Zhitong Hong Kong Stock Analysis | Unleashing the "King Bomb" Trump's softened stance strengthens the countermeasure concept trend

[Anatomy of the Market]

Last Friday, China unleashed a "king bomb" on rare earths, retaliating in kind, which directly led to a sharp decline in the U.S. stock market. The Nasdaq plummeted by 3.56%, the S&P 500 fell by 2.72%, and tech stocks collectively suffered heavy losses, with the VIX fear index soaring over 31%. Affected by the capital outflow, Hong Kong stocks also dropped by 1.52% today; however, the trend is considered controllable, with support at the bottom.

Why did this lead to a crash in the U.S. stock market? The key is that the latest policy has closed all loopholes in rare earths, leaving no room for exploitation. Not to mention the important role of rare earths in military and new energy vehicles, just looking at chips, rare earths are core materials for manufacturing photoresists, polishing liquids, and magnetron sputtering targets, directly affecting the precision and yield of chip processes. 90% of the heavy rare earths required for TSMC's 3nm core production line come from the mainland, while over 80% of the light rare earths for the 7nm and 5nm production lines also come from the mainland. China's rare earth control policy stipulates that any chips containing more than 0.1% mainland rare earth components must apply for permission from the mainland's Ministry of Commerce for export. If TSMC's production of 14nm and below logic chips and 256-layer and above memory chips involves relevant rare earth materials, it will be difficult to continue processing for U.S. clients without obtaining permission. Previously, the U.S. used TSMC to avoid processing our chips; now, U.S. chips are also not allowed to be processed. If strictly enforced, companies like NVIDIA and Apple would be nearly finished. AI development would also be halted, and the driving force behind the rise of U.S. stocks would disappear, making the outlook for U.S. stocks quite bleak.

After much contemplation, this problem seems nearly unsolvable because the U.S. is developing its own rare earths, which would require at least five years of massive investment to be feasible. By the time they manage to do that, our chips will have already become completely self-sufficient. But the U.S. lacks rare earths; it wouldn't last a year, let alone five.

As a result, Trump became defensive and irrationally announced that starting November 1, the U.S. would impose a 100% tariff on China, even hinting at the possibility of canceling high-level talks during the APEC summit. However, this has no real effect. Tariff issues are not bargaining chips; despite the U.S. raising tariffs, China's exports remain strong. According to data released by the General Administration of Customs, China's exports in September increased by 8.3% year-on-year in dollar terms, while imports rose by 7.4%, both significantly exceeding expectations, resulting in a trade surplus of $90.5 billion. The export growth rate in September was higher than the median expectation of 6.6% from economists, indicating that foreign trade has not been impacted.

With no other options, they can only face reality. Trump's attitude has clearly softened; today he published a statement regarding U.S.-China relations, explicitly stating that both he and China do not wish to fall into economic recession, while emphasizing that the U.S. stance is "to help China, not to harm China." U.S. Vice President Pence stated in an interview that Trump "values" the friendship with China and hopes not to have to use more bargaining chips against China. If China is willing to remain rational, the U.S. will do the same. Furthermore, U.S. Trade Representative Katherine Tai "lamented" that China upgraded its rare earth export controls without prior notice to the U.S., and that calls afterward were not answered, refusing communication. Only when it hits a sore spot will they become rational and understand the correct way to deal with us. Undoubtedly, tariffs are merely superficial and of little significance; the key issue is chips. Everyone has cards, but ours are bigger We just don't want to be too extreme; we also leave room for further negotiations. If Trump is really sincere, he should sit down and talk. This way, at least there is hope for the U.S. stock market.

Our hard stance this time has had a clear effect, and the attitudes of other countries are also changing. On the 11th local time, Manitoba Premier Heather Stefanson wrote to Canadian Prime Minister Mark Carney, requesting the federal government to cancel the 100% tariff on Chinese electric vehicles. In the letter, Stefanson stated that Canada's imposition of tariffs on Chinese electric vehicles has "triggered a bilateral trade war, severely impacting the western regions of Canada." China's countermeasures against Canada have led to a significant drop in canola prices and a heavy blow to the pork production industry. This is what it means to strike a decisive blow to avoid a hundred punches.

Today's market decline is mainly due to concerns that the situation between the two sides may worsen and trigger a chain reaction. On October 13, spot gold opened with a rapid rise, briefly breaking through $4,060, setting a new historical high. Chifeng Jilong Gold Mining (06693) rose over 9%, and Shandong Gold Mining (01787) rose over 7%.

Some people compare the current situation to April 7, but in reality, the current situation is much better than back then. At that time, there was uncertainty because there hadn't been significant progress in the chip sector, and there was fear of not being able to withstand the worst-case scenario. Now, several lines of lithography machines are in development, with the latest being the 2025 Bay Area Semiconductor Industry Ecosystem Expo to be held at the Shenzhen Convention and Exhibition Center (Futian) from October 15 to 17. According to various market rumors, new breakthroughs from New Kylin are expected. Today, related New Kylin concept stocks in the A-share market all hit the daily limit, while in the Hong Kong stock market, Hua Hong Semiconductor (01347) and SMIC (00981) rose over 8% and 3%, respectively, with Shanghai Fudan (01385) also rising over 3%. Therefore, the country's choice to take a stand at this moment fully demonstrates that there is confidence. With no fear regarding lithography machines, there is nothing else to be afraid of. As for tariffs, let them be however they want. The market actually doesn't need to panic so much.

