CITIC Securities Co., Ltd.: The mid-term report season is still dominated by structural opportunities

According to the Zhitong Finance APP, CITIC Securities released a research report stating that compared to the end of 2014 and the beginning of 2019, the current market may not support a purely liquidity-driven market from a valuation perspective. However, if the Federal Reserve unexpectedly cuts interest rates in July and the People's Bank of China simultaneously eases, it could become a catalyst to ignite market sentiment. Structural opportunities are expected to be a recurring topic throughout the mid-year report season, while index-based opportunities may need to wait until the end of the third quarter to the fourth quarter.

The following is a summary of the research report:

Compared to the end of 2014 and the beginning of 2019, the current market may not support a purely liquidity-driven market from a valuation perspective. However, if the Federal Reserve unexpectedly cuts interest rates in July and the People's Bank of China simultaneously eases, it could become a catalyst to ignite market sentiment. From the perspective of sector rotation, active funds may be shifting from pharmaceuticals and consumption to technology and finance, with dividends also beginning to stagnate. Structural opportunities are expected to be a recurring topic throughout the mid-year report season, while index-based opportunities may need to wait until the end of the third quarter to the fourth quarter. Recently, the popularity of YU7 and Europe delaying the ban on oil vehicles signify that product capability is replacing product form, accelerating the global electrification process. The next phase of market logic may be the improvement of monetization capabilities across the entire industrial chain in the electrification field, as well as catching up in the AI intelligence sector. The resumption of IPOs for technology companies in the A-share market in the third quarter, along with frequent product catalysts in the technology sector, may redirect market attention back to the technology sector, potentially continuing the momentum of innovative drugs and new consumption. It is expected that AI and military industry will be the focus for seeking structural opportunities in the third quarter.

Compared to the end of 2014 and the beginning of 2019,

the current valuation may not support

a purely liquidity-driven market

As of June 27, the dynamic PE ratios for the Shanghai Composite Index, SSE 50, and CSI 300 are 12.2 times, 10.9 times, and 12.1 times, respectively, all higher than the valuation levels before the market began at the end of 2014 (November 20, 2014) and the beginning of 2019 (January 3, 2019). In contrast, the valuation of small and mid-cap stocks represented by the CSI 1000 is cheaper than at that time. At the industry level, for the 12 primary industries with high market attention, such as power equipment and new energy, the dynamic PE for consumer services is currently lower than at the end of 2014 and the beginning of 2019. Additionally, the dynamic PE for telecommunications, computers, and media is lower than at the end of 2014, while the dynamic PE for home appliances, pharmaceuticals, banks, and non-bank financials is lower than at the beginning of 2019. The valuation levels of other industries are higher than at the end of 2014 and the beginning of 2019.

However, if the Federal Reserve unexpectedly cuts interest rates in July,

and the People's Bank of China simultaneously eases,

it could become a catalyst to ignite market sentiment.

The biggest expectation gap currently is that the Federal Reserve may not cut interest rates until September or even the fourth quarter. However, some statements and signals from Federal Reserve officials are loosening, and a rate cut in July is no longer a low-probability event. If the tariff exemption expires on July 9 and the trade war situation does not worsen, an unexpected rate cut by the Federal Reserve at the July meeting, followed by a reduction in reserve requirements and interest rates by the People's Bank of China, could lead to a scenario where the dollar declines rapidly, the renminbi rises rapidly, and global liquidity easing expectations sharply increase, which is somewhat similar to the situation at the end of 2014. Currently, there is actually a large amount of redundant liquidity accumulating in the market, reflected in the continuous rise of dividends, bonds, and micro-cap stocks, while only the varieties driven by fundamentals and institutional funds are relatively weak For example, sectors heavily invested by institutions, such as the Mao Index, Ning Combination, CSI 300, and CSI 500, are still in a low position. Once confidence and expectations reverse, the bullish sentiment may quickly heat up. Recently, Guotai Junan International was approved to provide cryptocurrency trading services, which immediately ignited brokerages and the entire market, reflecting the market's bullish enthusiasm. As for the sluggish price signals, they are actually consistent expectations that have been relatively fully priced in, manifested as an increasingly extreme barbell structure and a more obvious contraction, which may not hinder the market driven by liquidity.

From the perspective of sector rotation, active funds may

be shifting from pharmaceuticals and consumption to technology and finance,

with dividends also starting to stagnate.

In May, the excess return level of consumption and pharmaceuticals relative to the technology sector reached a phase peak, with consumption and pharmaceuticals outperforming for 2.8 months, with a maximum excess return of 17%, which is even the highest level in the past three years. However, we observed that this trend reversed in June, reflected in the rapid retracement of excess returns of consumption and pharmaceuticals relative to technology. As of June 27, the excess return of consumption and pharmaceuticals relative to technology was -11.1%. From the rotation trajectory of the six main sectors: technology, consumption, pharmaceuticals, new energy, overseas, and dividends, as well as the AI sector's various sub-segments, it can be seen that active funds may be shifting from pharmaceuticals and consumption to technology. As of the week of June 27, the marginal improvement in relative strength (RS) of the six main sectors included: AI, new energy, robotics, and overseas; while those with marginal weakening included: consumption, pharmaceuticals, and dividends. Among them, the relative strength momentum of the dividend sector has begun to weaken, reflecting a certain degree of "stagnation."

The popularity of YU7 and Europe delaying the phase-out of gasoline vehicles

marks that product strength is driving the global electrification process

to shift eastward and accelerate.

