According to the intelligence finance app, CITIC Securities released a research report stating that since August, Hong Kong stocks have had a different "independent trend" from A-shares. In addition to more thorough valuation and position clearing, the profitability advantage of Hong Kong stocks compared to A-shares is undoubtedly an important reason. In addition, under the highly probable continued volatile market conditions, sectors such as internet e-commerce and consumer services have higher prosperity based on the mid-year financial statements and market expectations. Utilities such as telecommunications and hydropower have stable profitability and are still worth continuing to observe as dividend targets. Profit growth of overseas Chinese stocks in the first half of the year has improved compared to the same period last year, but it is driven more by cost factors rather than demand, and companies are generally adopting a contraction strategy.

From a market perspective, considering the combination of earnings and the impact of the Fed's interest rate cut, we still believe that Hong Kong stocks have greater resilience than A-shares. In the short term, growth sectors benefiting from interest rate cuts may have higher elasticity, such as semiconductors, automobiles (including new energy), media and entertainment, software, and biotechnology. However, in the medium term, the structural market conditions of range-bound volatility still remain the main trend. The direction of allocation depends on the outlook for fundamentals, with dividends and technological growth as the main focus.

CICC's main points are as follows:

Growth situation: The growth rate in the first half of the year was 2.3%, better than A shares; high growth in internet e-commerce, exports and metals are highlights, while real estate and banks are dragging down.

Overseas Chinese stocks' profit growth in the first half of 2024 increased by 2.3% compared to the same period in 2023, accelerating from 0.2%. On a comparable basis and in Hong Kong dollars, overseas Chinese stocks' profit growth in the first half of the market increased by 2.3%. Among them, financials decreased by 1.1% (compared to -2.7% in 2023), and non-financials increased by 6.3% (compared to 3.9% in 2023).

Mining and export chains in the metal sector are highlights, while e-commerce and the internet maintain high growth, and real estate and banks are declining more rapidly. Looking at different industries, upstream resource companies are showing signs of recovery. Profit growth for raw materials increased by 24.0% (compared to -27.1% in 2023), with rising prices boosting the performance of the metal mining sector. Energy profit declined slightly by 1.0% (compared to -15.0% in 2023), mainly due to the decline in coal prices, while oil and gas profits increased by 6.0%, turning positive from a 12.4% decline in 2023.

Midstream manufacturing is relatively weak. Upstream resource price increases squeeze profits, with a decline of 8.9% in capital goods profit (vs. -7.3% in 2023); airlines reduce losses, performance improvement in some logistics and port companies due to rising freight rates; autos and components sector grow by 17.6%, speeding up from 9.9% growth in 2023, driven mainly by a year-on-year increase in profit margins by 0.4ppt (vs. -0.5ppt in 2023), but income growth slows to 6% year-on-year, compared to 22.3% in 2023.

Overall strength in TMT, significant decrease in losses for software services, telecommunications and technology hardware grow by 2% and 20% respectively, better than 1.2% and 17% in 2023, media and entertainment maintain a high growth rate of 32.8% (vs. 49.8% in 2023). Defensive medical care and utilities experience a decline in growth rates due to a high base, with medical care down by 2.8% (vs. +37.2% in 2023) and utilities up by 0.7% (vs. +42% in 2023).

Decline in profitability for financial and real estate sectors dragging down overall performance. Real estate accelerates its decline by 52.1% (vs. -15.2% in 2023); financial profits decrease by 1.1%, narrowing the decline from -2.7% in 2023, significant profit recovery in insurance (+19.3%), but narrowing interest rate spreads lead to accelerated profit decline in banks (-4.5% vs. -2.9% in 2023), and diversified finance (-7.3%) performance remains at the bottom.

Despite this, Hong Kong stocks still outperform A-shares by 3%, especially in the non-financial sector, which grows by 6.3% year-on-year, contrasting A-shares' non-financial decline of 5.5%. The main reason lies in the more advantageous profit structure of Hong Kong stocks.

