ab 14 April 2025 Global Research China Equity Strategy All you need to know about the 'national team' 'National team' to rebuild confidence via ETFs and managing expectations Before China's stock market close on 7 April, Central Huijin Investment (Central Huijin) announced it had increased ETF holdings and would continue buying. Before the open on 8 April, it said it was the "national team" in the capital market and would serve as a "quasi-stabilisation fund". We note an increase in various A-share ETF trad ...

ab 11 April 2025 Global Research China Equity Strategy ADR delisting concerns rise again… expect less impact this time HK portion has likely overtaken the US part for ADRs The US Treasury Secretary in a media appearance indicated the possibility for US-listed China ADRs to be delisted as a part of the conditions for trade negotiations. While in 2021 and 2022 such delisting fears resulted in an average drawdown of 22% for the ADR names, we would expect any potential impact to be more manageable this time aro ...

Investment Rating - The report maintains a cautious stance on the China equity markets, emphasizing capital preservation as the near-term priority [2][3]. Core Viewpoints - The report suggests that downside risks currently outweigh upside potential in the China equity markets due to escalating US-China tensions, global economic uncertainties, and a focus on short-term investments [2][3]. - The MSCI China index is trading at a 13% discount compared to its historical average P/E relative to MSCI World, indicating potential attractiveness despite the uncertainties [2]. - The report highlights that further deterioration in trade relations could lead to additional market drawdowns, as historical data suggests a 2% market decline for every 10% increase in tariffs [3][4]. Sector Preferences - The report recommends a tilt towards high dividend names for defensive purposes, particularly in the consumer staples sector, while avoiding exposure to export-oriented sectors [5][8]. - The most preferred sectors include high dividend names, consumer staples, internet, and A-share TMT, while construction and machinery are among the least preferred [8][9]. - Specific stock picks include China Mobile, NetEase, and Tencent Holdings, all rated as "Buy" with projected price targets indicating significant upside potential [8][36].

Investment Rating - The report does not explicitly state an investment rating for the industry Core Insights - The A-share market experienced a significant decline following the announcement of a 34% tariff increase by the US government on April 2, 2025, with the weighted ad valorem tariff rate on imports from China potentially averaging about 63% after the hike [2][9] - The UBS-S China Macro team estimates that the tariff hikes could subtract around 4 percentage points from A-share earnings growth in 2025, with non-financials' net profit growth expected to decelerate by 6 percentage points due to margin contraction [3][11] - The report highlights that the A-share market appears undervalued, trading at a significant discount to global emerging markets, which may provide resilience against the negative impacts of tariffs [4][34] Summary by Sections Macro Perspective - The US tariff hike on China is expected to have a substantial negative impact on China's export growth and GDP growth, potentially dragging down A-share earnings growth significantly [9][10] - The correlation between revenue growth of A-share non-financials and China's nominal GDP growth suggests that a slowdown in GDP will adversely affect earnings [11][12] Bottom-Up Analysis - The overseas revenue contribution for the non-financial A-share sector has increased from 6.8% in 2010 to 13.1% in 2023, with certain sectors like electronics and home appliances being more exposed to overseas markets [25][27] - The report indicates that more than 70% of sectors have less than 15% of their total revenue from exports, suggesting limited overall exposure to tariff impacts [25] Market Pricing of Tariffs - Historical data shows that the A-share market typically corrects around 3% on the first day of tariff-related news, indicating a timely pricing in of trade frictions [29][30] - The current market movements may have already factored in the potential negative implications of the new tariffs [30] Valuation and Market Stability - The CSI 300 and all A-shares are trading at trailing PEs that are below their five-year averages, indicating potential downside protection [34] - The 'national team' is expected to increase its holdings to stabilize the market, with significant net inflows into A-share ETFs reported [5][43] Policy Expectations - The report anticipates significant macro policy support to stabilize growth, including potential cuts in reserve requirement ratios and interest rates, as well as fiscal expansion measures [41][42] - The 'national team' has been actively engaged in market-stabilizing operations, reflecting confidence in the long-term prospects of China's capital markets [43][44]

