Group 1: Market Dynamics - The emergence of "Little Dragons" like DeepSeek and Yushutech has renewed confidence in China's supply chain competitiveness and technological innovation[2] - China's supply chain advantages stem from cost reduction and efficiency, but reliance on exports may continue due to domestic economic imbalances[4] - The potential market growth rate may fall below the pace of capacity expansion due to upcoming tariff pressures and long-term multipolar trends[4] Group 2: Economic Challenges - Structural economic imbalances and cyclical deflation pressures cannot be resolved solely through technological innovation[2] - Risks of capital misallocation persist, exacerbated by corporate profit pressures and non-market investments driven by supply-side policies[4] - Evidence of capital misallocation includes weak total factor productivity growth and rising debt ratios[4] Group 3: Policy Recommendations - A five-part policy framework is proposed to address economic challenges: re-inflation, rebalancing, restructuring, reform, and revitalizing private enterprise confidence[8] - Progress in the five-part framework could help overcome supply-side growth bottlenecks and enhance China's supply chain and innovation capabilities[8]

Group 1: Market Performance - Recent rebound in the Chinese market is primarily driven by AI momentum, with significant divergence between tech stocks and others[3] - From January 13 to February 7, 2025, the Hang Seng Index rose by 12%, while the Hang Seng Tech Index surged by 22%[3] - The MSCI China Index increased by 13%, with the MSCI China IT sector up by 24% during the same period[3] Group 2: Investment Trends - Southbound capital inflow reached $17 billion year-to-date, primarily directed towards IT and communication services[11] - Daily average net inflow for IT sector doubled from $42 million in 2024 to $88.1 million in 2025[11] - Global long-term investors still hold significant underweight positions in relevant sectors, indicating potential for catch-up[11] Group 3: Economic Outlook - Continued deflationary pressures are expected to hinder consumption and traditional non-tech sectors, prolonging performance divergence[12] - Recent macroeconomic data shows little improvement in deflationary pressures, with weak sales in duty-free shops during the Spring Festival[12] - Concerns over economic slowdown may limit broad beta investment opportunities until after the National People's Congress in March[12] Group 4: AI Sector Insights - The report highlights 15 AI-related stocks that are expected to benefit from advancements in AI technology, particularly in infrastructure and applications[13] - The technology from DeepSeek significantly reduces AI training and inference costs, potentially accelerating AI adoption in China[13] - The shift in global investor sentiment towards China's tech and AI sectors is seen as more sustainable than previous short-term rebounds[6]

Macro Policy and Economic Forecast - The official deficit rate is expected to reach 4% or higher, with a fiscal stimulus increment of around 2 trillion RMB[1] - Policy focus shifts towards consumer goods renewal, with a predicted cumulative policy rate cut of 40 basis points by mid-next year[1] - Unconventional counter-cyclical measures include central enterprises issuing special investment bonds and coordinated fiscal and monetary policies, injecting 2 trillion RMB in liquidity[5] Economic Priorities and Structural Reforms - Expanding domestic demand is prioritized over technology and industrial chain investments, signaling a shift towards an internal demand-driven framework[3] - Structural reforms are necessary to transition from an investment and real estate-centric economy to a more balanced structure, a process expected to be long-term[5] - Addressing real estate bad debts requires a combination of policy intervention and market-based mechanisms to clear the market and ensure fiscal sustainability[5] Financial and Insurance Sector Outlook - Loose monetary policy has led to increased deposit savings rates, limited consumption stimulation, and reduced resource allocation efficiency[8] - The insurance sector shows strong investment value, with significant growth in new business value and improved performance due to channel optimization and product structure enhancements[13] - Challenges for the insurance industry in 2025 include managing new business value growth and addressing market concerns over interest rates and opening red scenarios[14]

