Shenwan Hongyuan Group: A-share gross profit margin has increased for three consecutive quarters, verifying price recovery; innovation and entrepreneurship growth leads with ROE surpassing the main board.

Shenwan Hongyuan Group released a research report stating that in Q2 2026, the profit growth rate of A-shares rebounded to 20%, while revenue increased by only 6.8%. The profit elasticity mainly came from investment income and other non-recurring gains. Exchange rate fluctuations raised financial expenses, but gross profit margin and ROE continued to improve, indicating that quality outperformed quantity. The profit and ROE in the ChiNext and STAR Market showed significant improvement, surpassing that of the main board. The demand for replenishing stock has begun to surface, capital expenditure is running at a low level, cash flow structure is improving, and the intensity of dividends and buybacks has increased. However, caution is advised regarding global economic and geopolitical risks. The main points from Shenwan Hongyuan Group are as follows: Exchange losses expanded, but investment income was impressive. The A-share market in Q2 2026 saw stable growth and improved profitability. 1Overall, the improvement in the A-share market was better in price than in volume: The cumulative growth rate of non-recurring net profit continued to rebound to 20.0%, and the cumulative growth rate of net profit attributable to shareholders increased by 4.7 percentage points from Q1 to 22.0%. The cumulative revenue growth rate only rose by 0.1 percentage points from Q1 to 6.8%. The elasticity of profit growth was higher than that of revenue, and the repair of profits was significantly supported by non-recurring gains, resulting in a higher growth rate of net profit attributable to shareholders compared to recurring profit. The reason for this was the large contribution of investment income in non-recurring gains, where the sum of net investment income and net gains from fair value changes accounted for 1.1% and 19.0% of revenue and net profit attributable to shareholders respectively in Q2 2026, both reaching the highest levels since 2022. Therefore, if we exclude the sample of technology stocks that turned losses into profits and the non-recurring gains, the growth rates of non-recurring net profit and revenue in Q2 2026 were 13.1% and 6.3%, respectively, staying basically the same as in Q1. 2On the cost expense side, the expansion of exchange losses led to a significant increase in financial expenses, with the expense ratio in Q2 2026 being 10.64%, rising for three consecutive quarters. The growth rate of financial expenses from Q1 to Q2 was over 60%, mainly due to increased exchange losses caused by exchange rate fluctuations, which have remained above 10% since mid-2022. Companies focused on domestic demand exhibited relatively weak absolute growth but showed signs of returning to positive growth. 3In terms of profitability, improvements in the gross profit margin and ROE in A-shares confirmed sustainability. The TTM gross profit margin of A-shares in Q2 2026 continued to rise for three quarters to 18.0%. Even after excluding new stocks like Changxin and delisted samples, there was little difference and the trend remained unchanged, while the gross profit margin of offshore businesses remained dominant and improved simultaneously. The main board and ChiNext experienced slight rebounds in gross profit margins, while the STAR Market's gross profit margin increased by 3.4 percentage points to 35.0%. Among the three ROE components in DuPont, improvements in net profit margin and asset turnover contributed significantly, with the improvement in profitability being more pronounced in terms of price. Comparison of profitability across different sectors: In Q2 2026, the profitability of major growth represented by the Double Innovation segments saw significant enhancement. In Q2 2026, the profit, revenue growth rates, and ROE of various sectors all improved quarter-on-quarter, with the ChiNext and STAR Market showing more pronounced improvements. The main board (excluding the financial sector and "three major oil companies") saw a non-recurring net profit growth rate in Q2 2026 of 9.5%, remaining basically stable compared to Q1, while the revenue growth rate fell by 0.1 percentage points to 4.5%. In Q2 2026, the no-recurrent profit and revenue growth rates for the ChiNext increased by 5.7 and 0.5 percentage points to 31.5% and 22.3% respectively, while the STAR Market (excluding photovoltaic enterprises) saw profits and revenue grow by 524.5% and 47.4% year-on-year from a low base. All major sectors continued to improve ROE, with both the ChiNext and STAR Market exceeding the main board (excluding financial sector and "three major oil companies"). In Q2 2026, the ROE of the main board (excluding the financial sector and "three major oil companies") rose by 0.2 percentage points from Q1 to 6.5%, with the ROE of the ChiNext and STAR Market (excluding photovoltaic