15 June 2025 | 7:52PM HKT China Strategy The comeback of Chinese POEs (Part 3): The ascent of Prominent 10 We expect market (cap) concentration in the listed POE sector to rise over time (Part 2). Against that backdrop, our analysis suggests that ten existing leaders—Chinese Prominent 10—are capable of growing their dominance in the stock market, akin to the US Mag 7 stocks. These "Prom 10" stocks are all rated Buy by GS analysts. They amount to US$1.6tn in market cap and 42% of MSCI China index weight, tra ...

Investment Rating - The report assigns a "Buy" rating to LONGi Green Energy Technology Co. and a "Sell" rating to Flat Glass Group (A), Flat Glass Group (H), Tongwei, and Xinyi Solar Holdings [14]. Core Insights - Overall sentiment in the solar industry has turned more negative compared to the previous year, with lower expectations for supply-side policy support [1][4]. - Demand for solar installations is expected to face significant downside risks, with projections indicating a 55% year-over-year decline in installations from June to December 2025 and a 30% decline in 2026 [2]. - Tier 1 companies are maintaining optimistic price expectations, which may not align with the deteriorating internal rate of return (IRR) for solar farms in the current pricing environment [3][5]. - Leading module manufacturers are shifting focus towards integrated "Solar+BESS" solutions to enhance customer returns under new policy conditions [7]. - The report anticipates that 17% of end-2024 capacity will exit the market during 2025-2026 due to cash burn pressures and market access constraints [8]. Summary by Sections Industry Sentiment - The 2025 SNEC event in Shanghai reflected a smaller scale with fewer exhibitors and a more negative overall sentiment compared to 2024, with a notable increase in visitors from India and Central Asia [1][4]. Demand Projections - Industry experts predict a significant decline in solar installations, with expectations of a 55% year-over-year drop in the latter half of 2025 and a 30% decline in 2026, contrasting with more optimistic consensus estimates [2]. Pricing and Capacity - Tier 1 companies are guiding to maintain current solar prices, which may be overly optimistic given the current market conditions affecting solar farm IRR [3][5]. - Some companies have begun offering Topcon Modules at prices below Rmb 0.6/W, indicating a potential shift in pricing dynamics [5]. Competitive Landscape - Competition is intensifying in the high-efficiency module segment, with leading companies mass-producing higher wattage modules to compete effectively [6]. - The report highlights that leading players are actively exploring integrated service offerings combining solar and battery energy storage systems (BESS) [7]. Market Dynamics - The report suggests that the combination of cash burn pressures and market access constraints will lead to a significant exit of capacity from the market [8].

Investment Rating - The report indicates a positive outlook for Focuslight, expecting double-digit year-over-year revenue growth in 2025E driven by various market demands [1][4]. Core Insights - Focuslight is positioned to benefit from rising demand for laser and optical components, particularly from local and overseas semiconductor equipment (SPE) clients, as well as the data center sector [2][4]. - The company is expanding its offerings in optical communication and is optimistic about the long-term migration to silicon photonics and chip-on-board (CPO) technologies [2][10]. - Focuslight's revenue growth is supported by its comprehensive product range, including diode laser components and laser optics, targeting multiple industries such as automotive, medical health, and consumer electronics [3][4]. Summary by Sections Growth Drivers - Key growth drivers identified for 2025 include laser and optical products for pan-semiconductor applications, optical communication, and the AR/VR market [4][9]. - Management anticipates improved profitability due to the shift of some back-end manufacturing processes from Europe to China [4]. Market Expansion - Focuslight is actively expanding into the pan-semiconductor market, with products utilized in flat panel display manufacturing and mini/micro LED soldering, driven by increasing demand from both local and overseas SPE clients [9]. - The acquisition of SUSS MicroOptics is expected to enhance Focuslight's penetration into the optical communication market, particularly with Chinese optical transceiver clients [10]. Optical Communication Opportunities - Focuslight provides various optical components such as microlenses and molded lenses for optical transceivers and fiber connectors, with management noting significant revenue potential from these products starting in 2025E [10]. - The company is optimistic about the increasing adoption of silicon photonics, which will require advanced microlens designs for integrated systems, thereby enhancing the value of Focuslight's offerings [10].

