An analysis of the economic situation reflecting the emphasis of the decision-making level on increasing the intensity of macro-control and strengthening countercyclical regulation was conducted during the September Politburo meeting. On September 24th, the State Council Information Office held a press conference where the People's Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission announced multiple supportive policies. The policy signals were clear, boosting market confidence.
For A-shares, it is expected that the effectiveness of monetary policy efforts in improving the denominator in the short term will be more pronounced. The medium and long-term trend of A-shares depends on whether fiscal policy can swiftly take over.
For the bond market, the expansion of monetary policy is favorable for bonds, but it is expected that the speed of interest rate decline will not be too fast in the short term.
Regarding commodities, this round of expansive monetary policy exceeded market expectations and resonated with the Fed's rate cuts cycle. It is expected that China's monetary policy efforts will accelerate the upward movement of prices for black and nonferrous metals. However, in the medium to long term, commodity prices are expected to return to fundamentals.
The interim performance of A-share companies is in a state of low volatility. The current A-share profit cycle is highly correlated with the Producer Price Index (PPI) cycle. In the second half of the year, structural highlights may still be in domestic consumption, manufacturing with a good supply-demand structure, technology, and pharmaceuticals. It is expected that the year-on-year profit growth rate of A-share/non-financials will rebound from -2%/-3% in 2023 to +1%/0% in 2024.
We expect incremental policies to intensify, and the current bottoming process in A-shares with improved pricing efficiency is expected to accelerate. Currently, the main focus remains on dividends and overseas expansion, with a shift towards high-quality growth and domestic demand themes expected after a market turning point emerges. Hong Kong stocks have fully reflected pessimistic expectations, and their rebound is likely to continue as a monthly-level corrective trend, with growth styles potentially outperforming.
The implementation of policies boosts market confidence.
The implementation of policies includes multiple measures to support high-quality development.
On September 24, the State Council Information Office held a press conference, and the central bank, the banking regulatory commission, and the securities regulatory commission announced various supportive policies.
In terms of monetary policy, the central bank announced a 20 basis points cut in the reverse repurchase rate, which both the timing and magnitude exceeded market expectations; the 50 basis points reserve requirement ratio cut basically met expectations. We believe that the combination of policies fully reflects the central bank's supportive monetary policy stance and orientation, which is conducive to improving investor sentiment.
Regarding real estate policies, at the press conference of the State Council Information Office on September 24, the central bank mentioned that the Loan Prime Rate (LPR) is expected to decrease by 20-25 basis points. They also proposed guiding the average downward movement of existing mortgage rates by 50 basis points, which is beneficial for reducing the burden on residents for home purchases and repayments. The central bank will also adjust the minimum down payment ratio for second homes nationwide from 25% to 15% and increase the support proportion for refinancing of indemnificatory apartments from 60% to 100%.
On September 26, the Central Political Bureau meeting pointed out the need to promote the stabilization of the real estate market, strictly control the increase of commodity housing, offer incentives for existing inventory, enhance quality, increase loans for projects on the "white list," support the activation of idle land resources, respond to public concerns, adjust housing purchase restrictions, lower interest rates for existing homes, and accelerate the improvement of land, financial, and tax policies to promote new development models in real estate.
Both central and local governments have introduced a series of policies to stimulate demand and reduce excess inventory. Some policies are still pending implementation, and there is significant potential for further easing. In terms of the real estate industry chain, the recovery in sales volume, especially in the core urban market, shows a high certainty. The stability of core cities' housing prices will depend on the speed and form of policy implementation.
Regarding capital market policies, the Chairman of the China Securities Regulatory Commission, Wu Qing, clearly stated at the September 24 press conference that the Commission will introduce three key policies: medium to long term capital entering the market, measures to promote mergers and acquisitions, and the release of market value management guidelines for listed companies. The central bank will provide liquidity support for non-banking institutions, listed companies, and major shareholders participating in the stock market.
On September 24, the China Securities Regulatory Commission successively released the "Guidelines for Market Value Management (Draft for Solicitation of Comments)" and the "Opinions on Deepening Market Reforms for Mergers and Acquisitions of Listed Companies," which are the implementations of the policies announced at the press conference by the State Council Information Office on September 24.
Market value management-wise, the "Guidelines" specifically require major index constituent companies and long-term companies trading below net asset value to take special measures. Our calculations show that currently, companies trading below net asset value make up more than 20% of the market value, or prompt companies to carry out market value management operations more quickly.
On the aspect of mergers and acquisitions, the 'Opinions' basically continue to focus on supporting new production forces, industry integration, emphasizing optimizing payment, pricing inclusiveness, and other supporting policies, combined with the guidance of optimizing the layout of state-owned capital by the SASAC, suggesting a focus on the opportunities for central SOE mergers and acquisitions. It is recommended to continue to pay attention to the upcoming 'Guiding Opinions on Promoting the Entry of Medium and Long-Term Funds into the Market' as proposed by Chairman Wu Qing at the press conference, or to focus on efforts in developing equity public funds, improving the 'long money, long investment' system environment, and continuously enhancing the ecosystem of the capital market.
