Industrial: The light manufacturing sector lacks beta drivers. Seek high-quality targets with strong alpha capabilities from the bottom up.

Industrial reported that in the short term, the negative impact of exchange rate/oil and other disturbances will marginally ease in Q2, and the export tax rebate will be a positive factor, potentially directly or indirectly boosting the performance of light industry manufacturing. In the medium term, the overall demand logic of the export sector is weak. In the second half of 2026, the core logic of the light industry sector, according to the bank, lies in finding high-quality supply, with weak demand logic. Considering the macro environment of real estate/consumption, the demand for the light industry sector is currently still at a relatively low level, lacking beta drivers, and the core logic is still to find high-quality targets with strong alpha capabilities from the bottom up. The main points of Industrial are as follows: Home Furnishing In the short term, focus on policy games. The phased stimulation of the real estate policy has boosted the stock prices of the home furnishing sector, and custom companies with a high proportion of B-end business have greater stock price elasticity. In the medium term, it may be optimistic about the recovery of soft demand. On the one hand, the demand for soft home furnishings in second-hand homes and existing homes is expected to increase, mainly benefiting from the increase in second-hand home transactions and the replacement demand brought about by the recovery of consumer purchasing power. On the other hand, new products and supplies such as functional sofas and AI mattresses bring new growth points. The investment logic of the home furnishing sector is high dividend, and on this basis, targets such as Jason Furniture and Goneo Group with stable cash flow, good fundamentals, and the ability to cross the cycle are preferred. Paper Making Currently, the paper-making industry is at the bottom, with packaging paper prices rebounding in 2025 H2 and then falling again, and cultural paper prices continuing to hit bottom. Looking ahead, carbon emission regulations may be a potential catalyst for a major cycle, which could promote industry consolidation and improve the competitive landscape. In the near term, considering factors such as supply and demand and costs, waste paper is expected to perform better than pulp paper. It is recommended to focus on two main lines: raw materials are king and expected price increases. In a background where paper making is barely profitable, relying on pulp to make money, increasing the proportion of self-supplied pulp may be the only way out in the short term. Under this approach, it is suggested to pay attention to targets such as Shandong Sun Paper and ND PAPER (covered by Hong Kong Stock Group) that are actively developing pulp lines; in addition, targets with the ability to increase prices have stronger profit repair certainty and larger valuation repair space. Under this approach, it is recommended to focus on special paper targets such as Hangzhou Huawang New Material Technology with the ability to increase prices. Consumption For mature stock markets, as the overall consumption environment is weak, leading companies in various industries are facing tests. The key breakthrough point, according to the bank, lies in transformation to adapt to new situations, by providing new growth points through product upgrades and new business launches. For example, Perfect Group Corp., Ltd's investment and acquisition of Sinon Bio entering the probiotics industry; or by expanding channels to increase market share, such as Chongqing Baiya Sanitary Products vigorously developing offline peripheral markets to seek new growth points. For emerging incremental markets such as trendy toys and pets, which have the strongest demand logic, the key lies in proving brand capability. Targets such as POP MART (covered by the Hong Kong Stock Group) that have already proven brand capability are expected to perform better. Packaging The packaging sector is suggested to focus on three main lines: profit improvement, high dividends, and business extensions. Profit improvement is mainly reflected in the two-piece can industry, where companies like ORG Technology have already raised prices at the end of 2025. In the short term, with anti-insulation and aluminum prices continuing to rise, there is still an expectation of further price increases in the two-piece can industry, and there is even a possibility of excessive price increases. Regarding the high dividend mainline, companies such as Huangshan Novel have seen a peak and fall in capital expenditures, and with capital expenditures expected to decrease in the future and a stable profit background, dividend yields are expected to remain at a high level. The business extension mainline focuses on companies such as ShenZhen YUTO Packaging Technology and Shandong Linuo Pharmaceutical Packaging, which develop a secondary business through internal development and acquisition. Export In the short term, the negative disturbances of exchange rates/oil and others will marginally ease in Q2, and the export tax rebate will be a positive factor, potentially increasing performance directly or indirectly. In the medium term, the overall demand logic of the current export sector is weak. On the one hand, the relatively stable sales of homes in the United States have weakened the logic of real estate stimulating home consumption; on the other hand, the demand for stimulus from interest rate cuts is relatively weak. According to the bank, the medium-term growth DRIVE mainly comes from the supply side, that is, selecting high-quality production capacity under supply chain fluctuations. Specific targets include HHC Changzhou Corp., Zhejiang Zhongxin Environmental Protection Technology Group, CoCreation Grass, Ziel Home Furnishing Technology, etc. Chinese companies, with advantages in technology, cost, and certification, form high-quality production capacity, not only able to accept orders from overseas supply chain transfers to achieve short-term performance growth but also establish a long-term stable global supply chain network through active overseas production capacity layout. On the one hand, some overseas brand companies (such as Procter & Gamble, Kimberley-Clark) are reorganizing their supply chains, providing new growth space for related companies and the potential for rapid growth. On the other hand, as most companies in the export sector have completed the layout of overseas bases, 2026 is expected to be the stage of reaping the benefits of capacity climbing. Risk Warning: domestic demand recovery falls short of expectations, raw material prices rise sharply, geopolitical risks.