Investment Rating - The report provides a "Buy" rating for several companies including Marvell Technology (MRVL), NVIDIA (NVDA), Semtech (SMTC), Broadcom (AVGO), Micron Technology (MU), LAM Research (LRCX), Teradyne (TER), Analog Devices (ADI), Advanced Micro Devices (AMD), and Arm (ARM) [6] - Companies rated as "Neutral" include Indie Semiconductor (INDI), Entegris (ENTG), Western Digital (WDC), Applied Materials (AMAT), Seagate Technology (STX), KLA (KLAC), Qualcomm (QCOM), GlobalFoundries (GFS), Qorvo (QRVO), and Skyworks Solutions (SWKS) [6] Core Insights - The semiconductor industry is experiencing significant growth driven by AI and data center demand, with companies like ARM and NVIDIA positioned to benefit from this trend [11] - ARM is expected to see strong growth in its key markets, particularly in data centers and smartphones, with a target price of $215 representing a 99% upside [11] - NVIDIA's GPUs are dominating the AI workload market, with substantial growth opportunities anticipated, leading to a target price of $185, indicating a 69% upside [11] - AMD is also expected to gain market share in AI, with a target price of $175, reflecting a 70% upside [11] - Broadcom is leveraging its position in AI and networking, with a target price of $270, suggesting a 60% upside [11] - The report highlights potential risks for Intel (INTC), which is rated Neutral, due to concerns about its product roadmap and competitive positioning [11] Summary by Company - **Marvell Technology (MRVL)**: Positioned well in AI with a target price of $110, indicating a 77% upside [11] - **NVIDIA (NVDA)**: Dominating AI workloads with a target price of $185, reflecting a 69% upside [11] - **Semtech (SMTC)**: Expected to benefit from AI infrastructure growth, with a target price of $60, indicating a 71% upside [11] - **Broadcom (AVGO)**: Strongly positioned in AI with a target price of $270, suggesting a 60% upside [11] - **Micron Technology (MU)**: Target price of $130, indicating a 47% upside [11] - **LAM Research (LRCX)**: Target price of $130, suggesting a 31% upside [11] - **Teradyne (TER)**: Target price of $130, indicating a 57% upside [11] - **Analog Devices (ADI)**: Target price of $300, suggesting a 49% upside [11] - **Advanced Micro Devices (AMD)**: Target price of $175, indicating a 70% upside [11] - **Arm (ARM)**: Target price of $215, reflecting a 99% upside [11] - **Indie Semiconductor (INDI)**: Rated Neutral with a target price of $4.5, indicating a 113% upside [11] - **Entegris (ENTG)**: Rated Neutral with a target price of $115, suggesting a 30% upside [11] - **Western Digital (WDC)**: Rated Neutral with a target price of $50, indicating a 23% upside [11] - **Applied Materials (AMAT)**: Rated Neutral with a target price of $175, suggesting a 21% upside [11] - **Seagate Technology (STX)**: Rated Neutral with a target price of $105, indicating a 24% upside [11] - **KLA (KLAC)**: Rated Neutral with a target price of $735, suggesting a 9% upside [11] - **Qualcomm (QCOM)**: Rated Neutral with a target price of $190, indicating a 24% upside [11] - **GlobalFoundries (GFS)**: Rated Neutral with a target price of $45, suggesting a 22% upside [11] - **Qorvo (QRVO)**: Rated Neutral with a target price of $85, indicating a 19% upside [11] - **Skyworks Solutions (SWKS)**: Rated Neutral with a target price of $70, suggesting a 9% upside [11] - **Intel (INTC)**: Rated Neutral with a target price of $23, indicating a 1% upside [11]

