GUANGDONG DRIVE BIO-TECH CO.(BJ:838275) Zhi Tong Cai Jing·2025-11-18 05:14Core Viewpoint - UBS's report on the outlook for the Chinese stock market in 2026 indicates a shift from valuation-driven growth in 2025 to earnings improvement as the main driver for market performance in 2026, with a target for the MSCI China Index set at 100 points, representing a potential increase of approximately 14% from the closing level on November 14, 2025 [1][2]. Earnings Improvement as Key to Market Performance - The main upward momentum for the Chinese stock market in 2025 was driven by valuation recovery, but in 2026, the focus will shift to earnings growth, with an expected 10% increase in overall EPS for MSCI China Index constituents [2]. - The "anti-involution" effect driven by policy changes is expected to contribute approximately 3 percentage points to EPS growth in 2026, as regulatory measures promote orderly competition and improve resource allocation [2][3]. - A decline in depreciation and amortization is anticipated to support profit margins, as capital expenditure shifts from expansion to efficiency [3]. - Continuous optimization of cost structures in technology, internet, and advanced manufacturing sectors will enhance earnings sustainability and certainty [4]. Industry Allocation Recommendations - UBS recommends focusing on five key sectors for investment based on earnings certainty, policy support, and global market share enhancement: - Technology Hardware: Demand for servers, storage, and optical modules remains strong, with Chinese supply chains gaining competitiveness [5]. - Internet Sector: Recovery in advertising, e-commerce, and local services, combined with improved cost structures and cash flow among industry leaders, makes this sector attractive [6]. - Brokerage Sector: With capital market reforms and increased trading activity, brokerage firms are expected to see improvements across various business lines [7]. - Photovoltaic Supply Chain: Following a supply clearing in 2025, profitability in this sector is expected to improve significantly due to rising global demand for renewable energy [8]. - "Going Global" Enterprises: High-quality leading companies in appliances, automotive, consumer electronics, and machinery are expected to enhance their global market share [9]. External Risks and Valuation Advantage - UBS identifies two potential risks for the global market in 2026: potential valuation corrections in AI-related stocks and possible fluctuations in US-China relations affecting market sentiment [10]. - However, the sensitivity of Chinese stocks to these risks is considered limited, with lower correlation to global AI giants and a more favorable valuation position compared to other major markets [11][12]. Market Outlook - The Chinese stock market in 2026 is expected to exhibit structural opportunities rather than rapid unilateral trends, driven by improving fundamentals, stable policies, and deepening capital market reforms [13].