The strategy report on the Chinese stock market released by JPMorgan on January 26 in Eastern Standard Time indicated that the initial situation of US-China tariff tensions was better than expected, and this wave of rebound still has room to grow.

In the past week, Trump's statements regarding tariffs on China were better than expected, along with a weakening USD (down 1.9% for the week), pushing the Morgan Stanley China Index (MXCN) to rise 3% against the dollar this week. Given the low market expectations and low Hold Positions, our earlier prediction of significant market increases in Q1 2025 still holds.

As mentioned last week, the MXCN, Csi 300 Index, and Shanghai Composite Index experienced mid to low double-digit declines in USD-denominated returns during the period from November 5 to January 13, likely reflecting the negative impacts of the China-US trade war 2.0.

Looking ahead, key factors to watch include China's economic stimulus measures, stabilization in the Real Estate market, regulation of excess capacity, earnings reports of listed companies in Q4 2024, and the duration of the ongoing easing of tensions between China and the USA. In 2017 (see Figure 4), MXCN outperformed Emerging Markets (EM)/ Developed Markets (DM), benefiting from real estate stimulus policies, supply-side reforms, the inclusion of Internet companies in the MXCN index, and strong global demand.

In 2025, we see similar or mild positive factors regarding the de-stocking of Real Estate (10-year Chinese government bond yields falling to a record 1.64%, significant improvement in demand due to reduced property deed tax since December 1), regulation of excess capacity (such as in the Energy industry), resilience in US economic growth, more Large Cap stocks from A-shares listing in Hong Kong, and the clear objectives set by the People's Bank of China to support the Forex market and domestic and foreign stock markets.

In 2017, the USD index cumulatively fell by about 10% for the year. JPMorgan expects that by the end of 2025, the USD index may close at 111, 107, 105, and 103 for the four quarters. Important events in the next two weeks include: January Fed monetary policy meeting, consumer data during the Spring Festival, performance forecasts for Q4 2024, and interactions between China and the USA, particularly Trump's visit to China. We recommend adopting a barbell investment strategy, allocating premium high-dividend stocks and premium growth/cyclical stocks, with the latter having a larger weight.

The barbell investment strategy leaning towards growth/cyclical stocks focuses on themes of Spring Festival consumption: year-to-date, the cyclical/growth sectors (materials, information technology, discretionary consumer) have outperformed defensive sectors (utilities, energy, Communications Services, essential consumer).

On January 10, we upgraded our ratings on the industrial and materials sectors to overweight, set the ratings for discretionary and essential consumer sectors to neutral, and downgraded the energy and utilities sectors to neutral, maintaining an overweight rating on the information technology sector. This adjustment is more tilted towards cyclical/growth style compared to the allocations at the end of November 2024.

The release of DeepSeek R1 on January 20 has boosted market confidence in China's AI competitiveness due to its low-cost training and high-quality performance, despite some shortcomings in computing power. For views on the sector/individual stocks, including more content on the Spring Festival consumption theme, please refer to our 2025 Outlook report.

From a Thematic Investment perspective, we recommend export companies benefiting from overseas inflation (JPMorgan Export Basket Index: JPCHWVBE ), as well as high dividend stocks that can provide stable cash flow and dividends in the domestic deflationary environment.

The top three preferred stocks are: Futu Holdings Ltd (FUTU), MGM CHINA (MGM China), and NetEase (NetEase).

As of January 24, the number of A-shares companies issuing earnings forecasts for the fourth quarter of 2024 is 4.2 times that of the same period last year, due to the Spring Festival being two weeks earlier this year. Unfortunately, the proportion of negative forecasts is as high as 66% (1,377 out of 2,076 companies), far exceeding 23% of the same period last year (113 out of 490 companies). Since positive forecasts are often released earlier than negative ones, a more comprehensive situation is expected to be seen in mid-February. We have summarized key findings (see Figures 5 - 6 for more details).

Currently, the market generally expects the EPS of MXCN constituent stocks to grow by 17%/9% in 2024/2025, and the EPS of Csi 300 constituent stocks to grow by 7%/15% in 2024/2025 (see Figures 22 - 23).

