Looking forward to the "March Transition"

Report Introduction

The current AI market is reaching its peak, but there are still new options in the macro scenario. The contraction in our market-oriented enterprises has begun to show two major divergences: the first type is to increase investment and move towards new industrial development; the second type is to improve distribution, with capital transferring profits to labor ultimately promoting consumption. The endogenous momentum of the Chinese economy is being nurtured.

Summary

1. The "Gyroscope" Market of Technology Stocks.

This week (20250217-20250221), Chinese technology stocks continued to rise, driven by the successive emergence of new catalysts. From a pricing characteristic perspective, recent Chinese technology stocks have shown a feature of short pricing time but large increases. In terms of phases, the future performance of the technology sector may rely more on the continuous emergence of new catalysts. Referring to the experience of the fourth quarter of last year, the market's response to new catalysts in the technology sector may also gradually dull. In terms of trading heat and volatility, the current market shows a relatively extreme divergence: market heat has rebounded, and industry trading concentration has risen to the highest point since 2010. The Sci-Tech Innovation Board/ChiNext has shown a volatility-driven rise, which historically has poor sustainability. From the perspective of participants, the recent market has been mainly dominated by individual investors (margin trading, stock rankings, etc.), and their pricing has entered a relatively extreme stage, while the participation of actively managed equity funds, northbound capital, and ETFs is generally average. This indicates that the current market may gradually enter a high-volatility phase. Within the technology sector, we believe that due to different stages of industrial development and changes in market participants, the AI-driven market is beginning to show divergence: on one hand, for traditional giants (such as Alibaba, telecom operators, etc.), the revaluation of AI-related businesses may drive an overall upward adjustment in valuation; on the other hand, for emerging companies, before performance realization, due to more diverse participants, pricing volatility is relatively larger, and once entering the realization period, they may face risks due to participant switching or realization falling short of expectations, leading to valuation downgrades.

1. Referencing the U.S. Experience: Domestic Tech Giants Increasing Capital Expenditure is Expected to Drive Investment Recovery in Broader Fields.

The increase in investment by Chinese tech giants, represented by Alibaba, in the AI field may actually signify a "farewell" to past contractionary investments: the end of the low investment state over the past few years and the beginning of a new investment cycle. Referring to the U.S. experience, since 2010, the significant rebound in capital expenditure growth of U.S. tech giants has indicated a recovery in investment growth at the macroeconomic level. In terms of sub-sectors, the rebound in capital expenditure growth of the seven major U.S. tech giants has shown a leading significance for investment growth in mining, construction, manufacturing, information, and transportation and warehousing sectors. That is, the significant rebound in capital expenditure of U.S. tech giants usually does not limit its effects to their own industry but often spreads to other industries, bringing about a recovery in overall social investment. From the current perspective, the significant increase in capital expenditure by domestic tech giants in the AI field may also have implications beyond the AI sector itself; the resistance to balance sheet contraction on the investment side has already emerged, and ultimately this may reflect a rebound at the macro level

III. Another Transformation of Market Giants: Yielding Profits to Improve Distribution.

Recently, domestic companies such as JD.com and Meituan have begun to pay social insurance and housing funds for delivery workers. We believe this is an important signal that domestic enterprises are gradually yielding profits to enhance labor returns and improve income distribution, especially increasing social security for low- and middle-income groups. Past experiences generally suggest that improving labor returns relies on rising capital returns, but referencing the experience of the United States in the 1930s, the distribution to labor does not necessarily depend on ROE and growth; the underlying factor is the increase in government welfare spending. The increase in national subsidies this year is also a concrete policy manifestation of the government gradually supporting enterprises to prevent continuous declines in profits. The introduction of income increase and security policies for a broader group is conducive to tapping greater consumption potential. However, for low-income groups represented by rural residents, upgrading consumption expenditures is not an overnight process. This "consumption upgrade" may be difficult to reflect in the current performance of listed companies, but this does not mean there are no opportunities in the consumption sector; rather, it requires finding some consumption stocks that differ from the previous investors' "aesthetic": these consumption-listed companies do not rely on "price increases" and sales gross margins as the core source of profit, but achieve performance growth through "thin profits and high sales" and improved turnover rates.

