To The Moon

GTHT has released a research report suggesting that uncertainties are set to be resolved before China's Dragon Boat Festival, aligning with upward revisions to growth forecasts and the entry of new capital, which will open a new window for a market upswing. The firm is particularly optimistic about the technology, manufacturing, and brokerage/banking sectors, with some traditional sectors also poised for recovery. The main views from GTHT are outlined below.

Market Outlook Assessment

Uncertainties are expected to be resolved before the Dragon Boat Festival, opening a new window for a rally in Chinese equities. Over the past one to two weeks, some investors have harbored concerns regarding US-Iran tensions, inflation trends, and potential Federal Reserve interest rate hikes. GTHT remains a firm believer in the Chinese market, anticipating that these uncertainties will gradually clear before the holiday, paving the way for a new upward phase: 1) Reduced Uncertainty: International oil prices fell to the $80-90 per barrel range in June, potentially marking the peak in the sequential acceleration of US inflation and tightening expectations. With geopolitical tensions easing and shipping conditions improving, inflation expectations are likely to be revised down. Furthermore, the Federal Reserve's decision on interest rates will also be made before China's Dragon Boat Festival. 2) Upward Revision of Growth Expectations: Strong Chinese export data for May not only addressed market skepticism but also signaled improvements in interim reports for A-shares. This reflects substantial global demand from AI capital expenditures and the energy transition, as well as supply chain shortages. Recent AGI advancements by US-based Anthropic are also expected to raise expectations for AI capabilities and application demand, presenting a historic opportunity for Chinese industrial innovation, catch-up, and global competition. 3) Synergy from Fresh Capital Inflows: Declining risk-free returns are creating sustained wealth management demand and stronger support for the Chinese market. A new round of reforms to enhance capital market inclusivity is imminent. Additionally, since June, announcements of reduced share sales, faster private fund filings, and accelerated public fund approvals are expected to translate into tangible new investment capacity after the Dragon Boat Festival. Around the mid-year 630 assessment period, absolute return equity allocations are also anticipated to flow back, aiding in sector diversification and market balance. As the firm previously noted, following a brief "shower," the Chinese market is poised for solid performance in the third quarter, potentially reaching new highs.

With uncertainty receding and micro-level trading pressures easing, the market's price discovery function will operate effectively, likely leading to broader sector participation. 1) Current robust growth in global semiconductor sales, coupled with low inventory-to-sales ratios and recent AGI progress from Anthropic elevating AI capability boundaries, is expected to further drive investment demand diffusion and tighten supply-demand dynamics across the industrial chain. Historically, technology industry trends, due to their high growth, have shown low sensitivity to rising US Treasury yields. Furthermore, compared to previous A-share technology bull markets, the forward valuation (PE-FY3) of current AI computing leaders remains relatively low (15-20x, versus a historical average of 30-40x). Therefore, the technology sector's rationale remains solid from liquidity, industry momentum, and valuation perspectives, and it is expected to remain the market's main theme. 2) Profit expectations for the manufacturing sector focused on overseas expansion and the financial sector were revised upward in Q2. China's May exports exceeded market expectations, with strong growth not only from AI-driven demand but also in exports of automobiles, ships, and lithium batteries. Average daily trading volume on the two exchanges rose 7.6% sequentially in Q2. However, these sectors have underperformed due to micro-level trading pressures. Subsequent improvements in market liquidity supply and the restoration of price discovery functions are expected to drive stock price recovery. 3) As geopolitical tensions ease and oil prices fall, some traditional industries with improving fundamentals but previously constrained by high oil costs may also see a rebound: aviation, chemical pharmaceuticals, chemical products, building materials, etc.

Sector Comparison

The outlook is not for a single standout sector but for multiple areas of strength. The firm favors the main themes of technology and manufacturing, along with brokerages and banks, while also expecting improvements in traditional sectors. 1) Emerging Technology: Accelerated AI investment in China and the US, capacity shortages, and faster technological iteration, with no turning point yet in inventory-to-sales ratios or ROIC, and core leading company valuations not stretched. Recommendations include: integrated circuits, communication equipment, high-end equipment, and minor metals. 2) Competitive Manufacturing: Global AI investment and the energy transition are providing new historic growth opportunities for the globalization of Chinese enterprises. Recommendations include: power equipment and new energy, engineering machinery, and innovative drugs. 3) Traditional Sector Recovery: The firm is optimistic about brokerages and banks, where micro-structure clearing has occurred and valuation advantages are prominent. Improvements in cross-strait shipping also aid the recovery of some traditional sectors. Recommendations include: building materials, chemicals, as well as aviation and hotels.

Thematic Recommendations

1. AI New Infrastructure: Acceleration in the global opening of domestic models and increased investment in computing power networks. Favored areas: domestic computing power, AI data centers, and semiconductor manufacturing.

2. Robotics: Accelerated R&D in physical AI. Favored areas: sensors, dexterous hands, and lead screws.

3. Commercial Aerospace: SpaceX accelerating Starlink and Starship production expansion. Favored areas: aerospace infrastructure and satellite payloads.

4. Xinjiang Revitalization: Building a modern industrial system with regional characteristics and advantages. Favored areas: clean energy development, port trade, and cultural tourism.

Risk Warning: Overseas economic downturn exceeding expectations, and global geopolitical uncertainty.