With the implementation and effectiveness of structural mmf policy tools such as repurchasing and shareholding loans, convenient exchange between securities, funds, and insurance companies, undervalued, high dividend state-owned enterprises and institutions heavily invested in leading industries are expected to benefit.

First, reaffirm the reversal logic and maintain a bullish mindset.

At the end of September, while the market was still hesitating, we explicitly proposed to 'be bullish on China.' Since October, after the previous short squeeze style rally, despite market fluctuations due to changes in investor sentiment and concerns that the intensity and effectiveness of future policies may fall short of expectations, we continue to emphasize maintaining a bullish mindset. The core reason is that the market logic has reversed. The important policy lever of 'boosting the stock market' will fully leverage the combined force of policies to achieve high-quality debt and high-quality development.

The start of the capital market has three roles for the real economy: 1) Boosting confidence. The significant rise at the end of September is expected to reverse the pessimism that has formed in the past three to five years about the Chinese economy, Chinese balance sheet, Chinese property market, and Chinese stock market. 2) Through the wealth effect, boosting consumer confidence, as seen in previous stock market rallies. 3) By expanding balance sheets rather than shrinking them, improving the balance sheets of enterprises. An active capital market helps excellent companies consolidate industries, drive mergers and acquisitions and restructuring, capital operations, which then transmit to the balance sheets of residents, enterprises, and local governments.

Moreover, we have seen that the ongoing combined policy measures have gradually brought about a benign cycle between the stock market environment and the Chinese economy: 1) Since September 24th, in less than a month, multiple heavyweight news conferences have been intensively held, various easing measures have been intensively enhanced, continuously verifying the changes in this round of policies, which will be a lasting encouragement. 2) Countercyclical policies continue to intensify, driving and will continue to support economic expectations and momentum restoration.

Therefore, within the framework of the reversal logic, what we need to focus on is how long this rally will last, not how high it will go in the short term. Surrounding the reversal logic, a benign positive cycle needs to be formed between the capital market, balance sheets, and the Chinese economy, requiring a longer-lasting rally rather than short-term profits. However, the improvement of the Chinese economy is not immediate, so an upward market fluctuation is needed to go further.

Moreover, this round of rise may be composed of multiple stages of 'rapid rise, large fluctuations' in a volatile market landscape, gradually lifting the bottom and moving up step by step. Resolving issues in the operation of the Chinese economy takes time, so upward market trends are bound to have bumps. The large fluctuations and divergences after rapid rises in phases actually wait for a benign interaction between the stock market and the economy, which helps the market go further.

Second, during the period of upward fluctuations, focusing on three major themes that can cross the turbulence along the reversal logic.

2.1 Potential directions for mergers and acquisitions: revitalizing "dormant" assets through policies, boosting the stock market, and achieving high-quality debt and development are important focal points.

This year, against the backdrop of continued tightening of IPOs, mergers and acquisitions are increasingly being seen as an important means to optimize resource allocation and stimulate market vitality, with related policies being continuously improved and refined.

With ongoing policy optimization, the pace of mergers and acquisitions of domestic listed companies has significantly accelerated this year, especially in the second half of the year. The focus is mainly on the direction of new quality productivity in machinery, medicine, electronics, chemicals, new energy, and accelerated industrial integration.

On the other hand, as mergers and acquisitions move towards professionalization and high-quality development, two trends are emerging in the mergers and acquisitions market: 1) The speed of restructuring of central state-owned enterprises has increased.

Looking ahead, new quality productivity and industrial integration are expected to become the two core themes of mergers and acquisitions. Under the current theme of "strengthening supervision to prevent risks and promote high-quality development," technological innovation and industrial adjustments will become important targets for mergers and acquisitions.

2.2 Advantageous & turnaround direction for Q3 financial performance: Business environment remains a key source of excess returns.

As the market enters a phase of large fluctuations and differentiation, coupled with the current disclosure window for the third quarter reports, the business environment has become an important indicator for market transactions.

Based on the current disclosed information, the third-quarter business environment is mainly concentrated in non-banking, automobile, electronics, food and beverage industries.

After sorting out the business conditions of various industries in the third quarter, we have summarized three clues worth paying attention to:

1) Electronics and communications, benefiting from the AI industry cycle and the recovery of consumer electronics demand;

2) Automobiles and home appliances driven by the 'trade-in old for new + going global' strategy;

3) Industries such as new energy and biomedical that are expected to interpret the turnaround of difficulties after the release of the third quarter report.

1. Electronics and Communications: The AI wave is driving an explosion in computational demand, and the global consumer electronics cycle is also seeing an upturn. Technology hardware represented by electronics and communications is expected to benefit significantly. In terms of electronics, the semiconductor cycle is still on the rise, the AI industry trend is an important driver of industrial growth, and the consumer electronics cycle and domestic substitution cycle driven by hardware innovation and replacement demand resonate. Various links in the industry chain such as chips, servers, consumer electronics, storage, panels, etc., are experiencing high demand. In the field of communications, AI infrastructure construction and continuous iteration of large models are driving computational demand. In the third quarter, domestic optical module exports maintained high growth, and the demand for the communications equipment industry driven by the AI wave remains strong. Based on the current disclosure caliber, the optical optoelectronics, semiconductor, consumer electronics, and communications equipment sub-sectors achieved high profit growth in the third quarter report.

