Zhitong Hong Kong Stock Analysis | The Logic Behind the Unaffected U.S. Stimulating Stronger Consumption Through Interest Rate Cuts

[Market Dissection]

Yesterday, Moody's downgraded the U.S. sovereign credit rating. It was initially thought that U.S. stocks would face a significant impact, but after a lower opening, U.S. stocks turned positive instead. Today, both markets strengthened, with the Hang Seng Index closing up over 1.49%.

The reason U.S. stocks did not weaken this time like in previous instances is primarily due to the fact that before 2011, there were clear stipulations in the U.S. regarding asset-backed derivatives contracts, loan agreements, and investment instructions that required the use of AAA-rated bonds as collateral. Therefore, when S&P downgraded the U.S. credit rating, the impact was substantial. However, later on, some manipulative actions occurred; in late 2011, all contracts related to Treasury collateral were rewritten, adjusting the bond rating requirement to "government securities" instead of emphasizing the AAA rating. Subsequently, when Fitch downgraded the U.S. credit rating to AA+ in 2013, those contracts originally involving Fitch ratings were also rewritten. By this time, most contracts involving Moody's ratings had already been rewritten, so there was no significant impact. Of course, the enormous pressure of the U.S. fiscal deficit has not been eliminated; it is merely a question of when it will explode. Additionally, it is estimated that Wall Street is aware that China is about to start cutting interest rates; the world is interconnected, with China watching U.S. stocks and U.S. stocks also observing the Chinese market.

Today, both deposit rates and the Loan Prime Rate (LPR) were lowered, with varying degrees of reduction. On Tuesday, May 20, the People's Bank of China authorized the National Interbank Funding Center to announce that the one-year LPR is now 3.00%, down from 3.10%; the five-year LPR is now 3.50%, down from 3.60%. This means that both the five-year and one-year rates were lowered by 10 basis points, in line with market expectations. This is the first reduction of the LPR this year, which will further lower financing costs for enterprises and residents, boost market confidence, and support stable growth in the real economy. Banks also followed suit, with major state-owned banks generally lowering deposit rates across various products and terms, with reductions exceeding those of the same-term LPR (one-year and five-year fixed deposit rates were lowered by 15 and 25 basis points, respectively, while the one-year and five-year LPR were both lowered by 10 basis points). The reason for the larger reductions by banks is primarily due to excessive interest rate spreads affecting profitability. Normally, a rate cut would be favorable for real estate stocks, but today, real estate stocks did not show much movement. The key point is that mortgage rates have not been relaxed simultaneously; on the contrary, some banks have even raised the mortgage rates for first-time homebuyers. Coupled with the current low industry sentiment, greater stimulus is needed to revive the real estate sector.

For depositors, the new round of deposit rate cuts may drive more funds toward the stock market, bond market, and wealth management products, bringing new liquidity to the capital market. However, it is expected that the funds flowing into the stock market will not be substantial, as the profit-making effect in the stock market is not strong. More funds are likely to flow into wealth management products and the bond market, as their returns are generally higher than those of banks.

Given such low interest rates, the willingness to deposit funds is relatively low, which may stimulate some funds to shift toward consumption, such as gold, because gold can also preserve and increase value. Today, Lao Pu Gold (06181) rose over 9% again The 618 Mid-Year Sale has begun, with national subsidy policies and platform investments expected to further enhance online consumption vitality and penetration rates. From the pre-sale data of 618, this year, Li Jiaqi's live streaming room has launched 385 beauty products, covering 145 beauty brands, with year-on-year growth of 3.8% and 2.8%, respectively. According to Qingyan News data, within one hour of the pre-sale launch, domestic skincare brand Mao Ge Ping (01318) saw its sales rise to the top five in the live streaming room. On May 14, Tmall announced the performance report for the first four hours of this year's 618 promotion. From the TOP 20 list, the proportion of domestic brands is still not high; apart from Proya and Kefu Mei, only four brands including Mao Ge Ping made the list, with Mao Ge Ping being a new entrant this year. Mao Ge Ping rose over 12% today.

The pet economy has also been booming recently. According to the "2025 China Pet Industry White Paper" by Paidu Pet, it is estimated that by 2027, the urban pet (dogs and cats) consumption market will exceed 400 billion yuan, reaching 404.2 billion yuan, with a compound annual growth rate of 12.6% from 2015 to 2027. The logic is that as the birth rate declines, many people tend to keep pets to express their emotions. Related concept Chaoyun Group (06601) rose over 9% today. Another company, H&H International Holdings (01112), reported total revenue of approximately 3.17 billion yuan in the first quarter, an annual increase of 10.4% based on the reported benchmark (with a comparable benchmark increase of 10.9%). The pet nutrition and care products segment grew by 7.3% based on the comparable benchmark, driven by sustained growth in North America and recovery in mainland China. It also surged over 17% today.

From the perspective of emotional support, the film and entertainment sector is also an important direction. Alibaba Pictures (01060) benefited from the booming development of offline entertainment and diversified business structure. As of March 31, 2025, Alibaba Pictures achieved revenue of 6.702 billion yuan, a year-on-year increase of 33%; adjusted EBITA has been profitable for five consecutive years, with a profit of 809 million yuan, a year-on-year increase of 61%. It surged nearly 30% today, while the similarly themed Maoyan Entertainment (01896) rose over 3%. Likewise, the gaming sector is also worth attention, and everyone can explore it themselves.

