Industrial: Comparing industry opportunities in three dimensions to combat overwork.

One, Anti-Incumbency: New Changes in the Supply Side by 2025 The 2024 government work report clearly stated that "some industries have excess capacity," and the PPI has been fluctuating in negative territory since October 2022. On one hand, under the switch from old to new driving forces, the domestic real estate cycle is still in a downward phase, dragging down the process of economic fundamentals recovery. Some traditional industries have long-term weak demand, with capacity utilization hovering at the bottom; on the other hand, driven by the surge in external demand during the pandemic and competition in local government industrial policies, some emerging industries have rapidly expanded their capacity. However, as domestic and international demand falls back, it becomes difficult to digest the newly added capacity. Under the imbalance of supply and demand, fierce homogenized competition within some industries has resulted in frequent vicious price wars to grab market share, posing severe challenges to the sustainable development of the industrial chain and the construction of a unified large market. The "incumbency-style" competition under strong supply and weak demand has squeezed enterprise profit margins. China's industrial capacity utilization rate has been declining since the second half of 2021, indicating relative surplus on the supply side. The operating profit margin of industrial enterprises above a designated size has been trending downward for the past three years, reaching a relatively low level in nearly a decade. The gross profit margin data of non-financial listed companies also reflects the same issue. Anti-incumbency is one of the most important policy threads this year. The Central Economic Work Conference in December 2024 clearly identified "comprehensively rectifying 'incumbency-style' competition and regulating the behavior of local governments and enterprises" as one of the key tasks for 2025. This is the second time that top-level meetings have explicitly expressed opposition to incumbency, following the Central Political Bureau meeting in July of the same year. Moreover, the language has been upgraded from "preventing incumbency" to "comprehensively rectifying," showing a more resolute attitude. In the second quarter, with successive statements from central institutions such as the State Council General Office, the National Development and Reform Commission, and the Central Finance and Economics Committee, the pace of anti-incumbency has accelerated. In April, the State Council General Office issued the "Opinions on Improving Price Mechanism Reform," in May, the NDRC again mentioned rectifying "incumbency-style" competition, and in July, the Central Finance and Economics Committee's sixth meeting reiterated the governance of low-price and disorderly competition by enterprises in accordance with the law and regulations to promote the orderly exit of backward production capacity. Various industries are beginning to take substantive actions to rectify "incumbency-style competition." Two, What are the differences between this round of anti-incumbency and the supply-side reforms in 2016-2017? 2.1, Review of the Supply-Side Reforms in 2016-2017 In 2016-2017, China carried out a vigorous supply-side reform, successfully promoting the elimination of excess capacity in industries such as steel and coal. With the support of the four trillion investment plan, the steel and coal industries and other upstream industries saw a significant build-up of capacity. After 2012, as economic growth slowed down, the supply-demand issues in upstream industries became more severe. In November 2015, the Central Leading Group for Financial and Economic Affairs first proposed "supply-side structural reforms." In December of the same year, the Central Economic Work Conference prioritized "cutting overcapacity" as one of the five main tasks for the year, officially launching the supply-side reforms. One of the key reasons why the supply-side reduction of capacity in the steel and coal industries was effective was the strong determination of administrative policies to reduce overcapacity: 1) Top-level documents clearly set annual targets for capacity reduction in the coal and steel industries from 2016 to 2018, issuing mandatory orders for the forced shutdown of backward capacity such as "local-made steel" and small coal mines with safety issues. 2) The capacity reduction targets were split and strictly implemented by various provinces, with the National Development and Reform Commission and other ministries serving as convenors to establish an inter-ministerial joint meeting system and coordinate efforts to resolve overcapacity, supervise the progress of steel and coal capacity reduction. Secondly, leading state-owned enterprises drove a large number of industry mergers and acquisitions, significantly increasing industry concentration and improving the competitive landscape. At the end of 2015, there were 3,128 steel/coal industry enterprises, which decreased to over 1,500/4,000 by early 2018, leading to a continuous increase in industry concentration, with the top 10 steel/coal producers' market share reaching 36.9%/44.2% in 2017. Under the drive of supply-side reforms, the steel and coal industries and other upstream resource sectors became important market themes in 2016-2017, with leading returns for two years. Looking at the market performance, after the industry documents were issued in February 2016, the sector saw an initial uptrend driven by reform expectations. Given that the supply side was still at a low point, without significant changes in fundamentals, the increase mainly came from valuation adjustments. The real turning point came in June 2016 when steel and coal commodity prices entered an upward channel, leading to improved industry fundamentals and a trend market for the steel and coal sectors. 