China Merchants Securities has released an in-depth analysis of the 2025 annual reports and Q1 2026 performance for A-shares. The report evaluates corporate profitability, supply-demand constraints, and cash flow ratios, assigning scores to assess the cyclical position and supply-demand dynamics of various sectors. This analysis identifies sub-sectors with strong performance and improving prospects. The year-on-year net profit growth rate for A-shares turned positive in Q1 2026, with significant profit recovery seen in non-financial and non-petrochemical sectors. Supported by moderate inflation recovery, ongoing anti-involution policies, and sustained high demand in the TMT and new energy industry chains, overall A-share profitability is expected to maintain its recovery trend.
The current economic landscape is characterized by a K-shaped divergence: relatively strong external demand, a gradual but weak recovery in domestic demand, robust performance in high-tech industries like AI and new energy, and weakness in traditional infrastructure and consumption sectors. The optical communication and chip industry chains are in a typical boom phase. The performance of export-oriented chains is mixed. Industries benefiting from both domestic and external demand are in upward or boom phases, while the real estate sector and some post-cycle consumer industries are in a downward phase. China Merchants Securities' key views are as follows:
The report scored 60 frequently tracked sub-sectors based on seven weighted indicators: growth in contract liabilities (sustainability), net profit growth (profitability), gross margin, ROE (profit quality), supply level (inventory growth percentile), capacity expansion (capital expenditure growth percentile), and the ratio of free cash flow to revenue. Sectors with the highest overall scores were primarily in resources (e.g., petroleum & petrochemicals, chemical fibers, building materials, minor metals), consumer services (e.g., baijiu, beverages & dairy, condiments, medical devices, paper), and high-tech fields (e.g., semiconductors, aviation & airports, software development, wind power equipment, computer equipment). (Note: This scoring is for analytical purposes only and does not constitute investment advice.)
**Overall Profitability:** A-share net profit growth turned positive year-on-year in Q1 2026. Profits for non-financial, non-petrochemical sectors showed significant recovery. With moderate inflation recovery, continued anti-involution policies, and sustained high demand in TMT and new energy chains, overall A-share profitability is expected to continue recovering.
**Profit Breakdown:** Overall, the recovery in ROE was primarily driven by "price increase chains" like non-ferrous metals, electronics, chemicals, and power equipment, as well as sectors like electronics, defense, and computers. Consumer sectors such as agriculture & animal husbandry, home appliances, food & beverage, and automobiles, along with the real estate chain (real estate, steel, construction), were the main drags. For non-financial, non-petrochemical listed companies, the increase in ROE was contributed by growth in net profit margins and asset turnover.
**Demand Divergence:** 1) High-growth areas are concentrated in TMT, resources, and some mid-to-high-end manufacturing, such as energy metals, industrial metals, minor metals, semiconductors, batteries, communication equipment, consumer electronics, and computer equipment. 2) Most industries are in a moderate growth phase, including some manufacturing, petrochemicals, and parts of the consumer sector. Typical examples are condiments, beverages & dairy, hotels & catering, power grid equipment, automation equipment, engineering machinery, wind power equipment, chemical raw materials, and chemical fibers. 3) Low-growth industries are mainly those with overcapacity and weak or flat demand, such as aquaculture, baijiu, photovoltaic equipment, home furnishings, and infrastructure.
**Inventory Cycle:** An active inventory replenishment cycle has begun. By Q1 2026, the year-on-year decline in inventory for non-financial listed companies narrowed further to -0.1%, while revenue growth expanded to 5.1%, indicating a clearer trend of inventory rebuilding. At the sector level, active replenishment is concentrated in TMT and some mid-to-high-end manufacturing, like general equipment, photovoltaic equipment, automation equipment, engineering machinery, semiconductors, and software development. Most sectors in the real estate chain are still in a destocking phase.
**Capacity Cycle:** Non-financial listed companies have entered a new capacity expansion cycle. In Q1 2026, the year-on-year growth rate of construction-in-progress for A-share non-financial companies bottomed out and began to rise. The decline in capital expenditure growth has narrowed quarter by quarter since 2025, turning positive to 3.2% year-on-year in Q1 2026. Capital expenditure growth typically leads construction-in-progress growth by about a year. Both are currently at an inflection point and trending upward, marking the start of a new capacity expansion cycle. Sectorally, most industries have undergone about three years of capacity reduction. Currently, capital expenditure growth has generally turned positive or seen a narrowing decline, except for utilities where the decline continues to widen. Information technology, mid-stream manufacturing, and resources are the main drivers of capacity expansion.
The report positions industries in their cycle stages based on six indicators across supply and demand dimensions: Industries in the germination stage are mostly in consumption/healthcare. Industries in the upward stage are mainly some manufacturing and resource sectors. Industries in the prosperous stage with strong supply and demand are primarily some TMT and resource sectors. Industries at a downward inflection point are mainly those with strong external but weak internal demand. Industries in the downward stage are concentrated in utilities and some mid-to-downstream sectors with persistently weak demand. Industries in the clearance stage are focused on the real estate chain.
Given the current K-shaped economic divergence—stronger external demand, weak domestic recovery, strength in high-tech (AI, new energy), weakness in traditional基建 and consumption—the optical communication and chip chains are in a typical boom. Export chain performance is mixed. Industries with domestic and external resonance are in upward or boom phases, while real estate and some post-cycle consumer industries are in a downward phase.
**Three-Tier Recommendations Based on Financial Metrics:** 1) High-growth sectors: e.g., chemical fibers, semiconductors, precious metals, wind power equipment, ground weaponry. 2) Sectors with improving supply-demand dynamics: e.g., building materials, chemical pharmaceuticals, paper, automation equipment, batteries, chemical raw materials. 3) Sectors with stable cash flow: e.g., condiments, aviation & airports, shipping ports, industrial metals, coal, precious metals.
**Risk Warning:** Macroeconomic fluctuations, policy implementation falling short of expectations, and tighter-than-expected overseas policies.
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