IV. Beyond the Noise, Focus on New Momentum for Internal Repair.

Currently, the AI market is reaching its peak, but there are still new choices in the macro scenario. The contraction in our market-oriented enterprises is showing two major divergences: the first type is shifting towards increased investment and new industrial development; the second type is improving distribution, with capital yielding profits to labor ultimately promoting consumption. The endogenous momentum of the Chinese economy is being nurtured: on one hand, referencing the U.S. experience, Chinese tech giants' spending in the AI field may spread to broader areas, leading to overall growth; on the other hand, past market-oriented "monopolies" cannot "lie flat" and are beginning to optimize the relationship between capital and labor distribution, ultimately improving total demand. We recommend: first, in the context of gradually improving domestic fundamentals bringing expectations for improvement, domestic pro-cyclical consumption (brand apparel, food, beverages, white goods, tourism, etc.) + midstream manufacturing (engineering machinery, special materials, chemical products, lithium batteries, etc.) + non-ferrous metals (copper, aluminum); second, under the logic of physical assets, nominal interest rates will lag behind inflation, and globally priced, dollar-denominated commodities will continue to be revalued, including gold + crude oil. Historically, the initiation of gold stocks may rely on the confirmation of gold price centralization moving up after the pace of gold price increases slows; third, undervalued + dividends, while also benefiting from the decline in China's macro risks: banks and insurance.

Report Body

The "Gyroscope" Market of Tech Stocks

This week (20250217-20250221), Chinese tech stocks (A-shares, Chinese concept stocks, etc.) continued to rise, driven by the successive landing of new catalysts: the private enterprise symposium, Yushu Technology's humanoid robot, the State-owned Assets Supervision and Administration Commission's AI thematic promotion meeting, and Alibaba's earnings report exceeding expectations From the perspective of pricing characteristics, the recent pricing of Chinese technology stocks has shown a feature of short pricing time but large price increases. In terms of stages, the future performance of the technology sector may continue to exhibit a "gyroscope" market characteristic, which relies more on the continuous emergence of new catalysts. In fact, the overall market in Q4 2024 has already shown the characteristics of a "gyroscope" market, but since October 2024, the market's response to policies has shown a declining trend. This means that, referencing the experience of last year's fourth quarter, the market's response to new catalysts in the technology sector may also gradually converge in the future.

From the perspective of trading heat and volatility, the current market shows a relatively extreme differentiation: on one hand, the market trading heat has risen to the highest point since December 2024, while the industry trading concentration has reached a historical high since 2010, with the aforementioned industries mainly concentrated in sectors such as computers, electronics, machinery, electric new energy, and communications. Historically, a decline in stage trading concentration often corresponds to market adjustments or fluctuations; on the other hand, the implied volatility of at-the-money options related to the Science and Technology Innovation Board/ChiNext has risen against the trend, and the option skew has also significantly increased, indicating that compared to other broad-based indices, the options market reflects a more positive sentiment towards the Science and Technology Innovation Board/ChiNext. Referring to the experience since September 24, 2024, a greater fundamental stimulus may be necessary to drive the market; otherwise, during the process of volatility decline, the market will gradually return to a state of fluctuation and adjustment.

, while the participation of actively managed equity funds, northbound capital, and ETFs has been generally moderate. Specifically, on one hand, since February, the proportion of financing purchases representing active individual investors and the total trading volume on the stock trading rankings have both rebounded, with margin trading showing a significant net purchase of A-shares; on the other hand, the behavior of northbound capital has been overall fluctuating, with ETFs experiencing significant net redemptions, and the median return on net value of actively managed equity funds has actually lagged significantly behind the TMT sector, with notable differentiation (high dispersion, and the gap between high-performing and underperforming funds widening).