Investment Rating - The report indicates a cautious outlook on the Chinese economy, with lowered GDP forecasts for 2024 and 2025, reflecting concerns over soft activity data [7][19]. Core Insights - The report highlights a significant decline in China's industrial production, retail sales, and fixed asset investments, leading to a negative GDP deflator throughout the forecast period [2][19]. - The Federal Reserve is expected to consider a 50 basis point rate cut in the upcoming FOMC meeting, with market participants anticipating a shift in monetary policy [3][7]. - The Bank of Canada is also under scrutiny, with Governor Macklem expressing concerns about economic slack, which may lead to more aggressive rate cuts [10][19]. Summary by Sections Global Macro Commentary - Soft economic data from China has raised growth fears, prompting economists to lower GDP forecasts [7]. - The USTs rallied amid expectations of a potential 50 basis point Fed cut, while uncertainty remains regarding the exact size of the cut [3][7]. Developed Markets - The Empire State Manufacturing Survey showed a significant improvement, rising to 11.5 in September, indicating a rebound in new orders and shipments [19]. - The Canadian economy is facing pressure, with the BoC Governor indicating a desire to avoid further economic slack, which may lead to rate adjustments [10][19]. Emerging Markets - China's August activity data was disappointing, with industrial production growth moderating to 4.5% year-on-year, and retail sales slowing to 2.1% [19]. - In India, the RBI Governor expressed confidence in sustaining a growth rate of 7.5% over the next few years, despite external influences from major central banks [19].

Investment Rating - The report assigns an "Attractive" investment rating to the industry [1]. Core Insights - The headline Total Social Financing (TSF) growth moderated to approximately 8% year-on-year (YoY) in August, indicating a more rational loan extension which is expected to stabilize loan yields [1][2]. - Government bond issuance is anticipated to be a primary support for investment and consumption in the second half of 2024 [1]. - The report forecasts TSF growth to remain around 8% for 2024, with a potential decline below this level, which is viewed positively for the long-term sustainability of the financial system [1][2]. - Credit growth is expected to slow to approximately 7% in 2025, which will help close the gap between credit supply and demand, thereby supporting loan yields through more market-oriented pricing by banks [1]. Summary by Sections TSF Growth and Loan Dynamics - TSF growth moderated to 8.1% YoY in August, with RMB loan growth also at 8.1% YoY [2][3]. - The moderation in loan growth is attributed to efforts to reduce self-circulating loans and a rationalization of loan growth as banks focus on risk containment [1][3]. - Long-term corporate loans remain weak, influenced by policies on capacity control and fair competition rules [1]. Government Bonds and Investment Support - Government bond issuance increased by 15.8% YoY, providing significant support for investment and consumption [2][3]. - The report highlights that government bonds will likely be utilized to bolster investment and consumption in the latter half of 2024 [1]. Household and Corporate Deposits - Household deposit growth remained stable at 10.9% YoY in August, while corporate deposits declined by 3.9% YoY [1][11]. - The stability in household deposits is seen as a positive indicator for fee income rebound in the second half of 2024 [1]. Loan Types and Trends - Short-term household loans saw a significant decline of 52% YoY, while long-term household loans are experiencing a slower decline [1][11]. - The report notes that mortgages are gradually stabilizing, attributed to lower early repayments and some recovery in demand due to lower mortgage rates [1]. Valuation Comparisons - The report includes valuation comparisons for various Chinese banks, indicating a range of price-to-earnings (P/E) and price-to-book (P/B) ratios, with several banks rated as Overweight (OW) [12][13].