Today's market overall is following a countermeasure route, with rare earths being the first to bear the brunt. Baogang Co. and Northern Rare Earth announced an increase in the related transaction price of rare earth concentrates for the fourth quarter of 2025. This news comes at a timely moment, with Jinli Permanent Magnet (06680) rising over 13%.

As mentioned regarding chips, there is also the domestic replacement of software. According to CCTV Finance, Microsoft will stop providing security updates and technical support for the Windows 10 system starting October 14. The increasing market share of domestic operating systems is a major trend, with domestic operating systems expected to account for 15% of the overall domestic PC market by the first half of 2025, and 30% of new computers. Related stocks include China Software International (00354), which has deep cooperation with Huawei to provide the domestic Harmony operating system. Additionally, the Ministry of Commerce's Document No. 61 concerns the decision to implement export controls on related rare earth items from abroad. The document format is WPS, not Word or PDF. Moreover, it states that if an application is to be submitted, the relevant documents must be in Chinese. The replacement of office software has entered a deep-water zone, with WPS achieving over 650 million monthly active devices in the personal market due to its free strategy and localized features (such as a vast number of Chinese templates and PDF editing), while its enterprise version has a penetration rate of over 55% in the government and enterprise market Kingsoft Software (03888) clearly benefited, soaring nearly 14% today.

After the National Day holiday, the average price of lithium hexafluorophosphate rose by 8,500 yuan to 69,500 yuan, with the highest price reaching 73,000 yuan and exports hitting 80,000 yuan. The three-day increase has already surpassed the overall increase in September. Ganfeng Lithium (01772) rose over 8%, and Tianqi Lithium (09696) rose nearly 5%.

【Sector Focus】

Details of the cobalt export quotas for companies in the Democratic Republic of the Congo have been finalized. Luoyang Molybdenum, Glencore, and Eurasian Resources occupy the top three quota shares, at 35.9%, 27.3%, and 21.6%, respectively. Other Chinese companies that received significant quotas include China Molybdenum Group, Shengton Mining, Huayou Cobalt, and Northern Mining.

The consequences are: 1. Supply tightening and cost increases: By establishing total control and strict export rules, the outflow of cobalt raw materials (especially cobalt intermediates) is controlled from the source, effectively creating "supply scarcity."

1. Value redistribution: Export rights are highly concentrated among a few large mining companies and government platforms, significantly enhancing the bargaining power of these "quota holders" in the supply chain. Smelters that fail to obtain direct quotas need to purchase export quotas or raw materials from quota holders, effectively adding a portion of "quota rent" to raw material costs.

Main stocks in the Hong Kong market: Luoyang Molybdenum (03993), Northern Mining (00433), China Nonferrous Mining (01258).

【Stock Picking】

Shanghai Fudan (01385): Domestic substitution heats up, demand expected to continue increasing

The company achieved revenue of 1.839 billion yuan in H1 2025, a year-on-year increase of 2.49%; net profit attributable to the parent company was 194 million yuan, a year-on-year decrease of 44.38%; and net profit attributable to the parent company after deducting non-recurring gains and losses was 182 million yuan, a year-on-year decrease of 40.96%.

Commentary: The company is a leading domestic FPGA product supplier, currently offering three sub-series of chips: FPGA, PSoC, and FPAI (programmable artificial intelligence chips), along with EDA development tools. Currently, the company's product line is primarily represented by billion-gate FPGAs and PSoC chips based on 28nm process technology, while actively promoting the customer introduction and mass production of ultra-large-scale FPGAs, RF-FPGAs, and RFSoC products based on advanced 1xnm FinFET processes and 2.5D advanced packaging. The company's FPAI heterogeneous fusion architecture chip integrates CPU, FPGA, and NPU, providing a reconfigurable intelligent chip for customized edge and fusion inference applications. The company has built a chip design platform and application development software platform for this heterogeneous fusion intelligent chip and is laying out the research and development of a series of products with computing power ranging from 4TOPS to 128TOPS, with the first 32TOPS computing power chip promotion progressing well. In the first half of 2025, the company accrued various impairment losses of approximately 172 million yuan, including inventory impairment losses of 143 million yuan. Currently, the company is actively adjusting its inventory structure to reduce the inventory levels of certain products, and improvements are expected in the second half of the year. In the first half of 2025, the revenue of each product line was approximately: security and identification chips about 393 million yuan, non-volatile memory about 440 million yuan, smart meter chips about 248 million yuan, FPGA and other products about 681 million yuan, and testing service revenue (after consolidation offsets) about 77 million yuan. Except for the non-volatile memory business, which saw a year-on-year decline, all other product lines experienced varying degrees of year-on-year growth Among them, the revenue from FPGA and other product lines increased by 23.15% year-on-year, playing an important supporting role in the company's operations