June 18, 2025 09:00 PM GMT Jonathan.Garner@morganstanley.com +65 6834-8172 China Equity Strategy | Asia Pacific M Idea Focus List Changes – China/HK We add PICC P&C (2328.HK) to our China/HK Focus List and remove Pop Mart (9992.HK) from the list Adding PICC P&C (2328.HK): PICC P&C is China's biggest P&C player with >30% market share. Morgan Stanley China insurance analyst Rick Zhao believes the company will maintain competitiveness in the market due to: 1) a strong balance sheet and healthy book value growt ...

Core Insights - Warren Buffett will step down as CEO of Berkshire Hathaway at the end of this year, marking the end of an era for the investment conglomerate he has led since 1965 [1] - Berkshire Hathaway has increased its exposure to technology trends and growth stocks, particularly in the realm of artificial intelligence (AI) [2] Group 1: Berkshire Hathaway's Investment Strategy - Berkshire Hathaway has been reducing its stock holdings and increasing its cash position, reflecting concerns about market valuations relative to macroeconomic and geopolitical risks [5] - The company has significantly reduced its holdings in Apple, which may indicate specific concerns regarding the business despite Apple remaining the largest stock holding in Berkshire's portfolio [9] Group 2: Apple Inc. - Apple has a market capitalization of $3 trillion and constitutes 21.6% of Berkshire's total stock portfolio, making it the largest publicly traded company in the portfolio [4] - Apple faces challenges in the AI space, particularly with its Siri platform, which has not met performance expectations [6] - The company is also experiencing difficulties in the Chinese market, with delays in the rollout of its AI platform and soft sales for the iPhone 16 [7][8] Group 3: Amazon.com Inc. - Amazon represents a smaller percentage of Berkshire Hathaway's portfolio, with its investment being made by one of the portfolio's managers rather than Buffett himself [10] - Amazon Web Services (AWS) is a key growth driver for the company, holding a 30% market share in cloud services and expected to be a multi-hundred-billion dollar revenue business [11][12] - AWS sales increased by 17% year over year in the first quarter, contributing significantly to Amazon's operating income [13]

Investment Rating - The report assigns an "Overweight" rating to Alibaba Group Holding, indicating a positive outlook for the stock's performance relative to its industry [3]. Core Insights - The report highlights that Alibaba's 4QFY25 results exceeded expectations in terms of core metrics, while cloud revenue was in line with projections [1][6]. - The overall industry view is considered "Attractive," suggesting favorable conditions for investment in the sector [3]. Financial Performance Summary - Total revenue for 4QFY25 was RMB 236.454 billion, reflecting a year-over-year increase of 6.6% but a quarter-over-quarter decline of 15.6% [2]. - Income from operations was RMB 28.465 billion, showing a significant year-over-year increase of 92.8% but a quarter-over-quarter decrease of 30.9% [2]. - Adjusted EBITA for 4QFY25 was RMB 32.616 billion, which is a 36.1% increase year-over-year, beating Morgan Stanley's estimates by 6% [6]. - Non-GAAP net profit was RMB 29.847 billion, representing a year-over-year increase of 22.2% but a quarter-over-quarter decline of 41.6% [2]. Segment Performance - The Taobao & Tmall Group generated revenue of RMB 101.369 billion in 4QFY25, a year-over-year increase of 8.7% but a quarter-over-quarter decline of 25.5% [2]. - The Cloud Intelligence Group reported revenue of RMB 30.127 billion, reflecting a year-over-year growth of 17.7% [2]. - The Alibaba International Digital Commerce Group achieved revenue of RMB 33.579 billion, marking a year-over-year increase of 22.3% [2]. Valuation Metrics - The price target for Alibaba is set at US$180.00, indicating a potential upside of 34% from the current price of US$134.05 [3]. - The report projects revenue growth to reach RMB 1,081 billion by FY26, with net income expected to rise to RMB 162 billion [3].

Investment Rating - The report does not explicitly provide an investment rating for the industry or specific companies. Core Insights - Emerging Market (EM) equity funds experienced outflows of US$1.2 billion in the week ending April 30, 2025, with China leading the outflows at US$2.8 billion, partially offset by inflows from India (US$0.7 billion), Brazil (US$0.5 billion), Korea (US$0.4 billion), and Taiwan (US$0.4 billion) [2][3] - GEM long-only managers increased their overweights in Brazil and Korea while reducing their underweight in China, funded by adding to India underweight and cutting South Africa overweight [3][4] - Japanese equities saw foreign inflows of US$3.7 billion in the week ending April 25, 2025, although year-to-date flows remain net sold [5] Market Dynamics - In March 2025, GEM investors trimmed underweights in Consumer Discretionary Distribution & Retail and Telecommunication Services, funded by cutting overweights in Semiconductors and Media & Entertainment [4] - The underweight in Japan among long-only investors narrowed to 27 basis points as of the end of March 2025, down from 39 basis points at the end of December 2024 [5] - Active long-only managers added to overweight positions in Consumer Durables & Apparels and trimmed underweight in Automobiles & Components, funded by adding to underweight in Capital Goods [5] Fund Positioning - As of March 31, 2025, the relative market allocation of EM fund managers shows a significant underweight in China, which has narrowed, while both portfolio and index weights have risen [11] - The report highlights that the active fund positions in EM equities by market show Brazil with a portfolio weight of 7.8%, India at 19.5%, and Korea at 9.0% [21] - Sector positioning indicates that Financials account for 24.1% of the portfolio, followed by Information Technology at 21.5% and Consumer Discretionary at 14.5% [23][27]

