GFSEC: The repair of A-share non-financial performance still requires time, and some industries have already shown structural highlights.

GF SEC released a research report saying that the revenue growth of A-share non-financial companies is still in negative territory in the mid-year report, and profit growth is slowing down, with second quarter quarter-on-quarter growth at the lowest level since 2010. It is expected that the full-year A-share non-financial profit forecast will remain in low single digits, and the recovery of performance is still not smooth. The bank also believes that there are more bright spots in industry comparison, including overseas profitability, hedging against inadequate domestic demand, supporting industries with high income and high gross profit margins; industries characterized by an increase in contract liabilities and advance payments indicating an increase in order growth and industries where stock prices are positively correlated with the growth of advance payments; and industries where the necessity of countering internal competition is strong and the supply-demand structure urgently needs to be improved. On the reversed strategy, the bank is bullish on wind power cables/machinery/offshore wind, overseas automobiles (lighting/IGBT), defense industry (FPGA/missiles), AI (liquid-cooling transformers), and lithium battery equipment. In terms of prosperity strategy, the bank believes that AI/non-U.S. exports/to U.S. exports /semiconductor equipment/lithium batteries/some end-side hardware/rising chemical prices and other sectors are expected to maintain prosperity, with profit growth continuing to be 30-40% and higher in the second half of the year and next year; SOC/motorcycles/engineering machinery/switches/power supply and other sectors with sufficient cash, potential supply expansion, and sustainable prosperity. GF SEC's main points are as follows: After exceeding expectations in the first quarter, the mid-year report has slowed down again, and the recovery of performance remains challenging. The revenue growth of A-share non-financial companies is still in negative territory in the mid-year report, with profit growth slowing down, and the second quarter quarter-on-quarter growth is at the lowest level since 2010. With the performance transmission path of "broad fiscal expansion PPI ROE" remaining unchanged, it is expected that the full-year A-share non-financial profit forecast will remain in low single digits, and the recovery of performance remains challenging. Broad-based index: Large caps outperform small caps, growth outperforms value, and the profitability advantage of the 25-year Science and Technology Innovation Board over the Shanghai and Shenzhen 300 index has turned upwards again. ROE has been declining for 16 consecutive quarters, and there are signs of bottoming out in the mid-year report this year. The increase in leverage provides important support, profit margins are stabilizing, turnover rate remains a negative drag, highlighting the strong necessity of countering internal competition. Companies are aggressively reducing supply (assets), but the recovery of income is slow, and substantial changes require administrative guidance for supply contraction (counteracting internal competition) or further stimulus from the demand side (domestic demand policies). Through the representation of growth rates, the expectations and confidence of entrepreneurs reflected in three financial statements have shown signs of recovery compared to 2024, consistent with the first quarter. Profit statement: The gross profit margin began to improve from the middle of 2023, but the net profit margin has gradually stabilized since half a year ago. This improvement is attributed to the recent effectiveness of cost control by companies, with a significant decrease in the expenses-to-revenue ratio. Profit redistribution among upstream, midstream, and downstream sectorsupstream industries are sacrificing profits, midstream materials and some manufacturing sectors are recovering, but downstream sectors are temporarily unable to absorb these changes. Balance sheet: One of the important indicators of changes in entrepreneurial confidence, the leverage ratio has ended the continuous decline from 2020 to 2024. The gradual increase in leverage by companies signifies changes in confidence for the future, with relief in accounts receivable pressures, an increase in advance payments (representing orders), and improving operating cash flows. Cash flow statement: There was significant pressure in 2024, but there has been a marked improvement in 2025. Normalization of cash flow operating cash flow recovery (due to increased sales), stabilization of investment cash flow (due to structural capacity expansion in some industries), and improved financing cash flow compared to last year (as a result of broad credit easing and debt restructuring). In the operational mid-cycle: Inventory cycles continue to bottom out, weak but not replenished, and the capacity cycle is near the bottom turning point. Inventory cycle: The trend of briefly replenishing inventory in the first half of 2024 has not continued, and it is currently still hovering at the bottom; structurally, aside from the restocking of the export chain, there is a structural restocking driven by downstream materials. Capacity cycle: At the turning point of a new cycle, this indicates that some industries with excess capacity are finally approaching the point of clearing out (such as the Science and Technology Innovation Board and new energy), while some emerging industries are driving the expansion of the technology chain, acting as a traction force for capital expenditures. Looking ahead to the next stage, there are more and more bright spots in industry comparison: 1. Overseas is more profitable, hedging against inadequate domestic demand, supporting high-income and high-gross-margin industries. Selection criteria: 1. Overseas gross profit margins are higher than domestic gross profit margins; 2. Overseas revenue accounts for >20%; 3. Supporting stable or increasing revenue growth: wind power, engineering machinery, motorcycles, passenger cars, medical services, etc. 2. Industries characterized by an increase in contract liabilities and advance payments indicating an increase in order growth and industries where stock price is positively correlated with advance payment growth. In the first quarter, the bank identified industries like components PCBs, motorcycles, and wind power equipment through improved orders. In the mid-year report, industries that showed continued improvement in orders and have historically had a positive correlation with stock prices include batteries, lithium battery equipment, wind power, motorcycles, engineering machinery, computer equipment, IT services, automation equipment, semiconductors, and military electronics. 3. Industries where countering internal competition is strongly necessary, and where supply-demand structure urgently needs improvement: coal, logistics, general steel, photovoltaics, cement, and some chemical products. New framework for industry comparison, positioning, and outlook for the second half of the year: The bank divides the industry basic cycle into seven stages: downturn period early clearing stage mid clearing stage late clearing stage recovery period expansion period peak period. The latest "positioning" of industries can be summarized as follows. Comparing Q2 to Q1 in terms of fundamental change, moving from right to left: (1) some categories of the U.S. export chain, national subsidy chain, new consumption, and the pig cycle have entered the peak period, with a slowdown starting in Q2; (2) industries in the expansion period include AI chain, non-U.S. export chain, batteries, end-side hardware, wind power subsectors, CXO, and some of the U.S. export chain/new consumption/chemical products/military industry. Among them, AI is the most prosperous sector in the entire industry and the dominant industry of this round. Wind power/lithium batteries/pharmaceutical R&D/some military industries are experiencing smooth recovery. (3) Some subsectors of offshore wind/defense/lithium battery/overseas automakers/energy storage chains are entering the late clearing stage; (4) Pro-cyclical leaders have transitioned from the early clearing stage to the middle stage, with capacity utilization rates stabilizing, waiting for clearer signals from demand/policy. Prosperity Strategy: Which categories can continue to maintain expansion in the second half of the year? Prospects are likely to maintain prosperity, with profit growth continuing to be 30-40% and higher in the second half of the year and next year: AI/non-U.S. exports/to U.S. exports /semiconductor equipment/lithium batteries/some end-side hardware/rising chemical prices, etc.; Clue 2: Industries with sufficient cash and potential supply expansion sustaining prosperity. SOC/motorcycles/engineering machinery/switches/power supply, etc. Reversal Strategy: Improved orders, high-profit growth in the second half of the year: wind power cables/machinery/offshore wind, overseas automobiles (lighting/IGBT), defense (FPGA/missiles), AI (liquid-cooling transformers), lithium battery equipment. Risk warning: Geopolitical conflicts exceed expectations, liquidity remains looser than expected, and growth stabilization efforts are lower than expected.