CICC: Mid-term market support of A shares is stable, focus on two major directions.

CICC released a research report stating that looking ahead, industries with high prosperity in the early stages have already shown excess returns. However, due to ongoing trade disruptions at the Strait of Hormuz and the arrival of crude oil from the Middle East in April, global onshore oil inventories will face pressure to reduce excess inventory. As a result, crude oil prices in the second quarter may remain high, potentially affecting market sentiment. However, the current profit situation of A-share companies has improved, market valuations are relatively reasonable, and the risk premium of the Shanghai and Shenzhen 300 Index stocks exceeds 5%. The political meeting at the end of April outlined a slightly optimistic stance, emphasizing the need to "stabilize and enhance confidence in the capital market." The efficacy of the capital market in supporting China's economic transformation will continue to be realized, and the logic of a stable market situation remains valid. In terms of allocation, the growth style still has advantages, but this year's relative performance with other sectors has converged. CICC believes that the determining factors of the growth trend lie in industry trends and profit realization in high prosperity sectors, which often outweigh macroeconomic, valuation, and other factors. After experiencing a three-year period of reducing overcapacity and progressing with policies against "inward competition," an increasing number of cyclical industries are expected to benefit from supply and demand rebalancing. Focus should be on: 1) Prosperity and Growth: Leading AI capital expenditures continue to grow rapidly, and infrastructure areas such as semiconductors, electronic hardware, and optical communications are still recommended for focus. Areas such as energy storage batteries and innovative drugs are also worth paying attention to. 2) Cyclical Improvement: Taking into account the possible geopolitical situation, the rise in oil prices, and the position of the industry in the production cycle, it is recommended to focus on chemical, energy, and metal sectors supported by supply and demand patterns, as well as electric grid equipment benefiting from the trend of overseas trade. Overweight industries in May: Electrical equipment, power generation and electric grid, communication equipment, semiconductors, basic chemical industry. Underweight sectors in May: Construction and engineering, textile and clothing, education, light industry, retail. In April, crude oil prices remained high, but after the United States and Iran reached a partial ceasefire agreement, optimistic expectations drove major global stock markets to rise. The rise revolved around performance and prosperity. The Shanghai Composite Index, the Shenzhen 300 Index, and the ChiNext Index increased by 6%, 8%, and 15% respectively. The ChiNext Index reached a new high in recent years, with industries such as electronics, communications, and machinery leading the way as high-prosperity sectors became the main upward trend. Listed companies gradually disclosed their first-quarter reports, confirming the trend of improvement in A-share profits. The overall net profit growth rate of A-shares stabilized and rebounded, with a divergence in structure. In light of the situation where domestic demand needs to be boosted, major sectors for A-share market vibrancy include rising commodity prices, global AI capital expenditures, resilience in Chinese exports, and sectors with improved supply and demand patterns. Sub-industries that have achieved positive growth in net profit year-on-year in the first quarter of 2026 and leading growth in net profit in the first quarter of 2026 include: basic chemical products (adhesives, potash, textile chemicals, coal chemicals, fluorine chemicals, adhesives and tapes, etc.), non-ferrous metals (lithium, silver, tungsten, aluminum, cobalt, gold, rare earths, etc.), communication network equipment and components, communication cables and accessories, printed circuit boards, digital chip design, semiconductor equipment, integrated circuit testing and packaging, passive components, consumer electronics components and assemblies, battery chemicals, lithium battery specialized equipment, lithium batteries, gaming, air transport, maritime equipment, cross-border e-commerce, natural scenic areas, hotels, express delivery, innovative drugs, power transmission and transformation equipment, etc. Continued focus will be on price transmission of resource products and basic materials, as well as improvement in downstream demand. With the continuous iteration of AI large model technology and the widespread application of Agent, the demand for computing power is driving the performance improvement of related companies. The current computing power industrial chain is in a phase of profit realization, with strong performance in the overseas computing power chain. Major North American cloud vendors continue to increase Capex in 2026, benefiting directly from optical modules, PCB, server power supply, and computing power leasing. In terms of domestic computing power, DeepSeek V4 is based on the Huawei Ascend ecosystem, and large model manufacturers such as KNOWLEDGE ATLAS have adapted to domestic computing power chips. In the first quarter of 2026, some chips and server net profits have achieved year-on-year growth. Capital expenditure represents companies' optimistic expectations of future demand and is also an important factor determining earnings sustainability and growth potential. Before 2023, China's inventory cycle time span exhibited a clear pattern, with an average cycle duration of about 3 years. The growth rate of capital expenditure for listed companies is positively correlated with the inventory cycle, but this pattern is changing due to the downturn in the real estate chain and economic transformation. Capital expenditures mainly achieve profit improvement and ROE enhancement through production expansion. The timing of capacity expansion determines the sustainability and elasticity of profit release, with differences between industries. The growth rate of capital expenditure for non-financial enterprises in A-shares turned negative since the second quarter of 2024 and experienced six consecutive quarters of negative growth, turning positive in the first quarter of 2026 with a year-on-year growth rate of 4%. Operating cash flow is the main source of funds for capital expenditure improvement, with year-on-year growth of 4% in the first quarter of 2026. Industries such as non-ferrous metals, components, consumer electronics, communication equipment, electric grid equipment, maritime equipment, aerospace equipment, and medical services are in a process of improving cash flow and expanding capital expenditure. Chart 1: CICC's A-share industry allocation viewpoints and sub-items Note: Data as of April 30, 2026 Source: FactSet, Wind, CICC Research Department Chart 2: Fundamental situation of various sectors in A-shares Note: Data as of April 30, 2026, using Wind consensus estimates Source: FactSet, Wind, CICC Research Department Chart 3: Performance of major energy and basic materials prices Note: Data as of April 30, 2026 Source: Wind, CICC Research Department.