Furthermore, we propose a short-cycle trading model for the current market: since 2024, driven by new catalysts, it is often the case that northbound capital and ETFs are the first to jointly buy in, followed by individual investors represented by margin trading and stock trading rankings. The peaks of these joint purchases often correspond to market peaks. According to our calculations, the current phase dominated by individual investors may gradually enter a relatively extreme stage: the consensus on buying by ETFs and northbound capital has fallen to a relatively low level, while the consensus on buying/selling by margin trading and stock trading rankings has significantly risen to/fallen to relatively high/low levels.

Regarding the technology sector, we believe that due to the different stages of industrial development and the differences and changes among market participants, the AI-driven market may begin to show differentiation: on one hand, for traditional giants (such as Alibaba, telecom operators, etc.), the revaluation of AI-related businesses may drive an overall upward adjustment in valuations, making these assets more suitable for investors whose main decision-making framework is based on economic prosperity On the other hand, for emerging companies, before the performance is realized, the pricing volatility is relatively larger due to the more diverse participants. Once entering the realization period, they may face risks due to participant switching (from trend-chasing participants without tracking advantages to those with tracking advantages) or underwhelming realizations, leading to valuation downgrades.

Referencing the U.S. Experience: Domestic Tech Giants Increasing Capital Expenditure Expected to Drive Investment Recovery in Broader Areas

Chinese tech giants represented by Alibaba are increasing their investments in the AI sector, which may actually signify a "farewell" to the past contraction in investments. Since 2022, the capital expenditure growth rates of both Chinese tech giants and the three major telecom operators have gradually declined. The announcement by Chinese tech giants, represented by Alibaba, to increase capital expenditure in the AI sector may actually mark the end of the previous low investment state and the beginning of a new investment cycle.

Looking at the U.S. experience, since 2010, the significant rebound in capital expenditure growth among U.S. tech giants has been indicative of the recovery in overall investment growth at the economic level. Specifically, since 2010, the rebound in capital expenditure growth among the seven major U.S. tech giants often leads the overall investment growth in the U.S. Similarly, the peak and subsequent decline in capital expenditure growth among these giants also precedes the decline in overall investment growth. Furthermore, from a segmented perspective, we find that the rebound in capital expenditure growth among the seven major U.S. tech giants has a particularly evident leading significance for investment growth in sectors such as mining, construction, manufacturing, information, and transportation and warehousing. In other words, the significant rebound in capital expenditure by U.S. tech giants typically has effects that extend beyond their own industries, often diffusing to other sectors and contributing to an overall recovery in social investment From the current perspective, the significant increase in capital expenditure by domestic tech giants in the AI field may have implications beyond the AI sector itself. The resistance to balance sheet reduction from the investment side has already emerged, which may ultimately reflect a rebound at the aggregate level.

Another Transformation of Market Giants: Yielding Profits and Improving Distribution

Recently, led by JD.com, domestic companies including Meituan have begun to pay social insurance and housing funds for delivery riders. We believe this is an important signal that domestic enterprises are gradually starting to yield profits to improve labor returns and thus enhance income distribution, particularly increasing social security for low- and middle-income groups. Past experiences generally suggest that improving labor returns relies on rising capital returns. Referring to the experience of the United States in the 1930s, the distribution to labor does not necessarily depend on ROE and growth; the underlying factor is the increase in government welfare spending. The increase in national subsidies this year is also a concrete policy manifestation of the government gradually supporting enterprises to prevent continuous declines in profits. In the future, enterprises in China that are contracting their balance sheets will face two paths: the former will expand their balance sheets again, investing in emerging industries to ultimately create aggregate demand; the latter will improve distribution, enhance the relationship between capital and labor, and ultimately promote consumption.