Futu Holdings Ltd

Investment Highlights: Futu Holdings Ltd is a leading technology-driven platform that provides digital brokerage and wealth management products. Its growth momentum comes from multiple aspects. We expect Futu Holdings Ltd to achieve growth in the number of paying customers by penetrating existing users and expanding into new markets (such as Japan and Malaysia). The rapid expansion of wealth management business may drive future business growth and increase user stickiness. The cryptocurrency business launched in August 2024 is expected to positively impact Futu Holdings Ltd's client and Asset Management (AUM) growth. Therefore, we assign an overweight rating to Futu Holdings Ltd.

Valuation: Based on the PEG valuation method, we expect a compound annual growth rate of 21% in EPS for Futu Holdings Ltd from 2025 to 2027, with a PEG of 1.0, leading to a Target Price of $160 by December 2025.

Risks of rating and target price: The risks of lowering the rating and target price include: 1) Weak performance of Chinese Technology stocks, leading to lack of growth in trading volume; 2) Regulatory risks (such as compliance with data security laws in China); 3) The growth in the number of paying customers is lower than expected. The risks of raising the rating and target price include: 1) The growth in the number of paying customers exceeds expectations; 2) Trading volume growth is stronger than expected; 3) Operational efficiency improvement is better than expected; 4) Futu Holdings Ltd launched its cryptocurrency business in August 2024, which may positively impact customer and AUM growth.

NetEase

Investment points: Communication with investors shows that the market lacks confidence in the games launched by NetEase in the fourth quarter of 2024 ("The Justice Mobile Game", "Marvel Super War"), and this is also reflected in NetEase's low valuation (the expected P/E ratio for 2025 is 10 times, the lowest in 10 years). Therefore, we believe that the successful launch of these games may drive the stock price up. We acknowledge that predicting game performance is not easy, but we do find that these two new games have unique aspects ("The Justice Mobile Game" features AAA game graphics and rich non-social exploration content; "Marvel Super War" is the first Marvel-themed multiplayer online competitive shooting game). We expect revenue from new games, the resilience of existing games (especially the return of Blizzard games to the Chinese market in the second half of 2024 and the performance of "Naraka: Bladepoint" on PC/mobile exceeding expectations), and the low base effect from the significantly reduced revenue base of "Battle! Ping An Jing" in the fourth quarter of 2024 to drive the gaming business revenue to recover a year-on-year growth of 2% in the fourth quarter of 2024, with a year-on-year growth of 8% in 2025. We believe that the accelerated growth of gaming business revenue and strong shareholder returns (we expect the shareholder ROI in 2024 to be 6%, with 50% from share buyback and 50% from dividends, assuming that NetEase allocates 70% of its adjusted net income for 2024 to shareholder returns) will be sufficient to drive valuation reconfiguration in the next 6-12 months.

Valuation: We set the target price for January 2025 at $120. Our target price is based on an expected P/E ratio of 15 times for 2025, which is an 18% discount from NetEase's five-year average P/E ratio. The expected P/E ratios for NetEase in 2024/2025 are 12 times / 10 times (based on Morgan Stanley forecasts), which are below the consensus expected P/E ratios of its peers in Asia's online gaming sector.

Risks of rating and target price: The risks of lowering the rating and target price include: a decline in revenue from existing games; increased competition in the international gaming market; and enhanced regulation of the gaming industry in China.

MGM CHINA

Investment points: We acknowledge that MGM China's growth momentum of market share (and profit share) may still be relatively weak compared to its peers, but this is mainly due to the significant increase in market expectations and benchmarks after more than eight consecutive quarters of performance exceeding expectations and market share growth. Compared to pre-pandemic levels, MGM China's performance still significantly outperforms its peers, with its EBITDA reaching 130% of pre-pandemic levels (the industry average being -85%), and market share approximately 50% higher than pre-pandemic levels (14.7% in the fourth quarter of 2024, compared to 9-10% in 2019). With peers adding extra capacity during the pandemic, MGM China’s performance far exceeds expectations, leading us to believe that the market valuation of this stock is somewhat unfair, with its valuation multiples in the Macau market significantly lower than its peers and also at a lower level globally. Therefore, based solely on valuation factors, we maintain an overweight rating.

Valuation: Based on the sum-of-the-parts valuation method, we derive a target price for MGM China of HKD 14 by June 2025, implying an expected enterprise value multiple (EV/EBITDA) of 9 times for FY 2025, while its historical mid-cycle multiple range is 12-13 times. Given our cautious approach, this multiple is lower than our assumptions for its peers (10-13 times), but it also indicates that its stock price has ample upside potential, thereby confirming the overweight rating.