In terms of industry structure, Hong Kong stocks have a higher proportion of new economic companies and a lower proportion of midstream manufacturing. E-commerce and internet sectors with double-digit profit growth in the first half of the year have a significant weight in Hong Kong stocks, accounting for close to 20% of market cap, whereas there are fewer such companies in A-shares. Midstream manufacturing companies under profit pressure are mostly concentrated in A-shares, with the industrial sector accounting for over 18% of market cap, significantly higher than Hong Kong's 7%. Among them, the power equipment and new energy sector, which saw a 53% decline in profit in the first half of the year, accounts for 5% of market cap in A-shares, compared to only 0.5% in Hong Kong stocks.

The concentration of top companies has a more pronounced contribution effect. In the first half of the year, the net profit of the top 10 Chinese companies listed overseas accounts for 44% of the total, and the top 20 companies account for 60%, while in A-shares, the top 10 companies account for only 33% of net profit, and the top 20 companies account for 45%. Therefore, the performance of top companies has a greater impact, with Tencent, Meituan, CNOOC and others showing impressive performance in the first half of the year, all achieving double-digit growth. This effect is even more noticeable by sector, with the automotive sector being a prominent example, as Great Wall Motor, Xpeng, and BYD all contributing significantly to the overall growth; in transportation, China Eastern Airlines drastically reduced losses and JD Logistics exceeded expectations, driving over half of the growth; in energy, CNOOC grew by 19.8% year-on-year, largely offsetting the drag from the decline in coal.

Quality of growth: More driven by cost rather than demand, companies generally adopt a contraction strategy.

Profit improvement is more cost-driven, while demand declines. The net profit margin of Chinese stocks listed overseas increased from 5.2% in 2023 to 6.2% in the first half of the year. Compared to 2023, the net profit margin of most sectors improved, with media and entertainment (+5.4ppt), retail (+3.4ppt), utilities (+2.7ppt), durable goods and clothing (+2.3ppt) sectors showing significant improvement in net profit margins compared to 2023, with only the real estate sector declining by 0.8ppt. In the first half of the year, overseas Chinese stocks listed companies reduced taxes and saw a slowdown in the growth rate of interest expenses. Companies are cutting costs to maintain operations in a weak demand environment.

In contrast, non-financial industry revenue decreased by 1.3% year-on-year (vs. -1.3% in 2023), operating cash flow decreased by 24.4% year-on-year (vs. 3.2% in 2023), with transportation (+13.2%), information technology (+12.7%), durable consumer goods (+11.4%) and other sectors achieving year-on-year revenue growth in the first half of the year, showing significant improvement compared to 2023, while automobiles (-16ppt), real estate (-10ppt), capital goods (-8ppt), medical care (-6ppt) and other sectors showed obvious slower growth compared to 2023.

Corporate investment contraction, net debt reduction. In the first half of the year, overseas Chinese capital expenditure decreased by 4.2% year-on-year. The leverage ratio remained basically unchanged at 343% compared to 2023, with the capital goods leverage ratio showing the highest increase (+41ppt); while transportation leverage ratio decreased by 10ppt. It is worth noting that the net gearing ratio decreased from 45% in 2023 to 41% in the first half of 2024, indicating deleveraging by enterprises. At the same time, against the background of destocking in the first half of 2024, inventory turnover continued to decline, accounts receivable increased year-on-year, and with limited investment return and insufficient domestic demand momentum, companies adopted contractionary operational management strategies.

Therefore, the increase in ROE is more attributable to the profit margin driven by cost. ROE rose from 10.9% in 2023 to 11.6% in the first half of 2024. Among them, the financial sector ROE remained flat at 10.8% compared to 2023; non-financial ROE increased from 11.0% to 12.7%; insurance, necessities, utilities, and telecommunications sectors saw an expansion in ROE of 7.9, 4.4, 3.5, and 2.5ppt, respectively; while banking, IT, and capital goods sectors saw a decline of 0.5, 0.4, and 0.3ppt. According to DuPont analysis, the rise in net profit margin supports the increase in ROE, with leverage ratio holding steady, and asset turnover declining from 49% in 2023 to 47%. In a situation of insufficient demand, companies find it difficult to find new profit growth points, and their profit-making ability is limited.

