CITIC SEC: Hong Kong stock performance in a vacuum period focuses on high certainty, recommend grasping three main lines.

CITIC SEC issued a research report stating that the fundamentals of the Hong Kong stock market from 25Y to 2026Q1 have experienced a logical evolution from "internal pressure" to "bottoming out and stabilizing". During the 25Y period, the Hong Kong market's profits were under pressure due to domestic price wars and weak domestic demand, but profits in the industrial chain accelerated towards upstream resources and overseas sectors. The 2026Q1 quarterly report confirmed a trend of bottoming out and rebounding in fundamentals, with the core feature still being strong external demand and weak domestic demand: globally priced bulk commodities, overseas premium narratives, and the overflow of overseas computing power in the AI core industry chain are driving strong performance release; on the other hand, traditional domestic demand related industries such as infrastructure, real estate, and automotive sectors are bottoming out due to oversupply and ongoing internal pressure. Entering May, the publication of quarterly reports led to a significant dampening of profit expectations, and pessimistic expectations have been mostly cleared. In a period of low overall performance elasticity in the index, it is expected that the market will further align its main themes towards high performance certainty. It is recommended to focus on three main themes: 1) strong cyclical sectors under supply constraints; 2) AI overflow hard technology sectors driven by computing power dividends; 3) broad-based dividend directions that offer high certainty premium compensation. CITIC SEC's main points are as follows: - The performance differentiation of Hong Kong stocks in 25Y has intensified, with overall profits under pressure. - Hong Kong stocks in 25Y show a pattern of "sustained revenue resilience and significant profit pressure". The Hang Seng Composite Index and the Hang Seng Index saw profit growth rates plummet to 2.4% and 0.6% respectively, due to capital spending on AI, internal price wars, and weak domestic demand. The overall performance realization has deteriorated significantly, with profit indicators falling short of Bloomberg consensus expectations (comparable net profit/excluding financial EBIT both lower than expected by 2.77% and 3.85% respectively). The structure shows a split between large market value companies with stable performance and small and medium-sized enterprises under pressure. - Profits concentrate towards upstream resources and overseas premium; Medical and financial sectors show independent trends. - In 2025, there was significant differentiation in the Hong Kong stock market. Compared to 24Y, the net profit margin of raw materials nearly doubled from 4.0% to 7.8%, with ROE increasing by 2.6 percentage points, showing extreme performance in the upstream cycle; although the industrial sector was suppressed by peak shipping, EBIT exceeded expectations due to industrial engineering support, and the overseas premium was highlighted. The financial and healthcare sectors saw revenue and profits exceed expectations, showing absolute independent trends. Among them, medical EBIT growth rate increased by 42.9 percentage points to 51.0% from 24Y, becoming the only sector with both profit margin and ROE growth. However, the net profit margin of consumer discretionary products dropped significantly by 1.9 percentage points compared to 24Y, with about 70% of stocks in the real estate construction sector falling short of expectations; most industries are facing profit pressure, and are caught in an ROE decline due to increased refinancing and retained earnings. - The performance differentiation of cyclical sectors, with raw materials and industrial engineering showing growth. In 2025, raw materials achieved nearly a 100% profit leap on a high base of 24Y (profit positive deviation of 8.2%), with gold revenues increasing significantly by 21.6%, and profits by 87.1% due to rising gold prices. Industrial engineering grew against the trend by 28.9%, forming a strong bargaining power defense wall. However, the growth rate of base metals slowed significantly to 9.2% and underperformed expectations due to cost rigidity; the transportation sector saw profit decline (-22.2%) as the business outlook exceeded expectations; the oil, gas, and coal sectors are struggling, with 71% and 86% of companies underperforming expectations; nearly 90% of construction companies fell short of expectations, facing extreme pressure. - In the defensive sectors, consumer retail shows a strong rebound, while agricultural products undergo significant corrections. In 2025, consumer retail in consumer discretionary sectors saw a strong rebound, with profit growth rate