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - Chinese equities experienced a significant outflow of US$5.3 billion from foreign long-only funds in April, reversing a two-month inflow trend since February [11] - The outflow was primarily driven by passive funds, which saw outflows of US$3.7 billion, and active funds, which had outflows of US$1.6 billion [11] - Cumulative foreign passive inflows since October 2022 have reverted to levels similar to late February 2025, with April outflows reversing approximately 50% of the inflows from March 2025 [11] - Active fund managers increased their underweight positions in China, with global funds down 1.3 percentage points, AxJ funds down 2.0 percentage points, and EM funds down 3.2 percentage points [11] - Domestic passive funds targeting China A-shares recorded a massive inflow of US$27 billion in April, marking the highest monthly inflow since 2024 [11] - The Southbound Stock Connect program maintained strong momentum with US$21 billion in April, bringing the net inflow for the first four months of 2025 to US$77 billion [11] Fund Flows - In April, foreign domiciled funds saw a total outflow of US$5.3 billion, with passive funds contributing US$3.7 billion and active funds contributing US$1.6 billion [11] - The report indicates that the northbound net flow data was terminated as of August 19, 2024, and suggests using foreign passive funds flow to CSI 300 as a proxy for historical northbound net flow [13] - As of April 30, 2025, US$0.4 billion in short interest was added in China offshore/HK equities, primarily in the Energy and Industrials sectors [13] Sector and Company Positioning - Active fund managers increased their positions in Household & Personal Products while reducing their holdings in Media & Entertainment and Insurance [11] - The most added companies by active fund managers included Alibaba, BYD, Trip.com, and China Construction Bank, while Tencent and Xiaomi were the most trimmed [11] - The report highlights that the top holdings among long-only EM and China active managers include Tencent Holdings, Alibaba Group, and Meituan, with notable changes in their active weights [42]

Consumption Trends - Consumption remains the primary driver of economic growth in China, with service consumption emerging as a new growth engine [1] - The "trade-in" policy is highlighted as a significant factor for consumption growth in 2024, driving industrial upgrades and transformation [1][2] - The trade-in program will be expanded in 2025, with broader subsidy coverage and initiatives to enhance service consumption quality [2] Challenges in Consumption - The main challenge for commodity consumption is the softer consumer purchasing power and willingness, affecting demand [3] - For service consumption, the challenge lies on the supply side, with insufficient high-quality services available [3] Company Strategies - Meituan's CEO emphasized a focus on food & grocery retail, international expansion, and technology for the next decade [4] - Alibaba's Hema is expanding its Freshippo Stores, planning to open about 100 new stores and enter dozens of new cities [4] - Alibaba's Ele.me is investing over 1 billion yuan (approximately $140 million) to support merchants through various initiatives [5] Market Expansion - Grab Holdings is acquiring the supermarket chain Everrise in Malaysia to enhance its grocery business and digitize operations [6] Technological Advancements - Alibaba has released an open-sourced inference model, QwQ-32B, achieving breakthroughs in various capabilities while reducing deployment costs [7] - Tencent has launched an open-source image-to-video model, allowing businesses and developers to apply for API access [8] - Alibaba Cloud aims to increase the number of Japanese projects utilizing its generative AI models to over 1,000 within three years [8]

Market Performance - The S&P 500 lost 3.1%, the Dow Jones fell about 2.4%, and the Nasdaq Composite retreated 3.5%, marking the worst week for the S&P 500 since September 2024 [1] - The Nasdaq officially entered correction territory, defined as a 10% decline from recent highs [1] - SPDR S&P 500 ETF Trust (SPY) lost 3.4% during the week [1] Employment Data - Nonfarm payrolls increased by 151,000 in February, falling short of economists' expectations of 170,000 [2] - The unemployment rate rose to 4.1%, raising concerns about economic softening [2] Trade Policy Concerns - Market turmoil was driven by uncertainty surrounding President Trump's tariff announcements, although goods from Canada and Mexico were exempted under the USMCA until April 2 [3] - Glen Smith, CIO at GDS Wealth Management, noted that the market does not favor uncertainty and anticipates continued market volatility until trade uncertainties are resolved [4] Economic Outlook - Treasury Secretary Scott Bessent acknowledged a potential loss of economic momentum but attributed it to a transition from previous policies [5] - He reassured investors that any tariff-related price increases would be a one-time adjustment rather than a trigger for lasting inflation [5] Top-Performing ETFs - Gold Miners – MicroSectors Gold Miners 3X Leveraged ETN (GDXU) increased by 14.8%, with gold bullion ETF (GLD) gaining over 1.2% [7] - China – Direxion Daily CSI China Internet Index Bull 2x Shares (CWEB) rose by 12.1%, driven by developments in Chinese tech stocks, particularly Alibaba's AI advancements [8] - Europe – Direxion Daily FTSE Europe Bull 3x Shares (EURL) was up 10.6%, with earnings momentum shifting towards Europe and parts of Asia [9] - Homebuilding – Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) gained 5.1%, likely due to a decline in treasury bond yields [10] - Mexico – Direxion Daily MSCI Mexico Bull 3X Shares (MEXX) increased by 4.8%, aided by the delay of auto tariffs on Mexico and Canada [12]