The pharmaceutical sector mentioned yesterday is welcoming catalysts, with 3SBio (01530) reaching a down payment agreement of 1.25 billion USD with Pfizer, along with potential milestone payments for development, regulatory approval, and sales that could reach up to 4.8 billion USD. Additionally, Pfizer will subscribe for 100 million USD worth of common stock in 3SBio on the effective date of the agreement. This indicates renewed hope for innovative drugs going overseas. Currently, cash on hand is nearly 10 billion, and with subsequent milestone payments, the current market value of 46 billion is not high, surging over 32% today.

The significant rise in this sector has directly stimulated funds to chase the Hong Kong Pharmaceutical ETF (513700), which rose 3.78% today, accumulating over 19% since April 9. This ETF belongs to T+0 trading, with a total scale exceeding 1.054 billion, primarily investing in leading companies in the pharmaceutical and healthcare industry within the Hong Kong Stock Connect, including BeiGene (06160), WuXi Biologics (02269), CSPC Pharmaceutical Group (01093), Innovent Biologics (01801), and 3SBio. Most of the varieties mentioned yesterday have strengthened again today Contemporary Amperex Technology Co., Limited (03750) was listed on the Hong Kong stock market today, with an increase of over 16%. Currently, the price in Hong Kong is 7 cm higher than that in the A-share market. This is different from the domestic situation, where foreign capital tends to favor large-cap stocks, considering them safer and more stable. 90% of the funds raised from this Hong Kong IPO will be invested in the first and second phases of the Hungary project, further enhancing local supply capabilities and consolidating the company's global leading position in the new energy sector. Foreign investors are more optimistic about the prospects of this global giant and are willing to give it a higher valuation.

【Sector Focus】

Recently, the Central Cyberspace Affairs Commission, the National Development and Reform Commission, and the Ministry of Industry and Information Technology jointly issued the "Key Points for Deepening the Large-scale Deployment and Application of IPv6 by 2025": By the end of 2025, a globally leading IPv6 technology, industry, infrastructure, application, and security system will be fully established. The number of active IPv6 users will reach 850 million, the number of IoT IPv6 connections will reach 1.1 billion, the proportion of IPv6 traffic in fixed networks will reach 27%, and the proportion of IPv6 traffic in mobile networks will reach 70%. The IPv6 user experience will be significantly improved, the end-to-end network performance of IPv6 will continue to be optimized, the scale of content sources supporting IPv6 will continue to expand, and new networks, applications, services, and terminals will default to enabling IPv6. The IPv6 deployment level of government and enterprise institutions will be significantly improved, with continuous strengthening of the IPv6 upgrade and transformation of office networks in party and government agencies, and a significant increase in the proportion of IPv6 traffic in dedicated internet lines of enterprises and institutions. The efforts for single-stack IPv6 deployment will continue to increase, and the promotion scope of single-stack applications will further expand. The IPv6 innovation ecosystem will continue to improve, and the IPv6 standard system will become more complete. The security capabilities of IPv6 will continue to improve, with further enrichment of IPv6 functions in various security products and enhancement of protection capabilities.

This policy has a strong impact because from government and enterprise institutions to party and government agencies and enterprises, these units have financial allocations, ensuring funding.

Main varieties: China Mobile (00941), China Unicom (00762), ZTE Corporation (00763), Yangtze Optical Fibre and Cable Joint Stock Limited Company (06869).

【Stock Picking】

Midea Group (00300): Significant Increase in Q1 Performance Accelerates Overseas Layout

In the first quarter of 2025, the company achieved total operating revenue of 128.428 billion yuan, a year-on-year increase of 20.61%, and a net profit attributable to the parent company of 12.422 billion yuan, a year-on-year increase of 38.02%. Midea Group will be included in the Hang Seng Index constituent stocks.

Comment: Midea Group's Q1 2025 hit a record high, breaking the 10 billion yuan mark. The company's smart home business revenue increased by 17.4% year-on-year, with its high-end brand COLMO and Toshiba's overall retail sales increasing by over 55% year-on-year. In terms of ToB business, the revenue from the new energy and industrial technology sector reached 11.1 billion yuan, a year-on-year increase of 45%; smart building technology revenue was 9.9 billion yuan, an increase of 20%; and revenue from robotics and automation business was 7.3 billion yuan, a year-on-year increase of 9%. Recently, on May 12, Midea Group signed multiple strategic agreements with Xylem Group, including Midea's acquisition of Xylem's existing business in China. Upon completion of the acquisition, Midea will supply boiler products and services to Xylem Group's extensive overseas market. In terms of overseas layout, recent penetration in Latin America, Southeast Asia, the Middle East, and Africa markets In Europe, with the completion of Teka's acquisition, Midea continues to seek acquisition opportunities. To enhance resilience, Midea plans to establish a parallel supply chain outside of China by the end of 2026, including upstream components. Brand business remains Midea's top priority, with the goal of increasing the proportion of overseas revenue from 43% in 2024 to ultimately 50%. In the commercial air conditioning sector, Midea is making progress in the chiller and centrifugal chiller fields. In terms of robotics, the company's self-developed humanoid robot will enter factory testing in May, and it is expected to be applied in offline store service scenarios in the second half of the year. Midea plans to achieve single-digit revenue growth and margin expansion in the next 2-3 years while further reducing the proportion of automotive industry clients from the current 65%. Midea Group has a clear leading advantage in the white goods business, and the domestic trade-in policy for home appliances is expected to drive demand. The focus on COLMO + Toshiba's dual high-end brand optimization is expected to enhance profitability, with the overseas OBM business proportion expected to increase by 2025. The trend of ToB business is improving, which is expected to accompany scale expansion and gradually optimize profitability