China has become the absolute center of the global new energy vehicle market. As the Xiaomi SU7 and YU7 gradually surpass Tesla's Model 3 and Model Y, Europe has begun to slow down its electrification process (Mercedes-Benz and Audi have recently adjusted their electrification strategies, choosing to postpone the phase-out of internal combustion engine vehicles). The subsequent full shift of the industrial chain to China is already an inevitable trend. Looking ahead, whether in the robotics industry or the drone industry, the relevant basic technologies, core supply chain links, and market applications are mainly based in China. Moreover, the more important significance of the Xiaomi YU7 is that it proves that good products made in China can "make money" based on a certain cost-performance ratio through product strength, rather than merely capturing market share through energy carrier forms, intelligent forms, or pricing. The YU7 is not necessarily cheap in an absolute sense; for example, the Max version has many optional features, and the total price approaches 400,000 yuan after selecting all options. It may also face changes in purchase tax exemption policies and national subsidy policies when delivered next year, but this does not hinder the product from selling well. Product strength and capturing users' real needs will be the core driving force for China to lead the global electrification process in the next stage, no longer limited to efficiency, cost, or product form.

The expected logic of the next stage of the market is

the improvement of the monetization capability of the entire industrial chain in the electrification field. And the Catch-up in the AI Intelligence Field

While YU7 is booming, the trend of "anti-involution" is also emerging, which means that the electrification sector is gradually transitioning from excessive investment squeezing profits across the entire industry chain to reshaping the industrial landscape and monetization. Whether it is government guidance, industry coordination, or the capacity behind good products continuously eliminating and replacing the capacity behind general products, all correspond to the stabilization and uplift of the overall profit margin in advanced manufacturing. According to Wind data, from 2021 to 2024, the net profit attributable to the parent company of listed manufacturing companies (machinery, national defense and military industry, power equipment and new energy, home appliances) in the A-share market decreased from 7.4% to 6.7%, while the number of listed companies increased by 260; during the same period, the profit share of the banking industry rose from 39.5% to 41.2%, with only one additional listed company. This trend will eventually reach a turning point. For example, in the new energy sector, which has low market attention, the competitive landscape and logic are beginning to change in certain areas. China is still catching up in the AI intelligence field. Recently, the usage of inference tokens overseas has surged, but the number of active users of DeepSeek in China has shown a significant decline, with month-on-month decreases of -13.35% and -17.24% in April and May, respectively. However, the extremely high user base in China also indicates a vast potential market space.

Third Quarter A-Share Technology Company IPO Restart,

Frequent Catalysts in the Technology Sector,

Expected to Follow Up on Innovative Drugs and New Consumption

On June 18, 2025, Wu Qing, Chairman of the China Securities Regulatory Commission, proposed the "6+1" policy measures to further deepen the reform of the Sci-Tech Innovation Board at the 2025 Lujiazui Forum, marking the normalization of technology companies listing in A-shares. In the second half of the year, the probability of IPOs for computing chip companies such as Suiruan Technology and Birun Technology is relatively high. Since the valuation of such companies highly depends on the capacity and yield of domestically produced advanced processes, SMIC may again become the focus of the entire market in the third quarter. The electronic group of CITIC Securities Research Department believes that SMIC has recently improved yield by concentrating resources and adjusting process formulas, and the yield fluctuation issue that arose in the first quarter has been controlled and has not further expanded. It is expected that the financial impact will be eliminated after July-August. In addition, regarding AI models, GPT-5 may be released in Q3, and the progress of DeepSeek R2 is also worth paying attention to; in terms of edge AI, Meta's upcoming Hypernova in September may officially upgrade the theme of AI glasses to AR glasses, bringing new thematic catalysts and targets; in AI hardware, more procurement announcements for Huawei's Shengteng servers may lead to a rebound in the domestic computing chain.

AI and Military Industry are Expected to be the Focus of

Finding Structural Opportunities in the Third Quarter

1. At this stage, overseas AI has formed a closed loop of "inference computing power enhancement → user stickiness → greater inference demand → more inference computing power demand," bringing more commercialization space and applications. The overseas computing chain remains a bottom warehouse configuration choice, with PCB, optical modules, ASIC chips, etc., worthy of continued attention. The domestic chain will also perform under the phased catalyst of market sentiment. Although it is significantly affected by the capital expenditure of leading internet companies falling short of expectations in the short term, the long-term space for leading domestic IDC companies is broad; In addition, the limited capacity of advanced semiconductor processes is currently a significant factor restricting domestic computing power. As the demand for domestic computing power increases in the future, there is also ample room for growth. 2) The biggest highlight of the military industry in the third quarter is the expectations of the "14th Five-Year Plan" and the catalysis of China's military trade. At the NATO summit on June 25, member country leaders decided to increase annual defense spending to 5% of GDP by 2035 (currently at 2%). In an increasingly complex environment, the world may enter a new arms race stage in the next five years, and China's military trade exports are also worth paying attention to. Additionally, the grand military parade to be held at Tiananmen Square in the capital on September 3 this year is an important event catalyst for the industry. 3) During the interim report season, allocation can be made along two lines: sectors with strong performance certainty or those with relatively thorough clearing of positions. Based on feedback from industry analysts in the research department of CITIC Securities, we have identified sectors with strong performance certainty in the interim report, including wind power, gaming, pets, small metals, rare earths, and brokerages. From the perspective of position clearing, some sectors in new energy (lithium batteries, photovoltaics) have seen valuations drop to reasonable ranges, such as lithium battery equipment, lithium batteries, and photovoltaic inverters.

Risk Factors

Increased friction in technology, trade, and finance between China and the United States; domestic policy strength, implementation effects, or economic recovery falling short of expectations; macro liquidity tightening both domestically and internationally exceeding expectations; further escalation of conflicts in Ukraine and the Middle East; slower-than-expected digestion of real estate inventory in China; unexpected shifts in the focus of Trump's policies