Roundup | Asia CNY: Trend Tracker #1 Round Up 22 Feb 2026 19:55:39 ET Citi Asia Research AC +852-2501-2751 RoundUp China Economics - Solid CNY Spend Sets the Stage; NPC Policy Catalysts Next The Chinese New Year (CNY) holiday delivered a broadly firm demand signal, with upbeat retail sales, resilient mobility & travel and improved home sales. The slump in the box office is not a concern, given the lack of blockbuster releases. This better-than-expected household spending suggests a steady economic start. Wi ...

Summary of Key Points from the Conference Call Industry and Company Overview - The report focuses on the **China & Hong Kong equity market** with a specific outlook for **2026** and investment strategies for **1Q26** [2][5]. Core Themes and Arguments 1. **Constructive Stance on MXCN/CSI300**: The report maintains a positive outlook on MXCN and CSI300, predicting further rallies in 2026 with targets set at **100** for MXCN, **5,200** for CSI300, and **16,000** for MXHK, based on consensus EPS estimates [2][7][9]. 2. **Investment Themes for 2026**: - **Anti-involution**: Expected to accelerate post-March NPC, improving margins and ROE for MXCN/CSI300 [5]. - **AI Infrastructure Growth**: Strong global capex in AI is anticipated to boost demand for computing power and localization plays in China [5]. - **Global Macro Support**: Positive macroeconomic conditions, including easing fiscal and monetary policies in developed markets, are expected to enhance overseas sales [5]. - **K-shaped Recovery in Consumption**: This will favor food & beverage and premium luxury sectors while negatively impacting mid-tier consumption [5]. 3. **Risks Identified**: - **Geopolitical Tensions**: Ongoing tensions between the US and China, particularly ahead of the US mid-term elections, and rising tensions with Japan [5]. - **Consensus EPS Growth Concerns**: Potential downward revisions in consensus EPS growth for MXCN from approximately **15%** to **9%** due to intense competition in quick commerce platforms [5]. - **Property Market Weakness**: Reports of declining luxury sales and price drops in mainland China may trigger policy changes [5]. Sector Recommendations and Top Picks 1. **Under-owned China Equity**: The report suggests that China equity is under-owned both domestically and internationally, indicating potential for increased allocation [6]. 2. **Sector Preferences**: - **Overweight (OW)**: Communication Services, IT, Materials, and Staples. - **Underweight (UW)**: Energy and Utilities [6][12]. 3. **Top Picks for 1Q26**: - **China**: Baidu, NetEase, Midea, MIXUE, PDD, Pop Mart, Trip.com, Tingyi, Futu, Innovent, CATL, COLI. - **Hong Kong**: AIA, HKEX, Futu, Galaxy, MGM China, Techtronic, Link REITs, MTR, China State Construction International [6][13][15]. Important but Overlooked Content - **Valuation Normalization**: Since September 2024, MXCN/CSI300 has shown a return of **29%/30%** in USD terms, indicating a shift from a valuation discount to a more favorable investment narrative [20]. - **EPS Recovery**: The report highlights a broadening recovery in earnings across various sectors despite weak headline EPS growth, with significant recoveries noted in Healthcare, IT, and Communication Services [41][42]. - **Quantitative Macro Indicator (QMI)**: The JPM China QMI indicates an expansion phase, suggesting positive momentum in the market [47]. Conclusion The report presents a comprehensive outlook for the China and Hong Kong equity markets, emphasizing potential growth areas, sector preferences, and the importance of monitoring geopolitical risks and market dynamics as 2026 approaches.

Investment Rating - The report indicates a positive outlook for the Chinese market, with MSCI China showing an increase of 8% in USD over the past month, outperforming MXEF's 3% increase, suggesting a favorable investment environment [2]. Core Insights - The focus of China's policy has shifted towards quality growth, limiting supply-side excesses, and enhancing consumption, which is expected to improve supply-demand dynamics and support corporate profitability [2][4]. - Investor skepticism remains regarding China's ability to maintain supply cuts, with concerns about the implications for near-term growth and employment [3][4]. - The report outlines three key reasons why China's policy pivot could yield positive surprises in both magnitude and duration, emphasizing the need for anti-involution to revive private capital expenditure and support sustainable equity upcycles [4]. Summary by Sections Private Sector Capex - The private sector in China has experienced a capex growth hiatus for the past three years, with current net profit margins at 5-6%, the lowest in Asia, necessitating supply-side cuts to rationalize competition and enhance profitability [8][9]. - Reviving private sector capex is crucial for sustainable job creation and economic growth, requiring a reduction in unnecessary output [9]. Consumption - China's high household savings rate of over 30% has underpinned growth, but there is a pressing need for households to spend more and save less, supported by a robust equity market [13][14]. - The report highlights that the MSCI China EPS CAGR from 2015 to 2024 is only 1%, significantly lower than other markets, indicating a need for EPS growth to drive long-term equity market gains [14]. Supply Side Drivers - The report notes that the initial catalysts for industrial overbuilding are diminishing, with China's supply-driven economy facing an extreme supply-demand imbalance [18][19]. - Recent developments in high-tech industries and a potential stabilization in Tier-1 city property prices could ease the growth offset needed from manufacturing [19]. Investment Themes - The report identifies several investment themes in China, including consumer leaders, equity market proxies, private innovation, and consolidation beneficiaries, suggesting a favorable risk/reward scenario in the early stages of capital discipline [24][25].