increasing to 34.8%, with 67% of companies exceeding expectations, becoming the biggest highlight in the sector; the telecommunications industry maintained slight revenue and profit growth, meeting expectations overall; public utilities faced revenue contraction (-2.5% year-on-year), as price and demand pressures did not support profit recovery as expected. In contrast, agricultural products faced significant corrections, with revenue growth dropping sharply from 39.9% in 24Y to 7.6%, and all companies failed to meet profit expectations, with the degree of decline far exceeding market optimistic expectations. - The financial sector shows resilience, while the real estate sector remains in contraction. The insurance industry saw high double-digit profit growth at 24.3% in 2025, driven by improvements in liabilities and investment income support; the banking industry showed strong stability, with revenue and profit both increasing by 3.0% and 3.4% year-on-year, in line with expectations; asset management and brokerage businesses performed well, driving a 35.9% increase in profits for other financial companies. In contrast, the real estate sector saw a 13.2% decline in revenue and a decrease in profit growth to -34.0%, with over 61% of real estate companies' profits falling below expectations, as deleveraging and provisions continued to weigh on performance. - The growth sector sees semiconductor and pharmaceutical companies recovering, with continued pressure on domestic demand. Semiconductors show signs of a bottoming out recovery, with revenue increasing by 15.1% in 2025 and profits turning positive to 47.5%. Over 50% of companies outperformed expectations, with the cyclical recovery better than market expectations; software services saw a steady revenue growth of 12.8%, with relatively stable profits amidst negative deviations from expectations; other healthcare (medical devices, CXO) and support services maintained steady growth with positive deviations. On the other hand, traditional growth sectors facing severe performance pressures from domestic demand. - Despite continued structural differentiation in 26Q1, there is an overall trend of stabilizing and rebounding. - In 26Q1, the disclosed quarterly reports show a quarter-on-quarter increase in revenue to 3.7%, with profit and profits excluding financial EBIT narrowing significantly to -0.9%/-0.2%, indicating a trend of bottoming out and stabilization in fundamentals. The core stabilizing forces are the positive trends in cyclical sectors, financials, and consumer sectors. Looking at specific industries, the pattern of strong external demand and weak domestic demand continues, with profits driven by commodity dividends leading to significant profit increases in metals and gold of 98.8% and 97.0% respectively. The battery industry chain saw a significant increase in revenue by 52.5%, continuing to realize overseas premiums, with brokerage asset management benefiting from increased trading revenue and profits, while banks remain steady. On the other hand, traditional construction and real estate sectors continue to face pressure due to weak domestic demand. The recovery in the growth sector shows extreme differentiation, with the AI core industry chain and mature semiconductor processes experiencing performance releases; issues stemming from weak domestic demand have not yet shown substantial improvement in the first quarter, but the downward slope is turning. Investment advice: - Performance outlook shows structural differentiation, focusing on high certainty. With the release of May quarterly reports, the downward revision of earnings expectations for Hong Kong stocks in 2026 has significantly narrowed, indicating a dampening of pessimistic expectations. In an environment of low overall performance elasticity and a lack of upward potential in the market, it is expected that the market's main themes will continue to align towards directions with high performance certainty and strengthened business conditions. - Combining expected performance growth rates with adjustment momentum, it is recommended to focus on three main themes: 1) strong cyclical sectors under supply constraints, including energy, shipping, and strong industrial metals; 2) AI overflow hard technology sectors driven by computing power dividends; 3) in the context of external disturbances and high risk premiums, the direction of broad-based dividends with improving performance expectations is also worth considering as it may offer high certainty premium compensation. Risk factors: - Global geopolitical conflicts escalating; Sino-US relations deteriorating beyond expectations; widespread downward revisions in earnings forecasts for Hong Kong stocks; domestic policy implementation and economic recovery falling short of expectations.