Investment Rating - The industry view is rated as Attractive [2]. Core Insights - Earnings for banks remained largely stable in 2Q24, with notable divergences among state-owned enterprises (SOE) banks, particularly with ABC and BOC showing positive revenue growth while ICBC and BoCom exhibited weaker trends [2][6]. - The net interest margin (NIM) remained stable on average, with a modest decline of 2 basis points in 2Q24, supported by lower deposit and funding costs [2][6]. - Fee income pressure persisted, with a double-digit decline reported across most banks, although investment gains helped offset some losses [2][8]. - There was a wider divergence in revenue growth, with Ningbo and Hangzhou banks leading with 7-9% year-on-year growth, while banks like PAB and ICBC experienced notable revenue declines [2][10]. Summary by Sections Earnings Performance - The average profit growth for covered banks improved to 4.9% year-on-year in 2Q24, up from 1.5% in 1Q24, driven by SPDB and CRCB's strong performance [4][6]. - ABC reported a profit rebound of 6.2% year-on-year, while BoCom's profit decreased by 5.2% [5][6]. Net Interest Margin (NIM) - NIM for banks showed a slight average decline of 2 basis points, with CITIC Bank experiencing a notable rebound due to rational loan pricing and deposit cost cuts [2][7]. - ICBC's NIM fell to 1.38%, the lowest among the big four banks, reflecting a significant decline from the previous year [7][16]. Fee Income - Fee income across the covered banks declined by an average of 12.6% year-on-year in 2Q24, with most SOE banks experiencing accelerated declines [8][17]. - Investment income helped stabilize non-interest income, which remained flat year-on-year despite the fee income pressure [8][17]. Revenue Growth - Revenue trends showed a decline of 1.2% year-on-year on average, with significant variations among banks; ABC and BOC achieved positive revenue growth while ICBC's revenue fell by 8.8% [10][12]. - Ningbo and Hangzhou banks reported revenue growth of 8.6% and 7.3% year-on-year, respectively, supported by stable NIM and balance sheet growth [10][12]. Cost Management and PPOP - The average cost-income ratio rose by 60 basis points year-on-year to 32.3%, with SOE banks experiencing a more significant increase [10][11]. - Ningbo reported the strongest PPOP growth at 11.7% year-on-year, while ICBC and BoCom faced sharper declines in PPOP due to weaker revenue [11][12].

Investment Rating - The report indicates a positive investment rating for Financials, while Semiconductors and Semiconductor Equipment have been trimmed to an overweight (OW) position of +3.0% [1][3]. Core Insights - Active GEM funds experienced a significant outflow of US$2.2 billion, contrasting with a US$254 million inflow into GEM passive products [1]. - India has surpassed China as the largest market in active portfolios, while China has become the largest underweight (UW) market, replacing Saudi Arabia [2]. - The most bought stocks include Hon Hai Precision, Meituan, and ITC, while the most sold stocks are TSMC, Alibaba, and SK Hynix [2]. Summary by Sections Active Manager Positioning - Active managers have reduced their overweight positions in Semiconductors and Semiconductor Equipment, while increasing their exposure to Financials [2][3]. - Brazil is now the largest overweight market, with funds reducing exposure to Taiwan, China, and India, as well as Mexico [3]. Sector Analysis - In Japan, active managers have added to Materials, which is now the most crowded sector, while trimming their overweight positions in Tech Hardware & Equipment [2]. - Hedge fund managers have covered shorts in Energy and Real Estate, while increasing shorts in Communication Services and Information Technology [4]. Top Holdings - The top holdings among long-only EM active managers include Taiwan Semiconductor Manufacturing (11.4%), Samsung Electronics (5.7%), and Tencent Holdings (5.1%) [6]. - Notable changes in QTD include a decrease in active weight for TSMC and Alibaba, while Hon Hai Precision has seen an increase [6].

Investment Rating - The report assigns an "In-Line" industry view for the Hong Kong property sector [1]. Core Insights - July 2024 retail sales in Hong Kong declined by 12% year-over-year, which is worse than expected, leading to a revised forecast for 2024 retail sales to a decline of 9% from a previous estimate of 5% [1]. - The report highlights that stocks with retail exposure, such as Wharf REIC, Link REIT, and Hysan, have underperformed the Hang Seng Index by 20-24 percentage points year-to-date [1]. - The report favors residential developers over retail and office landlords, with a preference for Wharf REIC and Link REIT among retail landlords [1]. - The report notes that luxury retail sales dropped significantly, with a 25% year-over-year decline in July 2024, and a 15% drop year-to-date [1]. - Online retail sales grew by 1% year-over-year in July 2024, accounting for 7.8% of total retail sales [1]. Summary by Sections Retail Sales Performance - July 2024 total retail sales were HK$29.1 billion, marking a 12% year-over-year decline and the lowest dollar amount since the full border reopening [1]. - Major categories such as luxury goods, department stores, and clothing/footwear experienced significant declines, with luxury sales down 25% year-over-year [1]. Stock Recommendations - The report recommends Wharf REIC and Link REIT with an "Overweight" rating, while Hysan is rated "Equal-weight" due to slowing retail momentum and high office exposure [1]. - The report anticipates that potential upcoming US rate cuts could widen the dividend yield spread, positively impacting earnings per share (EPS) and dividends per share (DPS) for these stocks [1]. Visitor Trends - Chinese visitor arrivals increased to 78% of 2018 levels in August 2024, but local spending per capita remains weak, affecting overall retail performance [1].