2.2, Differences between this round of anti-incumbency and the supply-side reforms in 2016-2017 Firstly, looking at the current supply-side situation and recent industry actions, the scope of this round of anti-incumbency covers a wider range of industries, not only involving traditional industries such as steel, building materials, chemicals, coal, and pig farming, but also including many emerging manufacturing industries such as photovoltaics, lithium batteries, new energy vehicles, and internet e-commerce. According to our exclusive framework of 157 supply-side industries, the utilization rates and capital expenditure indicators of most industries have dropped to historical lows, and excessive industry competition has severely suppressed profitability, indicating the necessity of anti-incumbency in the industry. In addition, a new round of price wars in internet e-commerce and new energy vehicles has also attracted widespread market attention. Secondly, with China's economy entering a key period of transformation and upgrading, a "one-size-fits-all" approach to capacity reduction policies may be difficult to adapt to, and the rate of capacity elimination may be slower than the previous round, requiring gradual support from the demand side. The previous supply-side reforms were able to swiftly advance due to strong support from the property market recovery and improving economic end-demand under the housing reform monetary policy. Currently, in the midst of a transition from old to new driving forces, the repair of end-demand still requires policy support. If the supply side undergoes drastic fluctuations in the short term, it will inevitably put pressure on employment, finance, and economic stability. Therefore, in February 2025, the National Conference on Regular Affairs emphasized, "We must make efforts from both the supply and demand sides, address key industry structural contradictions and promote industrial healthy development and quality upgrade. We must optimize industrial layout, strengthen standards guidance, promote integration and reorganization, push for the orderly exit of backward and inefficient capacity, and increase the supply of high-end capacity," indicating that the slope of this round of anti-incumbency may be relatively flat, requiring joint efforts from the demand side to drive supply-side reforms in terms of quantity and quality. Thirdly, looking at the deployments of the two rounds of policies, in the previous supply-side reforms, the NDRC and other ministries led the establishment of inter-ministerial joint meetings to address excess capacity and facilitate the development of the steel and coal industries, making sure that capacity reduction targets were implemented at the local government level and strictly enforced. In contrast, the current anti-incumbency round is primarily driven by industry self-regulation, with the Ministry of Industry and Information Technology and industry associations leading and organizing industry anti-incumbency discussions or signing pledges, which have relatively weaker binding force. The subsequent policy effectiveness and intensity remain to be observed. Three, Which industries have a better foundation for anti-incumbency? We analyze which industries have a better foundation for anti-incumbency from three dimensions: the urgency of participating in anti-incumbency, the continuity of anti-incumbency implementation, and the resistance to capacity elimination. Taking into account the proportion of loss-making enterprises and interest coverage ratios within the industry, we can assess the urgency for companies in the industry to participate in anti-incumbency: if the majority of companies in the industry are operating at a loss and struggling to cover interest expenses, it indicates a higher willingness to cooperate with anti-incumbency. Typical industries include the new energy chain, general steel, glass fiber, titanium dioxide, decorative building materials, and passenger cars. Considering the changing trend of industry concentration and the proportion of state-owned enterprises, we can evaluate the sustainability of capacity elimination in the industry: industries with a higher proportion of state-owned enterprises and rising market share for leading companies are more likely to take resolute actions when implementing capacity reduction policies. If there are many relatively dispersed private enterprises in the industry, the difficulty of capacity elimination will increase, and the probability of repeated capacity elimination will also rise. Therefore, typical industries with good sustainability in anti-incumbency policy execution mainly include general steel, coal, titanium dioxide, and other traditional cyclical sectors. When examining the changes in government subsidy levels and the intensity of expansionary capital expenditures in various industries, we can assess the resistance to capacity elimination: if the government continues to increase subsidy levels or if the industry has high capital expenditures, indicating ongoing future capacity releases, the difficulty of capacity elimination will significantly increase. Recent trends show that government subsidies in industries such as instrumentation, titanium dioxide, and glass fiber are on the decline, while expansionary capital expenditures in sectors like titanium dioxide, general steel, pig farming, and the new energy chain have turned negative and are at relatively low levels in nearly a decade. In conclusion, among the key industries involved in anti-incumbency, companies in general steel, glass fiber, titanium dioxide, and the new energy chain (silicon materials, photovoltaic cells and modules, specialized lithium battery equipment) are currently experiencing historical low levels of profitability and capital expenditures. They have a strong willingness to participate in anti-incumbency and are expected to make positive changes in the short term. Among them, the steel sector has a higher proportion of state-owned enterprises and lower resistance to capacity elimination, making it one of the industries likely to see a smoother implementation of anti-incumbency if further policies are issued. This article was originally published on the "Yao Wang After Trends" WeChat official account, Analysts: Zhang Qiyao, Zhang Qianting, Xia Qiu; GMTEight Editor: Huang Xiaodong.