2. Automobiles and Home Appliances: The effects of the 'trade-in old for new' policy have begun to show, while external demand remains resilient, providing dual certainty for automobiles and home appliances. In terms of domestic demand, the retail sales volume of new energy passenger vehicles continued to rise year-on-year in the third quarter, and in September, retail sales of home appliances hit a nearly three-year high year-on-year. The effects of the 'trade-in old for new' policy stimulating domestic demand for automobiles and home appliances have already been demonstrated. In terms of external demand, the export prosperity of automobiles and major home appliances remained resilient in the third quarter, with double-digit year-on-year growth. Based on the current disclosure caliber, passenger vehicles, auto parts, and white goods in the secondary sector showed relatively high prosperity in the third quarter report.

3. New Energy and Biomedical: Towards the end of the year and the beginning of the new year, the market often starts to lay out the trends for the next year. After the release of the third-quarter report, there are expectations of a turnaround from difficulties and the previously oversold new energy and biomedical sectors are also worth attention. In terms of new energy, the peak season demand in the third quarter is driving profitability to gradually stabilize. Various links in the industrial chain such as lithium batteries and photovoltaics are undergoing supply and demand balance readjustments. Several new production capacity projects have been announced to be terminated or postponed, and domestic policies continue to restrict the expansion of low-end production capacity, making the turning point for capacity clearance clearer.

2.3. Structural opportunities brought about by the implementation of capital market tools: Focus on the industry leaders undervalued by the state-owned enterprises and institutions with heavy positions.

Since September 24, the decision-making level has used policies such as share buybacks, increased holdings and loans, and swap convenience as leverage to support the capital markets through multiple measures. While boosting market confidence, it is also expected to bring some structural opportunities.

Regarding share buybacks and increased holdings loan tools, 44 listed companies have announced current usage, involving an amount exceeding 15 billion yuan. Following the announcement by the central bank on September 24 to create the first batch of 300 billion yuan quota for share buyback and increased holdings loan tools, the tool was officially established on October 18. On October 20, the first 23 listed companies announced the use of special loans for share buybacks, marking the beginning of this tool supporting the capital markets. As of October 25, 44 companies have announced the use of this tool for share buybacks or increased holdings, involving an amount exceeding 15 billion yuan, which helps inject liquidity into the capital markets.

Moreover, we see that listed companies participating in share buybacks and increased holdings loans generally are able to achieve larger excess returns, showing market recognition of this type of market value management approach. Looking at the excess returns of listed companies participating in share buybacks and increased holdings loans one day after the announcement, the excess returns for most companies are concentrated in the 1-5% range compared to the A-share index. Additionally, the Hithink Royalflush Information Network share buyback and increased holdings re-lending concept index rose by 5.43% this week (October 21-25), achieving 2.72% excess returns compared to the A-share index, fully demonstrating market recognition of this type of market value management approach.

Structurally, looking at the listed companies that have participated in share buybacks and increased holdings loans, state-owned enterprises with low valuation and high dividend yields, as well as industry leaders in various sectors, have shown high enthusiasm. Among the companies leading in participating in share buybacks and increased holdings loans, there are state-owned enterprises with low valuation and high dividends from industries such as real estate, transportation, petroleum and petrochemicals, as well as leading companies from industries like autos, agriculture, new energy, and electronics. From a valuation perspective, most companies have low PB ratios (below 1.5, below the median of the past five years) and relatively high dividend yields (around 2% median), demonstrating the demand for market value management.

In terms of securities, funds, and insurance companies' swap convenience, the central bank carried out the initial operation of 50 billion yuan on October 21. Following the announcement on September 24 to create securities, funds, and insurance companies' swap convenience tools, which officially launched on October 10 and published the first batch of 20 securities, funds companies that were approved to participate in the swap convenience operations and the first application quota exceeding 200 billion yuan, the central bank conducted the initial operation of 50 billion yuan swap convenience on October 21.

Structurally, considering the positioning of the comprehensive tools themselves and the investment preferences of the three categories of participants: securities, funds, and insurance companies, it is expected that the direction of the large cap and institution-heavy leading industries will benefit more from the swap convenience tool.

Therefore, considering the implementation and effectiveness of structural monetary policy tools such as share buybacks, increased holdings loans, and securities, funds, and insurance companies' swap convenience, undervalued, high dividend state-owned enterprises and institution-heavy leading industries are expected to benefit.

Risk Warning: Economic data fluctuations, looser-than-expected policies, and unexpected interest rate cuts by the Federal Reserve may pose risks.

Editor/ping