The introduction of income increase and security policies for a broader group is conducive to tapping into greater consumption potential. When the proportion of consumption expenditure rises, categories with significant disparities compared to other consumer groups may be the primary targets for enhancement. For example, in terms of durable goods consumption, rural residents have a significantly lower average ownership of computers, range hoods, air conditioners, household cars, water heaters, and washing machines compared to urban residents, which may be the preferred consumption "upgrade" projects after income and security improvements. From the overall expenditure perspective, rural residents show significant gaps in other goods and services, service consumption, clothing, daily necessities and services, and education and cultural entertainment compared to urban residents, and these "service-type" consumptions may be areas with incremental consumer groups as the income and security gaps narrow in the future

However, for low-income groups represented by rural residents, the "upgrade" in consumption expenditure is not achieved overnight. Instead, it starts with brands or categories that have a relatively low price threshold. This kind of "consumption upgrade" may be difficult to reflect in the current performance of listed companies, but this does not mean that there are no opportunities in the consumer sector. It is necessary to find some consumption companies that differ from the previous investors' "aesthetic": these consumer listed companies do not rely on "price increases" and sales gross margins as the core source of profit, but achieve performance growth through "thin profit and high sales" and improved turnover rates.

Therefore, we calculated the relationship between the ROE of various consumer sub-sectors and their total asset turnover and net profit margin. We found that many service consumption sub-sectors (cultural entertainment, comprehensive services, tourism and leisure, catering and hotels) and commodity consumption sub-sectors (beverages, food, white goods, home furnishings) actually possess the characteristics that can rely on the rebound of "volume" to achieve a rebound in ROE. Among them, if the valuation (price-to-book ratio) is below the historical mean, or the historical percentile of valuation is still lower than the percentile of total asset turnover, then this type of industry has a greater opportunity to gain both profit and valuation in the future stabilization of consumption volume:

(1) White goods, home furnishings, small appliances, chemical fibers, tourism and leisure, hotels and catering currently have total asset turnover below the historical mean, and there is greater room for ROE rebound with "volume increase" in the future. The valuation is below the historical mean and the percentile is lower than the historical percentile of total asset turnover, indicating that the market's pricing of its ROE with the rebound of turnover is still insufficient;

(2) Food, beverages, branded apparel, other pharmaceuticals and medical services, and financial services currently have total asset turnover below the historical mean, and profitability can also benefit from "volume increase." Although the valuation percentile has surpassed the total asset turnover percentile, the valuation is still below the historical mean, leaving room for valuation uplift;

(3) Other light industry, commercial retail (professional market operations, specialty chains), comprehensive services, cultural entertainment, and real estate services are currently in a high range of total asset turnover. The future space for further improving turnover to boost ROE is limited, but their valuation percentile is lower than the total asset turnover percentile, which may further enhance valuation as the economy continues to improve

Beyond the Noise, Focus on the New Momentum of Endogenous Repair

Currently, the AI market is reaching its peak, but there are still new choices in the macro scenario. The contraction in our market-oriented enterprises has begun to show two major divergences: the first type is to increase investment and move towards new industrial development; the second type is to improve distribution, where capital transfers profits to labor, ultimately promoting consumption. The endogenous momentum of the Chinese economy is being nurtured: on one hand, referencing the U.S. experience, the spending of Chinese tech giants in the AI field may spread to broader areas, leading to overall growth; on the other hand, past "monopolistic" giants through marketization can no longer "lie flat," and are beginning to optimize the relationship between capital and labor distribution, ultimately improving total demand. We recommend:

First, in the future, under the background of gradually improving domestic fundamentals bringing expectations improvement, domestic cyclical consumption (brand clothing, food, beverages, white goods, tourism, etc.) + midstream manufacturing (engineering machinery, special materials, chemical products, lithium batteries, etc.) + non-ferrous metals (copper, aluminum);

Second, under the logic of physical assets, nominal interest rates will lag behind inflation, and globally priced, dollar-denominated commodities will continue to be revalued, including gold + crude oil. Among them, referencing historical experience, the current activation of gold stocks may rely on the confirmation of gold price central moving up after the increase in gold slows down;

Third, undervalued + dividends, while also having a decrease in China's macro risks: banks, insurance.

Author of this article: Minsheng Strategy Mu Yiling, Source: Yiling Strategy Research, Original Title: "A-Share Strategy Weekly Report 20250223: Looking Forward to the 'March Transition'" Report Writing: Mou Yiling SAC No. S0100521120002 | Mei Kai SAC No. S0100522070001 | Ji Hongkun SAC No. S0100124070013

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk