and financial real estate sectors, with the information technology sector leading in profit growth. In the third quarter of 2025, the profit growth rates were as follows: information technology > financial real estate > resources > utilities > midstream manufacturing > healthcare > consumer services. The upstream resource sector has seen a positive profit growth rate, with incremental ROE, benefiting from low bases and price increases; the midstream manufacturing sector had a narrowing profit growth rate, with improvements seen in industries such as defense, photovoltaic equipment, batteries, and commercial vehicles. The profit growth rate for consumer services has seen a larger decrease, with a continuous decline in ROE, and improvements in profitability were seen in a few industries such as small appliances, major appliances, cosmetics, and personal care products; the pharmaceutical sector had a negative profit growth rate; the TMT sector led in profit growth, with high growth rates seen in electronics and media; the utilities sector saw a positive profit growth rate compared to last year; the profit growth rate for financial real estate expanded, with non-banking profit growth expanding and real estate profit declining. Return on Equity (ROE): Non-financial and non-oil ROE has marginally improved, mainly due to the marginal increase in total asset turnover rate (boosted by revenue improvement), the upward trend in net profit margin (supported by improvements in revenue and the continued decrease in sales expenses as a percentage of revenue), while asset leverage has decreased. Further improvements in income and expenses are needed to continue to drive the recovery of ROE. Cash flow & capacity expansion: The proportion of free cash flow to revenue has steadily increased; overall operating cash flow has increased year-on-year, mainly contributed by the midstream manufacturing sector; financing cash flow has had a net outflow, with accelerated debt repayment in the non-financial petroleum and petrochemical sector; the proportion of investment cash flow to revenue in the non-financial petroleum and petrochemical industry has decreased, with capital expansion still negative, indicating a relatively low willingness for capital expansion. After reaching a peak in the second quarter of 2023, the overall capital spending growth rate of A-shares has been trending downwards, currently slightly recovered from its low point, with continued decline in construction in progress. In terms of industries, areas such as mid-to-high-end manufacturing (land-based armaments, defense electronics, aviation equipment, aerospace equipment, photovoltaic equipment, environmental protection equipment, power grid equipment, medical devices, automotive components), TMT areas with prosperous demand (semiconductors, games, optical optoelectronics, computer equipment), resource sectors benefiting from anti-indoctrination (non-metallic materials, special steel, coking coal, general steel), and some new consumption industries (medical aesthetics, personal care products, cosmetics) have seen an improvement in the proportion of free cash flow to total revenue compared to the second quarter of 2025. Key industries to focus on with high or improving performance in the third quarter of 2025: TMT (communications equipment, semiconductors, consumer electronics, optical optoelectronics, games, software development), mid-to-high-end manufacturing (photovoltaic equipment, batteries, land-based armaments, marine equipment, defense electronics, motorcycles, commercial vehicles), some resource sectors (general steel, precious metals, industrial metals, energy metals, minor metals, agricultural chemicals, fiberglass), as well as processing, insurance, securities, and other industries such as Shenzhen Agricultural Power Group.