Guosen: Finding market opportunities from performance and policies.

Guosen released a research report stating that according to the first quarter report data of A-share listed companies in 2026, the overall profit situation of A shares continues to show a recovery trend. The accumulated year-on-year growth rate of net profit attributable to mother of all A shares in 26Q1 is 6.8%, an improvement from 2.0% in 25Q4. The Political Bureau meeting emphasized the stability and enhancement of confidence in the capital market, and supported the development of science and technology innovation, as well as the resource and energy industries. Looking ahead, negative factors at home and abroad may gradually become clearer, but the short-term fluctuations do not change the upward trend in the market. In addition, attention should be paid to undervalued liquor and real estate, as well as strategic resources under safety considerations. Guosen's main points are as follows: - The recovery trend in overall A-share profits continues, with significant growth in upstream resources and midstream TMT performance. According to the first quarter report data of A-share listed companies in 2026, the overall profit situation of A shares continues to show a recovery trend, with the cumulative year-on-year growth rate of net profit attributable to mother of all A shares in 26Q1 being 6.8%, an improvement from 2.0% in 25Q4. However, the return on equity (ROE) of all A shares is still at a bottoming stage. The ROE in 26Q1 is 7.5%, showing no signs of improvement from 25Q4; with financials and energy excluded, the ROE in 26Q1 is 6.0%, a marginal stabilization compared to 25Q4. - In terms of components, the contribution of the income side to profit recovery is more prominent, but the willingness of listed companies to expand their balance sheets has not yet warmed up. Regarding profit margin, the sales net profit margin (TTM) of all A shares in 26Q1 is 7.4%, a slight improvement from 25Q4. On the income side, the cumulative growth rates of operating income for all A shares/all A shares excluding financials and energy in 26Q1 are 4.7%/5.7%, a significant improvement from 0.9%/1.1% in 25Q4, contributing significantly to profit recovery. In terms of production capacity, measuring the growth rate of listed companies' production capacity with fixed assets and construction in progress, the year-on-year growth rate of production capacity for all A shares in 26Q1 is 5.8%, a decrease of 0.2 percentage points from 6.0% in 25Q4, continuing the downward trend since 23 years. However, the year-on-year growth rate of capital expenditure (TTM) for all A shares in 26Q1 has turned positive to 1.6%, indicating that production capacity digestion may have reached a bottom. In terms of inventory, the year-on-year growth rate of non-financial stocks excluding financials and energy in 26Q1 has risen from -4.3% in 24Q4 to -1.1% in 25Q4, further rising to 0.5% in 26Q1, ranking in the 15.4% percentile over the past 10 years, indicating weak stocking efforts in the current period. - In terms of structure, there is significant profit growth in upstream resources and midstream TMT, while the manufacturing and downstream consumer sectors are relatively under pressure. The highlights of the quarterly reports for A shares are concentrated in the upstream resource and midstream TMT sectors. Driven by the rising prices of strategic resources, the net profit growth rate of the upstream energy and materials sector has increased from -1.6% in 25Q4 to 19.6% in 26Q1. Among them, the non-ferrous metals, transportation, and petrochemical sectors saw the most significant increases in growth rates. Additionally, benefiting from the AI technology wave driving the capital expenditure growth of tech giants, the net profit growth rate of the TMT sector has increased from 19.8% in 25Q4 to 30.4% in 26Q1. The computer and electronics segments saw significant increases in profit growth. The overall profit growth of the manufacturing sector has slightly fallen, with the cumulative year-on-year net profit growth rate declining from 3.0% in 25Q4 to 0.7% in 26Q1. However, the performance of the power equipment sector, which has improved demand, has maintained a high level of prosperity, with year-on-year net profit growth rates in 26Q1/25Q4 of 53.4%/39.3%. The downstream consumer sector profits are still under pressure and require support from policies to stabilize investment. However, there are also structurally improved industries within the consumer sector, such as food and beverage, with a cumulative net profit growth rate of 3.2% in 26Q1, rebounding from -18.3% in 25Q4. - The Political Bureau meeting emphasized the stability and enhancement of confidence in the capital market, and supported the development of science and technology innovation and the resource and energy industries. The Chinese economy achieved a good start in the first quarter of this year, with a year-on-year GDP growth of 5.0% in Q1, reaching the upper end of the annual target range and significantly higher than the 4.5% in the last quarter of last year. However, the domestic fundamentals of employment and consumption still face certain pressures, and external disturbances may also have negative effects on economic recovery. In this context, the Political Bureau meeting held on April 28 clearly stated, "Facing some difficulties and challenges, the foundation for sustained and positive economic development still needs to be further consolidated." The meeting called for "making good use of macroeconomic policies" and "precisely and effectively implementing more proactive fiscal policies and moderately loose monetary policies," indicating a clear policy stance for the protection of macroeconomic conditions. - At the industry level, the policy highlights are in the technology and energy resource sectors. Firstly, expanding domestic effective demand remains the primary task of the current economic work. The Political Bureau meeting emphasized the need to strengthen the planning and construction of water networks, new power grids, computational power networks, new generation communication networks, urban underground pipeline networks, and logistics networks, with technology infrastructure and energy infrastructure likely to become important focal points for stabilizing investment. Secondly, the meeting continued to emphasize "coordinated development and security." This includes implementing the "AI+" action comprehensively, developing new forms of intelligent economy; and improving the level of energy and resource security. Guosen believes that under the leadership of AI-empowered new technological revolutions, policy may focus on supporting the development of emerging industries such as AI in the context of industrial