Investment Rating - The report upgrades the investment rating for several companies, including Cambricon, SMIC, AMEC, and VeriSilicon to "Buy" [3][70]. Core Insights - The semiconductor demand in the China market continues to grow, supported by advancements in generative AI, RISC V technology, and local suppliers gaining market share [2][4]. - Integrated circuit (IC) production in China showed a year-on-year growth of 4.0% in April 2025, while the import value increased by 8.9% year-on-year in May 2025 [4][22]. - The total revenue for semiconductors in China was reported at US$16.2 billion in April 2025, reflecting a 14.1% year-on-year increase [5][38]. Summary by Sections IC Production and Imports - IC production volume in April 2025 was 42 billion units, with a year-on-year growth of 4.0% [4][39]. - IC import volume increased by 9.9% year-on-year to 50 billion units in May 2025, while the import value rose by 8.9% year-on-year to US$34 billion [11][32]. - The average selling price (ASP) of IC imports decreased by 1% year-on-year in May 2025 [11][24]. Revenue Growth - The semiconductor sector's total revenue in April 2025 was up 14.1% year-on-year, indicating sustained growth in the industry [5][38]. - Taiwan's semiconductor companies reported a revenue growth of 25.3% year-on-year in May 2025 [9][42]. Inventory and Market Dynamics - The days of inventory (DOI) for China's electronics sector was 59 days in April 2025, lower than the historical average, indicating a healthy inventory level [28][9]. - Increased capital expenditure (capex) plans from local suppliers are expected to drive further market share expansion in the semiconductor sector [4][15].

Investment Rating - The report indicates a favorable outlook for Chinese private-owned enterprises (POEs), suggesting selectivity is required for investment success in this sector [1][3]. Core Insights - Chinese POEs are in the process of regaining market strength after losing nearly US$4 trillion in market capitalization since late 2020, with a significant underperformance compared to state-owned enterprises (SOEs) [1][4]. - The importance of the private sector has been acknowledged by policymakers, with recent legislative support aimed at promoting private enterprises [3][19]. - Regulatory risks have eased, contributing to a more favorable investment environment for listed POEs [3][20]. - The ongoing advancements in AI and technology are expected to enhance growth prospects for POEs, which constitute 72% of the defined AI-Tech universe [3][40]. - POEs are increasingly leading China's "Going Global" strategy, allowing for organic growth and higher profit margins [3][41]. - Profitability metrics for POEs have shown improvement, with profits and return on equity (ROE) rising by 22% and 1.2 percentage points, respectively, since the lows of 2022 [3][47]. - There are early signs of renewed investment appetite within the POE sector, indicating a return of "animal spirits" [3][56]. - POEs are currently trading at valuation discounts compared to historical ranges and SOEs, with cash returns reaching record highs [3][62]. Summary by Sections Section 1: Market Performance - Listed Chinese POEs have lost almost US$4 trillion in market capitalization since their peak in 2020, reflecting a 32% decline [4][6]. - POEs represent 60% of the total market capitalization of the listed universe in China [6][19]. Section 2: Regulatory Environment - The regulatory cycle for POEs has shifted towards a more accommodating stance, reducing the perceived policy risk premium [3][20]. - Recent legislative actions, including the first-ever POE law, aim to support the private economy and enhance investor confidence [3][19]. Section 3: Technological Advancements - AI and technology breakthroughs are reshaping the growth narrative for POEs, with significant representation in the AI-Tech sector [3][40]. - Widespread AI adoption is projected to boost corporate earnings in China by 2.5% annually over the next decade [3][36]. Section 4: Global Expansion - POEs are increasingly diversifying their revenue sources, with non-domestic sales expected to reach nearly 20% of total sales by 2024 [3][46]. - The profitability of POEs in overseas markets is generally higher than in the domestic market, driven by better pricing and reduced competition [3][45]. Section 5: Profitability Recovery - POEs have shown signs of profitability recovery, with expectations for further improvement in ROE and net margins [3][55]. - The consensus forecast indicates a potential uplift in ROE to around 13%-14% in the coming years [3][55]. Section 6: Investment Opportunities - The report emphasizes the need for selectivity in investing within the POE universe, highlighting specific investment themes such as the Chinese Prominent 10 and GS China Select AI Portfolio [1][74]. - The thematic bias towards high-quality SOEs remains, particularly those with strong shareholder returns [1][74].

