CSC Financial's Xia Fanjie: Third-quarter earnings highlights concentrated in AI computing power, resource commodities and high-end manufacturing

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Pang Huawei, Special Correspondent, 21st Century Business Herald

Recently, A-share third-quarter reports have entered a period of intensive disclosure. The Shanghai Composite Index is fluctuating around 3,700 points, the shadow of a pullback in the technology growth sector has not yet fully dissipated, and the market is once again seeking a main line of earnings amid fluctuations and adjustment.

"This round of adjustment is the result of the combined effect of rising risk-aversion sentiment in the market, insufficient incremental capital, and tightening overseas liquidity, rather than a systemic deterioration in fundamentals," Xia Fanjie, a senior strategy analyst at China Securities Co., Ltd. (CSC), said in an exclusive interview with the 21st Century Business Herald on October 24. The current market is in a stage of "risk appetite repair and earnings verification," and the period ahead will likely be dominated by fluctuations and structural repair, with third-quarter reports serving as the key "anchor" for verifying earnings expectations.

The anchor has surfaced. As of October 24, the revenue and net profit attributable to parent companies of 848 A-share companies that had disclosed third-quarter reports grew by 13.6% and 19.0% year on year, respectively, with profit growth outpacing revenue growth by 5.4 percentage points.

Xia Fanjie pointed out that, judging from the disclosed third-quarter data, A-share earnings show clear structural divergence, with performance highlights concentrated in three major directions: AI computing power, some resource products, and high-end manufacturing.

"Judging from the disclosed third-quarter reports, the degree of earnings realization has already diverged across different links of the AI industry chain," he said, further breaking down the data: the electronics industry's third-quarter revenue grew 13.4% year on year, while net profit attributable to parent companies surged 63.6%; among them, components and electronic chemicals saw revenue growth of 43.7% and 46.9%, respectively, and net profit attributable to parent companies growth of as much as 89.2% and 54.2%, respectively. "Some links have benefited from a higher share of high-end products and improved capacity utilization, with profit growth clearly faster than revenue growth; product structure upgrading is being converted into real profits."

Catalysts on the demand side are equally clear. Meta's third-quarter capital expenditure reached as high as US$34.91 billion, and overseas computing power investment is being transmitted along the procurement chain for servers and network equipment to domestic supply chains such as high-speed optical modules and high-end PCBs.

"Going forward, focus can be placed on links where earnings are being realized, such as optical communications and PCBs, as well as domestic AI chips, semiconductor equipment, and supporting directions such as server power supplies and liquid cooling," Xia Fanjie said.

The "turnaround" in resource products is equally noteworthy. Net profit attributable to parent companies of minor metals and industrial metals surged 96.7% and 101.2%, respectively, in the third quarter, mainly benefiting from rising product prices, tighter supply constraints, and the release of capacity at some mines; profit in chemical raw materials grew 86.5%, with some varieties entering a repair window as the price spread between products and raw materials improved. In his view, the medium-term logic remains solid for industrial metals such as copper and aluminum, which have the dual support of supply constraints and capacity growth, as well as for directions in petroleum and petrochemicals and basic chemicals where prices and profitability are improving in tandem.

High-end manufacturing, meanwhile, shows the combined momentum of "intelligentization + going global." In the third quarter, machinery and equipment revenue and net profit attributable to parent companies grew 16.0% and 41.9%, respectively; intelligent upgrading, equipment renewal, and domestic substitution continued to advance, and prosperity continued in sub-sectors such as automation equipment and special-purpose equipment. Among power equipment, profit in other power supply equipment grew 84.4%, and power grid equipment grew 4.8%; the acceleration of domestic ultra-high-voltage construction, overseas demand for power grid upgrades, and AI electricity demand jointly drove industry earnings growth.

Core allocation: "dividend defense, performance-driven"

Beyond earnings, the balance of valuations is also quietly swinging back.

Citing data, Xia Fanjie said that as of October 23, the median price-to-earnings ratio of the Shanghai Composite Index was about 20.1 times, in the low 7.8% percentile of the past five years, down sharply by 17.6 percentage points from the same period in September; the median price-to-earnings ratio of the ChiNext Index was about 35.7 times, in the 52.1% percentile of the past five years, down 25.5 percentage points from the same period in September.

"Valuation pressure has been released to some extent, but divergence across industries remains pronounced," Xia Fanjie noted.

As for the period ahead, he judges that the market will likely be dominated by fluctuations and structural repair, and that three major variables need to be watched closely: the pace of domestic incremental capital entering the market, changes in the overseas interest rate environment, and further verification of earnings expectations by third-quarter reports.

"The market is shifting from being driven by themes and valuations to being driven by earnings realization, entering a verification period of 'eliminating the false and retaining the true,'" Xia Fanjie said.

At the allocation level, Xia Fanjie's answer is the eight-character principle of "dividend defense, performance-driven."

On the defensive side, with uncertainty still present in the overseas interest rate environment and the valuation and trading pressure accumulated earlier in the technology sector not yet fully digested, high-dividend assets with stable cash flow, such as banks and utilities, remain the ballast for defense.

On the offensive side, after the earlier adjustment, valuation pressure in some industries has eased markedly. As A-share funding conditions improve, the market is expected to see a rebound and repair rally. Focus can be placed on AI hardware directions such as optical communications, high-end PCBs, MLCCs, and AI power supply supporting components, as well as areas with strong earnings support such as industrial metals, chemical raw materials, and high-end manufacturing.

English text is being prepared.

"In the short term, the market remains in a stage of risk appetite repair and earnings verification, and allocation should balance defensiveness with structural opportunities," Xia Fanjie concluded. "The certainty of earnings is the certainty that can carry us through the fluctuations."

(Source: 21st Century Business Herald) Middle of the body: embedded advertisement