enterprises) increasing by 0.7 and 3.4 percentage points to 7.4% and 9.0% respectively. From an index perspective, the profit and revenue growth rates of most major broad-based indices continued to rise, with only the small-cap National Equity Index 2000 experiencing slight single-digit declines in profits, although revenue growth was on the rise. In terms of profitability, gross profit margins and ROE generally improved. Regarding gross profit margins, the CSI 1000 recovered from its bottom, while the National Equity Index 2000 fell to historic low levels. Improvements in small-cap and dividend indices were relatively weak, while both the Double Innovation segments and broad-cap indices remained strong. Mild inflation is driving continuous replenishing stock for enterprises, while capital expenditures are running at low speeds. 1Inventory cycle: PPI and corporate inventory growth rates are resonating and recovering. Historically, when prices rise, enterprises also enter a replenishment cycle. After three years of nominal negative growth in inventory, A-share companies' replenishment demand began to emerge, with A-share inventories in Q2 2026 showing a year-on-year increase of 2.4%, marking the first time this has turned positive in 2023. In the following three quarters, as upstream resource prices slow down, PPI may retreat; however, looking at the year as a whole and into 2027, with supply pressures reduced as capacity is digested, PPI and corporate inventory are expected to maintain a slight single-digit gentle recovery trend. 2Capital expenditures and construction projects continue to show slight positive growth, with corporate personnel expansion and spending intentions stabilizing at low levels. In Q2 2026, A-share capital expenditures and construction project growth continued at moderate positive increases, while fixed asset growth remains in a declining phase. All three metrics are at historically low absolute growth levels. 3Despite the low levels of capital expenditures and expenses, the trend of listed companies enhancing investor returns remains unchanged, with increased intensity of dividends and share buybacks. As of August 31, 2026, over 1,000 companies released dividend proposals in their mid-year results, with a total amount exceeding 700 billion yuan, surpassing both the number of companies and total amount of the same period in the past two years. Under the regulatory guidelines to stabilize capital markets, the stock buyback proposals of listed companies show that from January to August 2026, A-shares had announced buyback amounts exceeding 240 billion yuan, surpassing the same period in the past two years. Cash flow: Net cash flow from investment and financing in A-shares and cash collection ratios continue to improve. 1Looking at the growth rates of operating cash flow, the rise in upstream prices has led to increased procurement costs. The net operating cash flow of A-shares experienced slight negative growth, while the net investment and financing cash flows maintained positive growth. In the first two quarters of 2026, the net operating cash flow of A-shares showed slight negative growth mainly due to the impact of upstream price increases and the technology growth sector ramping up procurement for expansion. The accumulated year-on-year decrease in contract liabilities and advance receipts in Q2 2026 was 5.1%, with the decline extending the rate by 0.1 percentage points from Q1; if the current orders improve, it will provide additional support for operating cash flow. The net investment cash flow has maintained positive growth for five consecutive quarters, as previous capital expenditures were significantly reduced and enterprises cut back on expansion investments to increase cash reserves. The net financing cash flow has continuously shown positive growth for three quarters, indicating a recovery in the market's financing functionality, with enterprises raising funds through equity financing, attracting long-term patient capital. 2The cash collection ratio and cash payment ratio of A-shares have returned to historical centers, with cash and cash equivalents continuing to improve year-on-year. In Q2 2026, the cash collection ratio and cash payment ratio rose to 102.0% and 93.5%, respectively. 3In addition to current cash income, from the perspective of future receivables, the turnover ratios of bills and accounts receivable in A-shares have declined by nearly five years since the peak in Q3 2021, but the turnover ratios of accounts receivable and bills of private enterprises have consecutively rebounded for three quarters to 555.7%, narrowing the gap with central state-owned enterprises. Risk warning: The global economic and trade pattern remains unclear, and global economic growth may not meet expectations; the global political cycle and geopolitical risks may disrupt the fundamentals of industries, especially those of enterprises operating overseas; financial report data have a certain lag and do not necessarily represent future trends.