Investment Rating - The report maintains a positive outlook on the semiconductor industry, particularly focusing on the potential impacts of AI diffusion rules on NVIDIA's revenue, estimating a potential revenue impact in the range of 10-15% if supply/demand equilibrium is assumed [2]. Core Insights - The AI diffusion rules are seen more as a bureaucratic delay rather than a fundamental risk to NVIDIA, with most Tier 2 countries having limited new capacity for AI infrastructure over the next few years [2]. - Microchip Technology's issuance of $1.485 billion in convertible preferred stock is aimed at avoiding a covenant breach and subsequent downgrade, with a projected headwind to EPS of approximately $0.05 per quarter for the next three years [3][5]. - Increased competition from domestic Chinese suppliers, particularly SiCarrier, poses a challenge to US semiconductor equipment suppliers, as they introduce new toolsets aimed at enhancing China's production capabilities [6]. Summary by Sections AI Diffusion Rules - The report discusses the implications of AI diffusion rules on data center capacity and NVIDIA's revenue, highlighting that most Tier 2 countries will not meet the compute cap by 2027 due to limited planned deployments [2][11]. - It notes that shipments to Singapore represented less than 2% of NVIDIA's FY25 revenue, indicating limited exposure to potential revenue impacts from the AI diffusion rules [2][13]. Microchip Technology - Microchip Technology's recent convertible preferred stock issuance aims to eliminate outstanding commercial paper and avoid a downgrade to high yield, with a significant portion of proceeds allocated to debt paydown [3][5]. - The issuance will result in a dilution of share count and EPS by approximately 5% if the stock price remains below $70, with updated EPS estimates reflecting this impact [5][22]. Competitive Landscape - The emergence of SiCarrier and other domestic Chinese suppliers introduces new competitive pressures for US semiconductor equipment suppliers, particularly in inspection and metrology tools [6][10]. - The report highlights the potential for these suppliers to accelerate the replacement of existing US equipment in domestic chip manufacturing [6]. Economic Indicators - The report emphasizes the importance of upcoming PMI and ISM releases, which are expected to provide direction for semiconductor stocks amid macroeconomic uncertainty [7]. - The consensus for these indicators is neutral, with a focus on the new orders component, which has shown a negative reversal recently [7]. Tariffs and Trade - The US government's announcement of 25% tariffs on auto imports and parts is expected to pressure sentiment on automakers and their suppliers, with potential price increases of $4-5k per vehicle required to mitigate the impact [8]. - Comments from major companies regarding USTR investigations suggest a desire for a more structured approach to protect domestic interests without resorting to tariffs that could harm US interests in China [9][10].

Investment Rating - The report does not explicitly provide an investment rating for the industry [1]. Core Insights - Following a 100 basis point hike by the Central Bank of Brazil (BCB), the report anticipates a subsequent 50 basis point hike in May, another 50 basis points in June, and a halt at 15.25% [3]. - The inflation forecast for South Africa has been adjusted to 3.4% for 2025, down from 3.5% [3]. Summary by Sections Current Forecasts vs Last Week - The report includes a comparison of current forecasts against those from the previous week, highlighting changes in economic indicators [2][14]. Forecast Highlights - The report provides detailed forecasts for various economic indicators, including Real GDP growth, Consumer Prices, and Fiscal balances for multiple countries [11][12]. - For the US, Real GDP is forecasted at 2.8% for 2024, 2.0% for 2025, and 1.8% for 2026, with inflation rates of 3.0%, 2.7%, and 2.5% respectively [12]. - Japan's Real GDP is projected at 0.1% for 2024, 1.2% for 2025, and 0.7% for 2026, with inflation rates of 2.7%, 3.1%, and 1.8% [12]. - The Eurozone is expected to have a Real GDP growth of 0.7% in 2024, 0.9% in 2025, and 1.1% in 2026, with inflation rates of 2.4%, 2.3%, and 2.0% [12]. Global Assumptions - The report outlines global assumptions for currency exchange rates and bond yields, including an expected EUR/USD rate of 1.12 by the end of 2025 and a 10-year US Treasury yield of 4.25% [13].

Investment Rating - The report assigns a "Buy" rating for Tencent Holdings with a 12-month price target of HK$676.00, while the current price is HK$502.00 [4][25]. Core Insights - Tencent is expected to benefit from AI advancements in its core businesses, particularly in online gaming, advertising, and cloud services. The integration of generative AI is enhancing content production and user experience in gaming, optimizing ad performance, and improving cloud service efficiency [2][3][8]. - The company is well-positioned for long-term growth through its Weixin ecosystem, which is seen as a trusted platform for Agentic AI, facilitating transactions and user engagement [3][8]. - The report highlights a robust revenue growth forecast, with revenues projected to increase from Rmb609,015 million in 2023 to Rmb735,186 million in 2025, reflecting a compound annual growth rate (CAGR) of approximately 10.5% [6]. Summary by Sections Financial Performance - Revenue projections show a steady increase from Rmb609,015 million in 2023 to Rmb916,840 million by 2028, with net earnings expected to rise from Rmb157,688 million in 2023 to Rmb347,008 million in 2028 [6]. - The report anticipates an EPS growth from Rmb16.41 in 2023 to Rmb38.21 in 2028, indicating strong profitability [6]. Market Position - Tencent's market capitalization is noted at HK$4,683 billion (approximately US$602 billion), with a free float of 66% [4]. - The company has a significant user base of 1.4 billion on its Weixin platform, which enhances its competitive edge in the digital ecosystem [3]. Valuation Metrics - The report indicates an attractive valuation with a projected P/E ratio of 17x for 2025, based on a 13% EPS CAGR from 2024 to 2026 [8]. - Forecast returns suggest a price appreciation of 34.7% and a dividend yield of 1.0%, leading to an overall forecast stock return of 35.6% [9].

