CITIC SEC: How should we respond after reaching the key level of 4000 points?

CITIC SEC released a research report stating that, at the same level of 4000 points, the current index performance is significantly better than the same period in 2015, and the valuation level is significantly lower than at that time. There is no need to overly focus on the index points themselves. With the conclusion of the Fourth Plenary Session, progress in the China-US talks, and the completion of the third-quarter reports, looking ahead, there are still structural opportunities. Timing is of limited importance, and it is recommended to continue focusing on upgrading traditional manufacturing industries, Chinese companies going global, and AI at the edge, and in the short term, attention can be paid to the clues of phased oversold rebounds that appear after the third-quarter reports. Key points from CITIC SEC are as follows: How has the quality changed relative to the key points in 2015? 1) The compilation rules of the Shanghai Composite Index underwent a major revision, reducing the impact of new stocks on the index trend. In July 2020, the Shanghai Composite Index made a major adjustment to its compilation rules, including the inclusion of the Sci-Tech Innovation Board and Chinese Depository Receipts in the sample space. The waiting period for new stocks to be included in the index was extended from 11 trading days to 3 months (for new stocks with a daily average market value ranking in the top 10) or to a full year (for other new stocks), and an exclusion process for ST stocks was added. These rule changes have to some extent reduced the drag of new stocks on the rise of the Shanghai Composite Index. For example, calculating only the inclusion of new stocks, in the 10 years from 2011 to 2019, 9 years led to a decrease in the actual return of the index, but this factor can be ignored after 2020. 2) During this period, the total market value of the Shanghai Composite Index increased by 82%, the total profit increased by 114%, and the EPS increased by 27%. Compared to the end of the second quarter of 2015 and the end of the third quarter of 2025, the total market value of the component stocks of the Shanghai Composite Index increased from 40.46 trillion yuan to 73.80 trillion yuan, an increase of 82%, with an annual growth rate of 6.0%. The net profit attributable to shareholders (TTM) increased from 2.14 trillion yuan to 4.57 trillion yuan, an increase of 114%, with an annual growth rate of 7.7%. Calculated as EPS based on the total net profit attributable to shareholders (TTM) of component stocks divided by the average total capital stock over the past year, the overall EPS of the Shanghai Composite Index has increased from around 0.6 yuan in the past ten years to nearly 0.8 yuan, with an annual growth rate of 2.4%. The expansion of share capital to some extent restricts the growth of earnings per share. There were noticeable cycles of EPS increase only in 2017 and around 2021, driven mainly by the "institutional fund-friendly" fundamental-led market conditions. It is worth noting that since the third quarter of 2024, the year-on-year growth rate of EPS for the Shanghai Composite Index has turned positive again and has been increasing quarter by quarter. 3) About 40% of individual stocks have exceeded their positions at that time, with the top 10% contributing 72% of the market cap growth. Analyzing the component stocks of the Shanghai Composite Index at the end of 2014 that are still listed, comparing the market caps on the last trading day when the index reached 4000 points on August 18, 2015, and on October 31, 2025, it can be seen that 419 companies had market values higher than they were at the 4000 points level in 2015, accounting for 40.52% of the total. In terms of market value contribution, in comparison to the position at 4000 points ten years ago, the top 10% of stocks in terms of growth contributed 823 billion yuan to the market value increase, accounting for 72.26% of the total market value increase of the sample companies (11.38 trillion yuan), with a few outstanding stocks contributing most of the market cap growth. The years with the largest impact of new stocks on market value were 2021 to 2023, particularly in 2023 when the market value of existing companies decreased by 1.02 trillion yuan, while the market value of newly listed companies reached 5.03 trillion yuan. With the significant changes in IPO policies in 2023, market value growth for the Shanghai Composite Index has returned to being driven by growth from existing companies. Since then, existing companies have increased their market value by 1.098 trillion yuan this year, while new companies have only contributed an incremental 0.37 trillion yuan. 4) There have been significant changes in the industry composition structure, with the market capitalization of sci-tech companies increasing from 11% to 33%. Comparing 2025 to 2015, the five industries with the highest increase in market share were: electronics (+8.8 pcts), telecommunications (+4.0 pcts), computers (+2.6 pcts), food and beverages (+2.0 pcts), and pharmaceuticals (+1.9 pcts). The five industries with the largest decrease in market share were: banks (-5.5 pcts), petroleum and petrochemicals (-4.7 pcts), non-banking financial institutions (-3.4 pcts), construction (-2.6 pcts), and real estate (-2.1 pcts). The market share of sci-tech companies (including electronics, telecommunications, computers, new energy, and biopharmaceuticals) has significantly increased from 10.8% at the end of 2015 to the current 32.9% by October 31, 2025, a growth of 22.1 pcts. From a specific stock perspective, as of October 29, 2025, sci-tech and mining companies had occupied 8 out of the top 30 companies in the Shanghai Composite Index, second only to financial companies (14 slots); whereas on April 10, 2015, the top 30 companies were mainly dominated by financial companies (17 slots), energy (4 slots) and infrastructure (4 slots). 5) The level of globalization has significantly deepened, with the overseas revenue share of non-financial oil companies increasing from 13% to 19%. From 2015 to 2025, there has been a significant deepening of the globalization of A-share listed companies represented by the Shanghai Composite Index. The overseas revenue share of non-financial companies in the index has increased from 15.6% in 2015 to 21.2% in the first half of 2025 (+5.5 pcts); the overseas revenue share of non-financial oil companies has also increased from 12.8% in 2015 to 19.2% in the first half of 2025 (+6.4 pcts). Further looking at the top 20 non-financial companies, companies with overseas business revenue shares of 20% are mainly in the petroleum and petrochemicals (2 companies), mining (2 companies), and pharmaceutical (2 companies) industries. However, this proportion is still lower compared to companies listed on the Shenzhen Stock Exchange, indicating that the Shanghai Composite Index is more influenced by domestic demand. Nevertheless, it is worth noting that the market share of real estate-related industries in the Shanghai Composite Index has decreased from 14.5% in 2015 to the current 5.5% in 2025, while the market share of consumer goods industries has increased from 7.3% in 2015 to a high of 18.3% in 2020 and then declined to the current 7.4%. From this perspective, the sensitivity of the Shanghai Composite Index to domestic consumption-related data is decreasing. Therefore, structurally, funds that pursue dividends in the long run continuously flow into financial companies, supporting the index's base, while the exposure of other non-financial companies to domestic real estate and consumption cycles is weakening. 