Huachuang Securities Zhang Yu: Four dimensions perspective on the "middle stream manufacturing" quality of China's broad-based index

Huachuang Securities released a research report stating that under the global "supply anxiety", China's midstream manufacturing is entering a strategic era of "going global for revenue". To obtain the dividends of the times, it is necessary to penetrate the illusion of the broad-based index labels and discern the true value of underlying assets from four dimensions. First, look at the size and trend: the differentiation and systemic rise of the "midstream content" in the broad-based index. Second, look at the virtual and real structure: there are significant differences in the profit support behind the market value of the midstream in the broad-based index. Third, look at the driving force and going global: the overall going global capability of the midstream is strong, but the index shows different tool attributes. Fourth, look at the dynamics and attribution: double attribution reveals completely different evolutionary paths. The summary of the Huachuang Securities report is as follows: First perspective: Look at the size - the cross-section and long-term trend of the midstream in the broad-based index. The "midstream content" of the broad-based index has significant characteristics in the cross-section and time series, which vividly reflects the switching of macro-industrial momentum. 1. Horizontal comparison: Structural differentiation of the broad-based background. The ChiNext Index shows extremely high "midstream purity", with midstream market value and profit accounting for over 70%, forming a large-capacity advanced manufacturing base; while the core weight of the broader Hong Kong index (such as the Hang Seng Index, Hang Seng Technology) is relatively concentrated in the internet and local life sectors, showing different configuration attributes biased towards the broad consumer field. 2. Vertical comparison: Ten years of systematic rise in pricing power. Over the past ten years, the pricing weight of midstream manufacturing in A-shares has comprehensively increased. The ChiNext Index's midstream market value proportion has increased by over 44 percentage points, and the representation in the main market, the Shanghai and Shenzhen 300 index, has jumped from 17.3% to 39.3%, objectively confirming the trend of macro-industrial upgrading and the transition of old and new energy. 3. Short-term anomaly: "Pulse acceleration" in 2025. In the first three quarters of 2025, the midstream expansion in the broad-based index accelerated (ChiNext Index's midstream manufacturing market value and profit proportion increased by 9.2 and 6.0 percentage points, respectively). This highly coincides with the current macro resonance - under the global "supply anxiety", China's midstream equipment manufacturing is stepping into a golden window of global market share expansion, as overseas orders and high gross margins accelerate realization. Second perspective: Look at the virtual and real - profit support behind the market value growth. Only focusing on market value proportion may easily overlook the profit growth behind the market value share. Through observing the "market value-profit misalignment ratio", the vast midstream beta in different broad-based indexes shows significant structural differentiation: ChiNext Index: Strong profit drive with high elasticity. It shows extremely high "midstream purity", where 72.3% of midstream market value contributes to a whopping 77.5% of net profit. The underlying advanced manufacturing cluster, with overseas high profit margin and industry barriers, maintains high profitability, serving as the cornerstone of absolute profit for the entire index, providing solid fundamental support for valuation expansion. Shanghai and Shenzhen 300 and the Shanghai Composite Index: A "new and old equilibrium" configuration structure. Both exhibit obvious asymmetric distributions (such as nearly 40% of midstream market value in Shanghai and Shenzhen 300 corresponds to only 10.6% of profit). This precisely reflects the unique macro positioning of the broader index: large financial and traditional consumption sectors act as a real profit "ballast", providing a strong risk-resistant bottom; while major blue-chip manufacturing companies are responsible for providing upward elasticity in industrial transformation. This structure allows the broader index to possess both the explosive power of "incremental option" and the stability of the bottom. Third perspective: Look at the driving force - who is truly earning global market share? The core of midstream's current excess returns comes from export price advantage and global market share expansion. Introducing the gauge of "overseas revenue exposure", the underlying DRIVE of the broad-based index shows a intertwining of "commonality and uniqueness": 1. Commonality across broad indexes: Strong overseas revenue capacity of the midstream. Whether it is the broader index (Shanghai and Shenzhen 300, CSI 500) or growth index (ChiNext Index), the midstream manufacturing sector within them has overseas revenue exposure ranging from 24% to 42%. This objectively confirms that China's manufacturing industry's upgrading and globalization revenue generation capability is a universal hardcore strength that crosses indexes. 2. Differences in index characteristics: High external demand elasticity and internal-external balance. Due to different macro positioning, different broad-based indexes show drastically different configuration attributes: 1) ChiNext Index and others are highly elastic to external demand, with over 30% of overseas revenue and the majority contributed by the midstream, making them high purity "global supply chain" assets, extremely sensitive to the upward elasticity of the offshore cycle. 2) Shanghai and Shenzhen 300 and others are tools with an internal-external balance configuration, with around 16% of overseas revenue, acting as a natural bearer of the entire macro picture, widely distributed in the domestic basic demand base, relying on large financial and consumer sectors to support the domestic cycle, while also benefiting from midstream going global as an "incremental engine", providing a dual-driven choice that considers both "going global dividends" and "domestic demand stability". Fourth perspective: Look at the attribution - the passive transition and the competition of endogenous growth. Behind the "midstreamization" and "going global" of the broad-based index, there are significant differences in micro-transmission mechanisms. Through the double attribution analysis of "market value" and "overseas revenue" shares, two completely different evolutionary paths are revealed: ChiNext Index is a bottom-up "dual-driven endogenous" process. Its market value share has grown by 43.1 percentage points over a decade, 88% of which comes from the "endogenous growth" of constituent stocks; and among the 19.6 percentage points increase in overseas revenue exposure from 2016 to 2024, as much as 95% comes from endogenous contributions. This confirms that its expansion heavily relies on the natural growth of leading players in advanced manufacturing in the wave of globalization, purely driven by industrial fundamentals. Shanghai and Shenzhen 300 demonstrate a top-down "metabolic" process. The broader index perfectly portrays a period of transition through "shedding the old and incorporating the new". In terms of market value, of the 22.0% increase in midstream market share, 52% comes from the "replacement effect", highlighting the index's advantage in closely following macroeconomic fundamentals through natural selection; in terms of going global, of the 9.4 percentage points increase in overseas revenue exposure, a high of 96% still comes from endogenous growth of old constituent stocks. This reflects the global revenue resilience of manufacturing blue-chips, providing a solid profit safety cushion for stable funds. Risk warning: Outdated financial data, lack of overseas revenue data for Hong Kong-listed companies.