Policy signals are clear, boosting market confidence.
Policies directly improve market liquidity expectations. The latest policies support equity market development through innovative monetary policies, facilitating exchanges between securities, funds, and insurance companies, establishing special refinancing for stock repurchases and shareholdings, which help boost market confidence and directly improve market liquidity expectations. There is hope for an increase in the flow of 'similar to the national social security fund' funds and expand the scope of investment. Various types of medium and long-term funds are expected to accelerate their investment in the stock market, enhancing short-term risk appetite in the market; additionally, optimizing the registration of equity fund products, vigorously promoting innovative index products.
Policy signals are increasingly clear, with loose monetary policy expectations landing, expecting further incremental policies, reducing the reserve requirement ratio and policy interest rates, driving down the market benchmark interest rates. Focusing on serving new productive forces, encouraging equity investment. On September 24, the State Council Information Office press conference proposed six measures to promote mergers and acquisitions, facilitating the private equity venture capital fund 'fundraising-investment-management-withdrawal' cycle, appropriately relaxing the amount and proportion limits of equity investments, and optimizing assessments.
The effects of policy implementation in batches need to be observed, with the price signals having the potential to turn ahead. The real estate five policies aim to stabilize housing prices. The situation of weak domestic demand and low inflation is expected to improve.
For A shares, it is expected that the strong monetary policy push will provide significant support for improving the denominator end in the short term. The medium to long-term trend of A shares depends on whether fiscal policy can quickly take over; for the bond market, loose monetary policies benefit bonds, but the speed of interest rate decline is not expected to be too fast in the short term; for commodities, this round of strong monetary policy surpasses market expectations, resonating with the Fed's interest rate cuts, it is expected that China's monetary policy push will accelerate the upward movement of black and non-ferrous metal prices, but in the medium to long term, it is expected that commodity prices will still return to fundamentals.
Mid-year financial report performance of A-shares is stabilizing.
A-shares' mid-year financial reports in 2024 are generally at a low point, with industries showing good year-on-year growth rates in net profit and improved ROE quarter-on-quarter concentrated in traditional consumer sectors (breeding, liquor, food), upstream resource products (non-ferrous, petrochemicals), and some export-oriented manufacturing industries (home appliances, autos, electronics).
We believe that the volatility of financial indicators in this earnings cycle has significantly decreased, with the core reason being the transition of new and old driving forces, industrial sectors with high correlation to PPI replacing finance and real estate to become the main source of profit growth in A shares.
No signs have been observed in the short term of the start of a new round of profit growth cycle. However, some clues worth tracking have been unearthed from the interim reports of A shares, including: 1. Differentiation of high dividend assets internally, 2. Differences in the transmission mechanism of PPI to real entities and upstream of A shares, 3. Some consumption industries starting to operate with reduced volumes, 4. Slowdown in capital expenditure in the technology manufacturing sector.
Overall, the performance of A-share interim reports hit a bottom, with significant differentiation in net profit structure.
For all A shares / non-financials in 24Q1, the year-on-year growth rates of single-quarter total operating revenue were 0.2% / 0.6%, with growth rates in 24Q2 adjusted to -1.3% / -1.7%, turning negative for the first time in this profit cycle. ROE-TTM for non-financial sectors is 8.3%, with a slight decline compared to the previous period. In terms of other financial indicators, the net profit margin of the entire A non-financial sector remains low and stable, the asset turnover rate continues to decline, and the efficiency of funds measured by accounts receivable turnover days is also at a historically poor level. The overall performance of A-share interim reports is still in a low-volatility bottoming state.
For all A shares / financial / non-financial sectors in 24Q1, the year-on-year growth rates of net profit for a single quarter were -4.2% / -3.3% / -5.0%, and for 24Q2, they were -0.8% / +7.2% / -6.5%. Growth in the financial sector is mainly contributed by non-bank insurance. At the industry level, in 2024Q2, the year-on-year net profit growth rates for industrial / consumption / TMT / pharmaceuticals / financial and real estate sectors were -4.2%, 8.2%, 3.8%, -4.5%, 0.0% respectively. The industrial sector is primarily driven by upstream resource products, with a significant improvement in the downward trend of profit growth rates. Consumption and TMT maintain positive earnings growth, while financial and real estate collectively show zero growth. At the industry level of Citic, the industries with faster year-on-year net profit growth rates and improved ROE quarter-on-quarter are mainly concentrated in traditional consumption (breeding, liquor, food), upstream resource products (nonferrous metals, petrochemicals), and some export-oriented manufacturing industries (home appliances, automobiles, electronics). Among these industries, except for food and beverages, and petrochemicals, in the second quarter of 2024, gross margin and net profit margin also showed quarter-on-quarter improvement, worthy of continued monitoring for improvement in business efficiency.
Figure 1: 24Q2 year-on-year growth rate of total operating revenue for all A and non-financial sectors turned negative.
Table 1: Performance of various indicators in A shares.