6) The valuation level is significantly lower than in 2015, and the profit growth of the non-financial sector is significantly higher than at that time. When the Shanghai Composite Index broke through 4000 points in 2025, the overall P/E ratio of all A-shares was 22.7 times (calculated as the total market value of the day divided by TTM net profit, the same for the following), almost the same as the P/E ratio of 22.6 times when it broke through 4000 points in 2015. In terms of the median, the median P/E ratio of the A-share listed companies when the index broke through the 4000 points level in 2025 was 28.9 times, significantly lower than the median level of 66.6 times when it broke through in 2015. If financial stocks (banks, non-bank financial institutions, comprehensive financial institutions) are excluded, the overall P/E ratio of the A-share market when it broke through 2025 was 37.2 times, slightly lower than the 39.2 times when it broke through in 2015; the median P/E ratio was about 29.4 times, significantly lower than the median level of 67.6 times at the same period in 2015. In the first three quarters of this year, the year-on-year profit growth of the entire non-financial sector of A-shares was 2.0%, much higher than the -9.8% of the same period in 2015; the year-on-year profit growth of the non-financial and real estate sectors was 3.7%, also significantly better than the -11.4% level of the same period in 2015. How to deal with the conclusion of the Fourth Plenary Session, the conclusion of the China-US talks, and the completion of the third-quarter reports? 1) Structural opportunities still exist, and the importance of timing is limited. The biggest structural fundamental clue for the A-share market at present is still Chinese companies going global, which is the main contradiction in the market. A calm situation between China and the US is conducive to a bullish market, but increasing competition between China and the US requires greater caution; this is the core framework for current trend analysis, until domestic factors begin to dominate, which is still a long way off. The probability of reaching a formal agreement between China and the US before the first quarter of next year is increasing, and then Trump will shift to North American issues and mid-term elections. This stable state is expected to continue until the end of the mid-term elections next November. During this stage, it is still necessary to actively seek opportunities for allocations, focus on structural opportunities, and downplay timing. In the short term, investors' fear of heights mainly appears in the technology sector, but there are still many directions in industries such as new energy, chemicals, consumer electronics, resources, and machinery where profits may continue to grow. The logic of going global has not encountered any substantive challenges, and the correction in innovative drugs and new consumption since August has been significant, requiring only time and new catalysts. In this context, the focus for the remainder of the year is on structural adjustments, actively positioning for next year. 2) Continue to focus on upgrading traditional manufacturing industries, Chinese companies going global, and AI at the edge. Among these, the upgrade of traditional manufacturing industries is a new clue that the market has not yet fully priced in. Learning from the suggestions of the 15th Five-Year Plan, it emphasizes at the beginning "building a modern industrial system, consolidating and strengthening the foundation of the real economy," and places "optimizing and improving traditional industries" before "cultivating and developing emerging industries and future industries." It also rarely mentions some traditional industries directly, such as "consolidating and improving the status and competitiveness of mining, metallurgy, chemicals, light industries, textiles, machinery, shipbuilding, and construction industries in global industrial division of labor." This is not only a requirement in the context of deglobalization for industrial chain security, but also indicates that the future development of manufacturing industries will no longer simply pursue scale but will transform China's traditional manufacturing sector's market share advantage into pricing power and profit, to channel ample profits back into research and development and build a moat. China's position in the global value chain is the fundamental basis for long-term improvement in people's quality of life and ensuring the well-being of the people. From this perspective, it is necessary to actively seek high-quality traditional manufacturing companies with a high global market share, low overseas supply elasticity, and high reset costs, mainly in the areas of power equipment and new energy, chemicals, non-ferrous metals, and machinery. For Chinese companies going global, it is more of a principle that permeates the industry and stock selection process at this stage. Even the consumer sector currently needs more focus on the global potential of enterprisestrends in IP, cultural creation, retail, and food supply chains going global are just beginning. As for AI at the edge, it may be the key direction for the continuation of the current AI boom, as the physical world's user and data interfaces are crucial to continuously expanding the application and commercial forms of AI. 3) It is recommended to focus on the phased oversold rebound clues that appear after the third-quarter reports. It can be observed that some sectors have new trading clues after the third-quarter reports: 1) The liquor sector is officially undergoing a comprehensive adjustment in profits, but by Friday (October 31), stock prices have basically stopped declining; 2) The software sector is still undergoing cost reductions and efficiency improvements, with many companies showing turning points in profit growth and becoming profitable, which as a stagnant sub-sector of TMT may attract some fund attention; 3) After experiencing a correction in the past three months, some representative companies in the innovative drug sector will announce heavyweight clinical data in November, potentially supporting some quality companies in the sector. These clues may be more suitable as a direction for "high cut low" than dividends. Risk Factors Intensification of friction between China and the US in technology, trade, and finance; Domestic policy strength, implementation effectiveness, or economic recovery falls short of expectations; Unanticipated tightening of domestic and international macro liquidity; Further escalation of conflicts in Russia, Ukraine, and the Middle East; Unexpectedly slow digestion of real estate inventory in China.