Growth prospects: A slight downward revision to the full-year growth for 2024 to 2%; it is recommended to pay attention to e-commerce, consumer services, telecommunications and utilities, etc.

Currently, the market consensus expects a 9.5% full-year growth for overseas Chinese-funded stocks, implying a nearly 20% year-on-year growth in the second half of the year. In terms of sectors, the market universally expects e-commerce, insurance, media and entertainment to remain the main contributors to profit growth; consumer services, real estate, insurance, semiconductors and other sectors are expected to perform significantly better in the second half of the year compared to the first half.

China International Capital Corporation believes that the market's consensus expectations may be overly optimistic, or there may be a conjunction fallacy. On the one hand, effective demand remains insufficient, real estate is operating weakly in terms of quantity and price, prices are under sustained pressure, and the internal driving force for economic growth is weak and still requires fundamental improvement. On the other hand, the stabilization of exports in the first half of the year, better than market expectations providing support for export chain enterprise profits, however, recent shipping prices have continued to fall, and the export situation may weaken in the second half of the year.

The root cause of the current growth pressure issue is still credit tightening, especially since the fiscal stimulus has slowed down again since February of this year, particularly in the second quarter, unable to effectively offset the continuous deleveraging in the private sector. Solutions include reducing financing costs and increasing leverage in the fiscal policy. With the accelerated growth in the July fiscal deficit and the anticipated September Fed rate cut providing a loose policy environment domestically, it is more likely that the focus will be on implementing existing policies for the remainder of the year. The Ministry of Finance has recently emphasized the prevention of excessive fiscal policy measures and the introduction of new projects. Therefore, the expectation of a "strong stimulus" is not realistic, and fundamentally, there is a lack of basis for high-speed profit growth in the second half of the year.

Based on the actual growth in the first half of the year, China International Capital Corporation has revised its 2024 profit growth forecast from 3-4% to 2%, lower than the current consensus of 10%. However, due to the higher proportion of new economic sectors and lower proportion of manufacturing, Hong Kong stocks are expected to outperform A-shares. At the sector level, it is recommended to focus on sectors with higher business activity such as e-commerce internet, consumer services, which have seen profit upgrades since the beginning of the year. The 2024 ROE is expected to be higher than the average of the past 5 years, and the PB ratio is lower than the average of the past 5 years, making it a highlight in the overall trend of moderate profit growth; in addition, the performance of public utilities sectors like telecommunications and hydropower is stable and worth attention as dividend targets.

From a market perspective, considering the impact of earnings and the Fed's interest rate cuts, Hong Kong stocks are still believed to have greater resilience than A shares. In the short term, growth sectors that benefit from interest rate cuts may have higher elasticity, such as semiconductors, autos (including new energy), media and entertainment, software, biotechnology, and so on. But in the medium term, the main theme is still a range-bound structural market. The current 10-year U.S. Treasury yield has already priced in the interest rate cut expectation to a large extent at 3.8%. If the risk premium returns to the level of last year, the corresponding Hang Seng Index is estimated to be around 19,000. If earnings grow by 10% on this basis, the Hang Seng Index could be around 21,000.

The allocation direction depends on the fundamental outlook, with dividends and technology growth as the main themes: 1) In a scenario of overall decline in returns, stable returns can be sought through high dividends and share buybacks, such as cash-rich "cash cows". From cyclical dividends to bank dividends and then to defensive low-volatility dividends; 2) Leveraging specific sectors, such as technology growth with industry prosperity (Internet, gaming, education and training) or policy support (technology hardware and semiconductors).