Investment Rating - The report suggests a positive medium-term investment case for Chinese private-owned enterprises (POEs), indicating an improvement due to various macro, policy, and micro drivers [4]. Core Insights - The market concentration ratio among Chinese equities is low, with the top-10 companies representing only 17% of the total market cap, compared to 33% in the US and 30% in emerging markets excluding China [3][7]. - Regulatory pressures on POEs have eased, enhancing their growth prospects through organic and acquisitive means [11][14]. - Industry consolidation in POE-led sectors is currently low, suggesting potential for market share gains and profitability increases for existing leaders [18][20]. - Large POEs are increasingly involved in AI technologies, positioning them as key players in China's global expansion strategy, which has positively impacted their growth and profitability [5][41]. - The top-10 POEs trade at a forward price-to-earnings (fP/E) ratio of 13.9, which is a 22% premium over the aggregate market, indicating they are relatively inexpensive compared to their historical valuations [7][47]. Summary by Sections Market Concentration - China has one of the lowest market concentration ratios globally, with the top-10 companies representing 17% of the total listed market cap, down from a peak of 46% in the mid-2000s [3][7][13]. Regulatory Environment - The regulatory framework for POEs has become more transparent, with significant easing of pressures since mid-2021, including the approval of a law promoting private companies [11][14]. Industry Dynamics - Industry consolidation is low in POE-led sectors compared to the US, indicating potential for further market share gains [18][20]. - The competitive landscape in China remains fragmented, with many sectors showing high levels of competition and overcapacity [20][21]. Technological Advancements - Large POEs are at the forefront of AI technology development, which is crucial for their long-term competitiveness and market positioning [37][40]. Valuation Metrics - The top-10 POEs are trading at a forward P/E of 13.9, which is at the low end of their historical range, suggesting potential upside in valuations [47][48].

Investment Rating - The report does not explicitly provide an investment rating for the transportation sector or specific companies within it Core Insights - The Brent oil price has increased by 12% to $74/bbl due to geopolitical tensions, with a forecasted decline to $59 in Q4 2025 and $56 in 2026, assuming no disruptions in oil supply [1][7] - A potential drop in Iranian oil supply by 1.75mb/d could lead to Brent prices peaking over $90/bbl before declining back to the $60s as supply recovers [1][8] - The transportation sector, particularly tankers and airlines, may experience significant impacts from fluctuating oil prices and geopolitical risks [1][2] Tankers - Iranian oil constitutes 3% of global oil production; a reduction in this supply could shift 0.8-1.5% of global ocean tanker demand from shadow fleets to compliant fleets, potentially benefiting companies like COSCO Shipping Energy [1][21] - The report anticipates an upside in shipping rates and share prices for compliant tanker fleets due to the expected shift in demand [1] Airlines - Airlines are highly sensitive to oil price changes, with China Southern Airlines showing a 22% earnings downside per 1% increase in oil price, followed by China Eastern Airlines and Air China at 17% and 10% respectively [5][17] - Despite short-term pressures on earnings due to rising fuel costs, long-term demand for air travel is expected to remain stable, provided there are no widespread concerns over aircraft safety [5][17] - The report maintains a bearish medium-term outlook on Brent oil prices, forecasting $66 in 2025 and $56 in 2026, which could alleviate some pressure on airline earnings in the longer term [5][7]

Investment Rating - The report maintains a "Buy" rating for Meituan, JD, Alibaba, Guming, Mixue, and Yum China, with specific target prices set for each company [19][24][25][27][28][36]. Core Insights - The food delivery industry in China has seen a significant increase in daily order volumes, reaching approximately 120 million, driven by platform subsidies and evolving consumer behavior [13][16]. - Competitive strategies among food delivery platforms have intensified, particularly between Meituan, JD, and Taobao Instant Shopping/Ele.me, with each platform adopting aggressive subsidy strategies to capture market share [7][9][12]. - Long-term market share projections indicate Meituan will hold a dominant position with 60-65% of the GTV market share, followed by Taobao Instant Shopping/Ele.me at 25-28% and JD at 10-15% [13][19]. Summary by Sections Market Dynamics - The food delivery market has expanded due to increased on-demand consumption, with daily orders growing from around 80 million to 120 million, including 30 million incremental orders attributed to subsidies [13][16]. - The expert anticipates that a portion of the new orders, particularly meal orders, may persist even after subsidies normalize [13]. Competitive Strategies - Meituan has focused on maintaining order volume and market share through differentiated offerings and targeted subsidies, particularly in higher-tier cities [7][19]. - JD has ramped up its order volume to 25 million daily orders, leveraging its delivery network and aggressive subsidy strategies [12][24]. - Taobao Instant Shopping/Ele.me has initiated campaigns to attract consumers, benefiting from traffic on the Taobao platform [9][19]. Long-term Projections - The expert presented various long-term market share scenarios, projecting Meituan's market share to remain robust while JD and Taobao Instant Shopping/Ele.me will capture smaller shares [13][19]. - The expert expects JD's loss per order to peak in Q2 2025, with gradual improvements anticipated by Q4 2025 [13].