transformation, accelerating the application of AI in downstream areas. As the situation in the Middle East remains unclear and the importance of energy security rises, future policies may place more emphasis on increasing reserves and guarantying supplies of strategic resources. - Additionally, policy support for the stable development of the capital market and real estate. Since the beginning of this year, there have been fluctuations in the A-share market affected by the changes in the Middle East situation. However, with domestic policy support, the resilience of the market has become evident. The capital market is an indicator of economic conditions, and the Political Bureau meeting in April emphasized the need to "stabilize and enhance confidence in the capital market," in conjunction with the policy deployments to deepen investment and financing reforms outlined in the government work report. Guosen believes that subsequent capital market policies are expected to continue to focus on guiding long-term capital inflows, enhancing market confidence, and improving inner stability, promoting the stability and upward trajectory of the capital market to better serve high-quality economic development. Regarding real estate, the meeting called for efforts to "steadily stabilize the real estate market and solidly promote urban renewal," with local regulations expected to be implemented to stabilize the real estate market. - Short-term fluctuations do not alter the upward market trend. Since March 23, the market has continued to rebound, with the maximum increase in the WIND A-share index reaching 12% by April 30, and the Shanghai and Shenzhen 300 index at 10%. Major A-share indices have recovered from the declines since the Middle East conflict and returned to near their previous highs. However, the average daily trading volume of A shares in April was 2.35 trillion yuan, somewhat lower than before, and still not reaching the level of over 3 trillion yuan in January, indicating that market sentiment recovery still needs some time. Moreover, the Middle East situation remains uncertain, with the Strait of Hormuz still closed, concerns about energy supply interruptions, and WTI crude oil prices rising above $100 per barrel again. Higher oil prices exacerbate expectations of stagflation, which may have a suppressing effect on equity assets. A-shares have seen significant gains in April, and there may be a period of consolidation following rapid increases. - Looking ahead, negative factors at home and abroad may gradually become clearer, but short-term fluctuations do not alter the upward market trend. Domestically, the Political Bureau meeting in April indicated that current policies will continue to have a positive focus and emphasize the stable and healthy development of the stock market. Since the beginning of the year, both macro and micro fundamentals have shown signs of recovery, with the Manufacturing Purchasing Managers' Index at 50.3% in April, still in the expansion range; and the profit growth rates of A shares in 26Q1 also continue to show a recovery trend. Guosen believes that with the support of stable growth policies in China, the improvement in domestic macro and micro fundamentals is expected to continue. Internationally, on May 2, Trump stated that he would review Iran's proposal to end the conflict, and the two parties may continue negotiations, leading to a potential reduction in geopolitical risk. Additionally, the upcoming mid-May meeting between Chinese and American leaders may strengthen consensus on core issues, potentially boosting market risk appetite. With positive factors at home and abroad driving the market, the upward trend of the A-share market remains unchanged. - In terms of structure, industry allocation should focus on balance. Guosen mentioned in a previous report on April 25, that currently, based on a comprehensive analysis of portfolio structure, trading heat, and excess returns, the industries in the communications, electronics, and other sectors are already hot, with high trading activity in subsectors like communication equipment and components exceeding 90%, while traditional value sectors like consumer goods have low heat levels. Industry allocation at the moment should focus more on balance. In the medium term, industries trending upwards such as technology and growth areas are still important targets. The technology industry represented by AI is currently in a new upward cycle, with the Political Bureau policy in April emphasizing the development of AI infrastructure and applications. The recent release of DeepSeek-V4 on April 24 has reached the best level in the current open-source model in Agentic ability coding evaluations. With resonating policy support and industrial breakthroughs, AI technology remains the main theme in the A-share industry, paving the way for accelerated AI applications in downstream sectors. The application of AI, computing hardware, and the upstream energy and power sectors are worthy of attention. - Additionally, attention should be given to undervalued liquor and real estate, as well as strategic resources under safety considerations. In terms of liquor and real estate, the sectors are currently at historically low levels of crowding, and since the beginning of the year, improvements have been observed in both the consumer and real estate sectors, with new home prices and second-hand home prices in tier-1 cities rising on a monthly basis in March. The Political Bureau meeting in April called for "exploring the potential of domestic demand" and "making efforts to stabilize the real estate market and solidly advance urban renewal." Recently, in response to the stable housing market deployment, Shenzhen, Guangzhou, and Tianjin have successively introduced new real estate policies involving easing purchase restrictions and optimizing provident fund loan policies, among others. Expansion of domestic demand and stable real estate policies may support the continued improvement of the fundamental trends for liquor and real estate. Undervalued real estate and liquor may present opportunities for a period of recovery. As for resources, the crowding levels of resource sectors such as non-ferrous metals and chemicals have come down from their peaks, and against a backdrop of a complex global environment, the Political Bureau meeting emphasized the need to enhance energy and resource security levels. With a long-term increase in the safety premium of resource commodities, combined with domestic anti-inequality policies and emerging demands, commodity prices are likely to be supported, benefitting the strategic resource sector. Risk Warning: Worsening geopolitical situations beyond expectations, and fluctuations in the domestic economic recovery.