Industry: The new economy's virtuous cycle has been established, leading to profit breakthroughs and three main economic trends.

Industrial released a research report stating that earnings have replaced valuation as the key to breaking the deadlock in this year's A-shares, with earnings across the board consistently exceeding expectations with high growth. A more significant signal is that prosperity is no longer concentrated in AI and resource products; high-end manufacturing, export chains, and certain cyclical industries have stepped up comprehensively, resulting in a breadth of earnings recovery reaching a near-year high. Looking ahead, while the external liquidity environment is likely to continue to suppress valuations, the high growth of earnings and the expanding scope of recovery are the greatest sources of confidence in the market this year. It is recommended to invest along three main prosperous lines: the AI chain, the export chain, and the reversal of domestic demand, which can capture broader fundamental recovery dividends. The main viewpoints from Industrial are as follows: 1. Earnings continue to exceed expectations The earnings growth rate for A-shares is expected to achieve double-digit growth by 2026. The primary contradiction in A-share pricing this year will shift from valuation to earnings, which will become the most important source of market returns. In last year's annual outlook, we were the most optimistic strategy team regarding this years earnings estimates, but the actual earnings growth rate continues to exceed even our most optimistic expectations: In the first quarter report, the net profit of all A-shares, excluding financials, achieved an initial double-digit growth of 12.61% year-on-year. In the recently disclosed mid-year report, both the overall A-share and the non-financial A-share earnings continued to accelerate, with the earnings growth rate both reaching double digits: as of 0:00 on August 29, under 97% of reporting coverage, the cumulative year-on-year growth rate of net profit for all A-shares/non-financial A-shares in H1 2026 was 16.86%/16.70%, an increase of 9.22/4.04 percentage points compared to Q1 2026. The highlights of this earnings recovery are not only in growth rates but also in breadth. In this mid-year report, in addition to AI and TMT driven by price increases, a broader category of high-end manufacturing, export chains, and certain cyclical industries also showed signs of significant earnings growth or improvement. Thus, the proportion of high-growth industries (where net profit growth exceeds 30%) in H1 2026 has risen to 29.01%, reaching a new high since 2022. Therefore, for the market this year, even though the globally tight liquidity environment suppresses valuations, earnings remain an important support for stabilizing the overall market and enabling some sectors to exhibit structural highlights. We have segmented the contribution of earnings and valuations to the typical industries' price increases this year and found that valuations are no longer the main contributors; in most cases, they have even become a drag, while earnings have become the primary contributor countering valuation pressure and leading the market towards structural highlights. Looking ahead, even though the market continues to face concerns about tightening external liquidity and valuation pressures, the high growth of internal earnings and the ongoing expansion of recovery will still support the market and provide more tangible allocation opportunities. This is our greatest source of confidence in a turbulent market this year. 2. This year's earnings recovery validates a new economic growth model Why can this cycle of earnings continue to exceed expectations, and why has the breadth of recovery not narrowed as previously expected by the market but rather expanded continually? The upgrading of the manufacturing sector brings about population concentration and wealth effects, which feed back into real estate and consumer demand, injecting new momentum into domestic demand growth. From the mid-year report data, this path is already being illustrated. We summarize several clues and paths regarding this cycle of earnings high growth and its spillover effects: First, under the wave of AI, the prosperity advantage of core hard tech assets continues to persist: the profit growth rate of the Sci-tech Innovation Board compared to the CSI 300 has improved from a 32.88 percentage point difference in Q1 2026 to 33.45 percentage points in H1 2026. Although the slope of growth has slowed as the breadth of earnings recovery has expanded, the prosperity advantage of core hard tech assets remains intact, and no downward inflection point has been seen. Second, AI-driven manufacturing upgrades and rising prices of upstream materials are driving faster prosperity across more industries: including computing hardware (semiconductors, communication equipment, components, computer equipment), software applications (software development, gaming, consumer electronics), upstream equipment (automation equipment, specialized equipment), and upstream materials (industrial metals, minor metals, plastics, glass fibers, electronic chemicals). Third, the broad advantage of Chinese manufacturing is driving significant earnings growth or improvement in more export chain industries: not only is AI driving manufacturing upgrades, but the broad advantage of Chinese manufacturing is also promoting high earnings growth or improvement in industries such as pharmaceuticals (innovative drugs, medical devices), new energy (battery storage, power grids), automotive (automotive services, commercial vehicles, components, motorcycles), light industry (papermaking, packaging printing), home appliances (black appliances, small home appliances), and textile manufacturing. More importantly, the prosperity advantages brought about by economic transformation and the rise of new dynamics are transmitting through population concentration and wealth effects to feed back into real estate and consumer demand, injecting new momentum into the improvement of domestic demand prosperity. This path has already been initially verified and reflected in some industries' mid-year reports: First, the year-on-year growth rate of employee salaries in most industries in H1 2026 continues to rise, with the certainty of high earnings growth in advantageous industries translating into improved purchasing power for residents. In recent years, industries with rapid salary growth in China have primarily been concentrated in midstream manufacturing, especially advanced manufacturing. The enhancement of residents purchasing power and the transmission of wealth effects are first occurring in these industries. Second, the development of emerging industries brings about improvements in population concentration and purchasing power; the "technology content" has become the core variable affecting housing prices in various cities, leading to the first improvement in housing prices in core cities. Since 2025, among 70 major and medium-sized cities, the higher the proportion of revenue from listed emerging industry companies to local GDP, the greater the overall increase in housing prices. Industrial structure is affecting urban fundamentals, attractiveness, and real estate purchasing power, thereby determining the resilience of housing prices. Thus, with the transmission of wealth effects and the spillover of demand, more domestic demand industries in this mid-year report have also exhibited clues of improved earnings. Currently, this transmission path is first occurring in the real estate chain and service consumption & high-end consumption, including real estate development, retail, beauty care, and education. As such, a new cyclical economic model is being verified and gradually taking shape: technology and high-end manufacturing are becoming the new engines of China's economic growth, while real estate and consumption are the pulling factors in the post-cycle under the transmission of wealth effects. In the future, we believe that the aforementioned transmission path of "external demand driving internal demand, technological manufacturing driving real estate and consumption" is expected to occur on a larger scale and in a broader range of industries. When more signs of prosperity are gradually seen and believed, the market will continue to price for a wider range of fundamental recoveries. 3. Around the clues of prosperity, pricing for broader fundamental recovery Pricing for a broader fundamental recovery based on several clues of this cycle of prosperity improvement: Acceleration of prosperity in the AI chain: computing hardware (semiconductors, communication equipment, components, computer equipment), software applications (software development, gaming, consumer electronics), upstream equipment (automation equipment, specialized equipment), upstream materials (minor metals, industrial metals, plastics, glass fibers, electronic chemicals); Traditional export chain prosperity advantage: pharmaceuticals (innovative drugs, medical devices), new energy (battery storage, power grids), automotive (automotive services, commercial vehicles, components, motorcycles), light industry (papermaking, packaging printing), home appliances (black appliances, small home appliances), textile manufacturing; Reversal of the domestic demand dilemma: real estate development, beauty care, retail; Geopolitically driven price increase of resource products: refining, coal. Risk reminders Economic data volatility, policy easing below expectations, Federal Reserve interest rate cuts not meeting expectations, escalation of geopolitical situations, etc.