Investment Rating - The report assigns a "Buy" rating to Sino Biopharmaceutical with a 12-month price target of HK$3.92, indicating a downside potential of 17.7% from the current price of HK$4.77 [8][10]. Core Insights - The company is expected to achieve double-digit sales growth in 2025, driven by a 25% year-on-year increase in innovative drug sales, projected to rise from approximately Rmb12 billion in 2024 to around Rmb15 billion in 2025, contributing over half of total sales [2][8]. - The management highlighted a significant deal worth several billion US dollars is anticipated to be realized soon, reflecting the company's active negotiations with multinational pharmaceutical and leading biotech companies [3][6]. - The earnings growth is expected to outpace revenue growth due to ongoing savings in selling, general, and administrative expenses, along with an improved gross margin from a shift towards more profitable innovative drugs [2][8]. Summary by Sections Sales Growth and Financial Performance - The company is confident in achieving double-digit total sales growth in 2025, with innovative drug sales expected to grow by 25% year-on-year [2]. - The generic portfolio is also anticipated to show positive growth, with major drugs having Rmb500 million or more in sales effectively managing the impacts of the volume-based procurement (VBP) policy [2][8]. Pipeline and Deal-Making - Sino Biopharmaceutical has a robust R&D pipeline with multiple innovative assets, including potential treatments for COPD and breast cancer, which are currently in various phases of clinical trials [6][7]. - The company is focusing on out-licensing as a key strategy to unlock global potential and generate sustainable collaboration income [3][6]. Market Position and Competitive Advantage - Anlotinib, a key product, is targeting peak sales of over Rmb6 billion, demonstrating superior efficacy compared to existing treatments for non-small cell lung cancer (NSCLC) [7]. - The management emphasized the large market for NSCLC in China, which can accommodate multiple players, and highlighted the advantages of their product's established recognition and cost efficiency [7].

Investment Rating - The report assigns a "Buy" rating for the data center sector, indicating a positive outlook for investment opportunities in this industry [1]. Core Insights - The report emphasizes that technology development, particularly AI and cloud transformation, is driving demand for data centers, with a forecasted 60% increase in demand by 2027, compared to only 10% growth in logistics demand [3][71]. - It highlights that the data center sector is currently mispriced, with average valuations correcting to 20x 1Y forward EV/Ebitda, which is at the lower end of the logistics range of 20-30x, suggesting potential for re-rating based on earnings delivery and monetization [3][71][106]. Summary by Sections Lessons from E-commerce Boom on Logistics Assets - The e-commerce boom during 2020-2024 led to a doubling of e-commerce value in Singapore and Australia, significantly impacting logistics fundamentals, with rental growth of 23% in Singapore and 100% in Sydney [2][20]. - The share prices of logistics-related stocks approximately doubled from the Covid trough, with EV/Ebitda expanding from 20x to 30x before correcting back to around 20x [2][20]. Applying Lessons to Data Centers - Data center demand growth is driven by cloud transformation and AI adoption, with a forecast of 60% increase in demand by 2027 [3][71]. - The report indicates that data center vacancy rates are expected to remain below historical averages until 1Q28, with stronger rental growth anticipated in markets with tight vacancies starting in 2024 [3][71]. Buy Recommendations - Keppel is well-positioned as a data center sponsor with a projected 4.7% dividend yield for 2026 and strong balance sheet capacity for acquisitions [4]. - Goodman Group is noted for its strategic assets and positive pivot towards data centers, while NextDC is highlighted for its first-mover advantage in Australia [4]. - DigiCo REIT is recognized for its favorable supply/demand dynamics in the US and Australia [4].