Figure 2: Improvement of profitability in the industrial sector in 24Q2, while consumption and TMT maintain positive growth.
Figure 3: A-share Profit Performance in Different Dimensions
The current A-share profit cycle is highly correlated with the PPI cycle, and the bright spots in the second half of the year may continue the current pattern.
In this profit cycle (from 2020 to present), the volatility of A-share financial indicators has significantly decreased. The core reason is that during the economic structural transformation process, the core driving forces have undergone a shift from old to new. Before 2020, the overall A-share profit structure was dominated by finance and real estate, gradually transitioning to industrial products after 2020. The industrial sector has shown significant profit expansion in the upward phase of each PPI cycle, maintaining relative stability in the downward phase. Currently, the industrial sector accounts for 33% of the total A-share profits.
1. Social financing, as a forward-looking signal for predicting PMI and PPI trends, can guide A-shares' profit cycle represented by the industrial sector. According to the macro research department of Citic Securities, PPI may be difficult to turn positive within the year, and subsequent improvements will mainly depend on the implementation of domestic incremental policies. Social financing still tends to be conservative in guiding PMI trends. As PMI generally fluctuates in the same direction as PPI, the probability of A-shares rapidly rising profits driven by the industrial sector in the short term is low.
2. Looking at the trend of Wind's consistent forecast of net profit changes, the overall annual consistent forecast net profit growth rate of A-shares is still in a continuously downward revision trend. The trend and magnitude of change are more consistent with the bottom years of the economic cycle.
Figure 4: Social Financing ("Credit+Non-standard+Bonds" TTM cumulative growth rate) Leads PMI and PPI by about 12 months
Domestic consumption, manufacturing industries with good supply patterns, and technology sectors related to new quality production capacity have shown positive net profit growth on a quarterly basis for two consecutive quarters. However, manufacturing in the black series with poor supply patterns, and industries with independent economic tracks (medicine, military industry, securities) continue to be under pressure on net profit. We believe that the bright spots in the A-share profit structure in the second half of the year will continue the current pattern.
The A-share profit year-on-year growth rate (CSI 800 index calibre) is expected to increase from -2% in 2023 to +1% in 2024. The non-financial sector's net profit growth rate is expected to rise from -3% in 2023 to 0% in 2024.
Figure 5: Distribution of net profit growth rates of different ETFs in 24Q1/Q2
Table 2: Forecast of profit growth rate of CSI 800 companies in 2024
A-shares are undergoing marginal changes in four aspects
1. Differentiation in high dividend assets: Income-sensitive dividend component stocks represented by banks have historically stable profit growth and future expectations, with stable levels of ROE and dividend yield; Commodity price-sensitive stocks have shown higher profit and dividend rate elasticity since 2021, but weak demand may suppress prices, which could affect the future dividend capability and cash flow quality of listed companies. Other dividend stocks mainly consist of traditional industry hakuba stocks, with the core influence still on their pro-cyclical nature, with the largest decrease in earnings forecasts for the year.
2. Differential transmission mechanism of PPI on profits between real entities and A-shares: Considering that commodity prices such as copper, gold, and silver are still supported in the third quarter (until the end of August), and downstream demand remains weak, it is expected that the third quarter will continue to maintain a stable pattern of PPI prices and low profits in the A-share industrial sector.
3. Some consumer industries are showing characteristics of reduced operating: In the second quarter of 2024, some industries are experiencing pressured year-on-year revenue growth rates, but maintaining positive net profit growth, along with robust operational cash flow, and reduced capital expenditure. These include alcohol, food, hotel dining, education, e-commerce, clothing, livestock, and more, with most of these industries having a price-to-earnings ratio within the lower 10th percentile over the past decade. Short-term or long-term investment logic changes may be observed in these industries due to reduced operations.
4. Differentiation between domestic and foreign demand in technology/manufacturing, but capital expenditure growth has slowed down: In the first half of the year, technology/manufacturing companies with over 80% of overseas business income accounted for 2024Q2 net profit year-on-year growth rate and net margin significantly higher than the overall A-level. At the secondary industry level, defining the scale of 2024Q2 net profit above 80% since 2020 as the "right side" of the profit cycle, industries oriented towards external demand include white goods, lighting electrical, general equipment, communications equipment, components, new energy power systems, motorcycles and more, commercial vehicles, auto parts, with good average profit growth rates and profit margins; industries oriented towards domestic demand include telecommunications operations, passenger vehicles, aerospace, electrical equipment, transportation equipment, metal products, automobile sales and services, with relatively weaker financial report quality than external demand. Apart from individual industries related to new quality production, consumer goods upgrades, and large-scale equipment updates, most industries have seen a significant decline in capital expenditure growth in 2024H1.
Table 3: Marginal changes that A-shares are undergoing in the mid-term report dimension
Table 4: Overview of the technology industry views
Table 5: Overview of the manufacturing industry views
Table 6: Overview of infrastructure and modern service industry views
Table 7: Overview of consumer industry views
Table 8: Overview of energy and materials industry views
Table 9: Overview of medical health industry views
Table 10: Overview of financial industry views
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