Investment Rating - The report maintains a positive outlook on key themes, particularly Obesity, AI, and Defence, indicating strong fundamentals and potential for continued growth [3][7]. Core Insights - The report emphasizes the importance of not selling secular themes too early, as they have historically delivered significant returns, averaging 66% in their first year and 17% in the second year [3]. - Among the leading themes, Obesity is highlighted as the strongest performer, with AI and Defence also showing promising fundamentals that justify their valuations [3][7]. - The analysis suggests that thematic stocks, particularly in Obesity, AI, and Defence, are experiencing earnings upgrades, which supports their current valuations [7]. Thematic Performance - The report categorizes thematic performance into three major themes: Tech Diffusion, Decarbonisation, and Longevity, aligning them with MSCI's thematic indices for better tracking [5]. - Obesity thematic stocks, led by companies like Novo and Lilly, continue to see upgrades, justifying their re-ratings over the past 24 months [8]. - AI and Robotics have seen significant EBITDA revisions of over 10% year-to-date, indicating strong performance and a re-rating close to 15% [8]. - Defence and Security have experienced modest re-ratings, with Defence showing greater earnings upgrades compared to Security, particularly in Europe [8]. Stock Selection - The report identifies 50 stocks globally that are included in multiple MSCI thematic indices, which have collectively outperformed the S&P 500 by over four times in the past decade [12]. - Multi-theme exposed stocks are considered reliable options for investors looking to outperform the market [12]. Market Conditions - The report notes that while China Tech is not a primary theme, it is experiencing 10% sales growth, suggesting a potential for higher valuation multiples [11]. - The analysis indicates that national budgets for Defence need to rise, and institutional investor positioning remains thin for key companies like Rheinmetall in Europe [7].

Industry Investment Rating - The report highlights a significant pivot in venture funding from blockchain protocols to AI start-ups, with blockchain funding down 75% while AI funding has doubled from 2022 lows [6][7] Core Report Insights - Bitcoin's price is 6% below its 2021 high and 15% below its all-time high, yet venture funding for blockchain protocols has dropped by 75% [6] - AI start-up funding now constitutes over 40% of all venture/growth funding, indicating a strong shift in investor focus [8] - AI funding has a stronger correlation to Bitcoin prices than blockchain funding, a trend only seen once before in 2020 [8] Blockchain Industry Analysis - Blockchain faces challenges with product-market fit and user engagement, with venture-backed investments unlikely to return significant funds compared to previous cycles [2] - Institutional interest in blockchain, driven by ETFs and the recent halving, has supported prices but not on-chain activity levels [6] AI Industry Analysis - AI start-ups have seen better adoption statistics compared to blockchain, but exit challenges remain in the private market [7] - AI funding has surged, with deal flow dominating other verticals, including blockchain-focused companies [8] Crypto Mining to AI Data Center Conversion - There is a growing opportunity for Bitcoin miners to convert mining facilities into AI data centers, with potential valuations up to $10/watt for powered shell conversions [11] - The conversion of a 150 MW crypto facility to an AI data center could yield significant financial benefits, with an indicative enterprise value of $411 million [13] Venture Funding Trends - Venture funding for AI start-ups has doubled from 2022 lows, aligning with the stock performance of key listed AI companies [7] - AI funding now makes up over 40% of all venture/growth funding, significantly outpacing other sectors [8] Market Performance and Correlations - AI funding shows a stronger correlation to Bitcoin prices than blockchain funding, a trend not seen since 2020 [8] - The report includes detailed correlation data between Bitcoin prices and AI/ML capital invested from 2014 to 2024 [9] Largest Deals and Funding Rounds - The report lists significant VC and PE deals, including Grafana Labs' $328 million 6th round and Borealis Biosciences' $150 million 1st round [17][18] - Notable AI-related deals include Story Protocol's $83 million 3rd round and Slingshot AI's $30 million 2nd round [17]