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the **China/Hong Kong** markets, particularly highlighting sectors such as **Biotech**, **Macau**, and **value cyclicals** which performed well in July 2025. [2][3] Core Insights and Arguments - **Market Performance**: - MXCN and MXHK indices recorded gains of **4.5%** and **4.8%** respectively in USD terms for July 2025. [2] - The MXCN ended July at **12.0x FTM P/E**, reflecting a **4.6%** year-on-year consensus EPS growth for 2025. [2] - MXHK ended July at **14.1x FTM P/E**, with a **7.8%** year-on-year consensus EPS growth for 2025. [2] - **Sector Performance**: - **Biotech** and **Macau** led returns, with Biotech benefiting from out-licensing deals and Macau exceeding expectations in gross gaming revenue (GGR). [2][8] - The **Healthcare sector** surged by **22.8%** in July, driven by competitive R&D capabilities and effective pricing strategies. [13] - **Financials** saw a boost from record IPOs and strong life insurance sales, with a **2.7%** increase in sector performance. [8][13] - **Macroeconomic Factors**: - China's GDP growth for the first half of 2025 was **5.3%**, surpassing the government's target of **5%**. [3] - The Politburo meeting at the end of July did not indicate new stimulus measures, suggesting a cautious outlook. [3] - US-China trade talks concluded with a pause in reciprocal tariffs, aligning with expectations for a deadline extension. [3] - **Investment Outlook**: - The report anticipates a range-bound trading environment for MXCN between **70-80** in the coming weeks, influenced by weak August seasonality and uncertainties in US-China relations. [3] - The **anti-involution policy** initiated on July 1st is expected to benefit selected Energy and Material stocks, potentially leading to pricing and profitability turnarounds. [3] Additional Important Insights - **Short-Sale Activity**: The short-sale ratio in Hong Kong eased to **12.2%** in July from **13.9%** in June, indicating a slight reduction in bearish sentiment. [2][16] - **Retail Sales**: Retail sales in Hong Kong showed signs of stabilization, with a **0.3%** year-on-year decline in volume for June, but expectations for recovery in the second half of 2025. [8] - **Macau Gaming**: The gaming sector in Macau is believed to have reached a cyclical inflection point after a prolonged period of consensus estimate cuts. [8] Company-Specific Highlights - **Top Picks for 2H25**: - Companies highlighted include **Tencent**, **Alibaba**, **MGM China**, and **Innovent Biologics** among others, indicating a focus on sectors like Communication Services, Discretionary, and Healthcare. [7][8] This summary encapsulates the key points from the conference call, providing insights into market performance, sector dynamics, macroeconomic factors, and investment outlooks relevant to the China/Hong Kong markets.

Investment Rating - The report suggests an "Overweight" rating for sectors benefiting from the influx of educated youth into the workforce, particularly in services, healthcare, financial services, high-tech industries, and hospitality & entertainment [66][69]. Core Insights - Youth unemployment in China has increased significantly, from approximately 10% in 2018 to around 21% in the summer of 2023, but this is viewed as an opportunity rather than a threat due to the unprecedented level of education among the youth entering the workforce [2][5][6]. - China is transitioning from an industrial policy-driven economy to a services-oriented economy, with a notable increase in the contribution of services to GDP, which has risen from 32% in 1990 to 55% in 2023 [4][53]. - The report highlights that the most educated cohort in China's history is entering the labor market, with tertiary education enrollment rates soaring from 3% in 1990 to 75% in 2023, indicating a well-prepared workforce [4][14][10]. Summary by Sections Youth Unemployment - Youth unemployment is currently misinterpreted as a threat, while it actually presents an opportunity for economic growth as the most educated population enters the workforce [6][13]. - The report emphasizes that the rise in youth unemployment should be viewed through the lens of potential service consumption growth [6][20]. Human Capital Development - China has rapidly upskilled its population, with 15,467 per 100,000 now holding a degree, a fourfold increase over the past 20 years [4][10]. - Investment in education has increased from 2.4% of GDP in 2005 to 4.0% in 2022, leading to a significant rise in STEM graduates [4][39]. Service Sector Growth - The services sector in China is expected to grow significantly, with the potential to reach levels comparable to the US, where services contribute 76% to GDP [53][55]. - Key sectors identified for growth include healthcare, financial services, high-tech industries, and hospitality & entertainment, which currently employ a lower percentage of the labor force compared to the US [62][66]. Investment Opportunities - The report lists specific companies that are well-positioned to benefit from the growth in service consumption, including Trip.com, MGM China, NetEase, and Ping An Group, among others [66][69][88]. - The financial intermediation sector is highlighted as having substantial growth potential, particularly in health and protection products, with a noted lack of active CPAs in China compared to the US [70][69]. Healthcare Sector - The healthcare sector is poised for growth, with China now holding a 20% share of global PCT patent publications in biotechnology, second only to the US [76][81]. - The report identifies companies like Innovent and Akeso as potential beneficiaries of the expanding healthcare services market [76][81].

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