Investment Rating - The report assigns a "Buy" rating to major Chinese cloud service providers including Alibaba, Baidu, Tencent, and Kingsoft Cloud, indicating a positive outlook for their stock performance [36]. Core Insights - The aggressive price cuts in LLM API services in China, initiated by companies like DeepSeek, have significantly reduced costs, making LLM services more accessible and driving competition in the market [2][3]. - The report highlights that while Chinese LLM API prices are approximately 5% of their US counterparts, the rapid decline in inference costs globally has made these services more affordable [2][5]. - The demand for AI services is expected to drive cloud revenue growth, with AI-related revenue contributing 10-20% to total revenue for both Chinese and US cloud vendors [5]. Summary by Sections Pricing Strategy - Chinese LLM leaders are employing a loss-leader pricing strategy to enhance user adoption and cross-sell opportunities, particularly to cloud service providers [3]. - The report notes that despite some companies achieving gross margins, many API services are priced at thin margins or losses, intensifying competition and leading to market consolidation [3]. Market Comparison - The report contrasts the pricing strategies of US and Chinese cloud vendors, noting that US companies have reduced API costs at a more moderate pace due to a mature cloud market and a focus on enterprise reliability [4]. - US vendors like OpenAI have implemented tiered monetization strategies, avoiding a full-scale price war while still reducing prices significantly [4]. Revenue Growth Expectations - The report anticipates that the increasing demand for AI applications will lead to accelerated cloud revenue growth, with major Chinese CSPs revising their revenue growth estimates upward for 2025 and 2026 [5][22]. - For instance, Alibaba's cloud revenue growth estimate was revised up by 8.3 percentage points post Q4 results, reflecting a positive trend in AI-related demand [22].

Investment Rating - The report indicates a positive sentiment towards China equities, suggesting an improving investment outlook for the sector [2][4]. Core Insights - Global investors are increasingly optimistic about China equities, driven by a rapid market rally and confidence in innovation and policy easing [2][4]. - The focus has shifted from long-term structural issues to short- and medium-term macro trends, indicating a search for immediate investment opportunities [4]. - Key sectors of interest include AI and consumer sectors, with a noted lack of interest in high-dividend yield sectors [5]. Summary by Sections Market Performance - As of March 19, 2025, the A-share market has underperformed compared to the Hong Kong stock market, with the CSI 300 and Wind All A-shares rising only 1.9% and 6.5% respectively, while the MSCI China Index and Hang Seng Index rose 23.4% and 23.5% [9]. - The underperformance is attributed to the composition of the A-share index, which is heavily weighted towards financials and industrials, contrasting with the tech-heavy Hong Kong indices [9][10]. Economic Recovery - There are signs of recovery in China's economy, particularly in consumer and industrial sectors, with notable increases in domestic tourism and auto sales [17][18]. - The property market is showing stabilization, with new home inventories falling and land auction activity increasing, which could positively impact consumer spending [18][45]. Earnings and Valuation - The report anticipates a potential re-rating of A-shares, with expected earnings growth for the CSI 300 improving from 1% in 2024 to 6% in 2025 [20]. - The current trailing PE of A-shares is noted to be 7-8% below the averages of 2017 and 2021, suggesting room for valuation improvement [20][24]. Sector Insights - The AI sector remains a focal point for investment, with significant interest in related industries such as robotics and intelligent driving [5]. - Capacity utilization trends vary across sectors, with some industries like aluminum and battery materials showing improvement, while others like steel and cement face declining utilization [58][60]. Global Market Positioning - UBS's global equity strategy favors European equities over others, with China equities positioned favorably among emerging markets [62][64]. - The report highlights that while emerging markets are attractive, they are more vulnerable to external factors such as tariffs, with China having lower revenue exposure to the US [64].