CHINA STRATEGY A Slow(er) China Bull Market A slow bull market is in the making MSCI China has bounced 80% from the cycle lows in late 2022, but disrupted by 4 significant drawdowns. We now call for a more sustained uptrend for China equities, forecasting key indexes to rise ~30% by end-2027, led by 12% trend profit growth and 5-10% further re-rating potential. The case for a durable bull run Bull-market mentality and strategies Lingering macro risks will cause pullbacks, but the default mindset should chan ...

October 17, 2025 03:10 PM GMT Investor Presentation | Asia Pacific China Equity Strategy: Can China Finish Strong into Year End? M Foundation Morgan Stanley Asia Limited+ Laura Wang Equity Strategist Laura.Wang@morganstanley.com +852 2848-6853 Chloe Liu Equity Strategist Chloe.Liu1@morganstanley.com +852 2848-5497 Vicky Wu Equity Strategist Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict ...

Summary of the Conference Call on China Economics Industry Overview - The report focuses on the **Chinese economy**, particularly the inflation metrics and the impact of anti-involution on various sectors [1][4][5]. Key Points and Arguments 1. **CPI and PPI Trends**: - China's headline **CPI** turned negative at **-0.4% YoY** in August, primarily due to falling food prices [4][6]. - The **PPI** reading improved to **-2.9% YoY**, with a sequential change of **0.0% MoM**, marking the end of an 8-month streak of negative prints [5][6]. 2. **Food Prices Impact**: - Food prices increased by **0.5% MoM**, but the year-on-year decline widened to **-4.3% YoY**, the largest contraction since February 2024 [6]. - Pork prices continued to decline, reaching **-16.1% YoY**, while vegetables and fruits also saw significant price drops [6]. 3. **Core Inflation**: - Core inflation, excluding food and energy, rose to **0.9% YoY**, with core goods inflation reaching **1.4% YoY**, the highest since February 2020 [6][13]. 4. **Sector-Specific Insights**: - Upstream sectors showed signs of reflation, particularly in coal and ferrous metal mining, where contractions narrowed significantly [5][6]. - Downstream sectors, including solar and NEVs, experienced selective recovery, but overall demand remains a concern [5][6]. 5. **Future Expectations**: - A firm pickup in CPI is expected towards year-end, despite near-term volatility, with ongoing upstream reflation for PPI [1][15]. - Incremental policy measures are anticipated, focusing on property support, infrastructure, and potential new financial injections of approximately **RMB 500 billion** [16]. 6. **Monetary Policy Outlook**: - The central bank is not expected to rush into rate cuts, with both policy rate cuts and RRR cuts likely delayed amid an equity rally [16]. Additional Important Content - The report highlights the potential for smaller discounts during upcoming online promotions due to regulatory efforts to manage price competition in food delivery [15]. - The overall economic outlook suggests stabilization in the GDP deflator and a cautious approach to monetary easing, reflecting the complexities of the current economic environment [15][16]. This summary encapsulates the critical insights from the conference call, providing a comprehensive overview of the current state and future expectations of the Chinese economy.

Summary of Key Takeaways from the Anti-Involution Trip in China Industry Overview - The report focuses on the **China Materials** sector, specifically analyzing the impacts of the **anti-involution** initiative on the **steel**, **lithium**, and **coal** industries [1][2][10]. Core Insights Anti-Involution Initiative - The anti-involution program aims to stabilize industry profits and curb deflation, with production levels being determined by the National Development and Reform Commission (NDRC) based on demand assumptions [2][3]. - The initiative is expected to lead to a recovery in industry profitability, although it will likely remain range-bound due to varying factors such as state ownership and current profitability levels [2]. Steel Industry - A production cut order has been issued by Beijing, but it has not yet reached Tangshan steel mills. Some mills believe production cuts are unnecessary due to positive margins, while others anticipate cuts in Q4 [3]. - Regions like Shandong, Jiangsu, and Liaoning are actively cutting production due to their lower GDP exposure to steel, while Tangshan mills have agreed to control production to maintain positive margins [3]. Lithium Industry - Demand for lithium is stronger than expected, driven by robust energy storage system (ESS) and electric vehicle (EV) demand [4]. - Potential supply cuts from lepidolite mines in Yichun could impact production, with a >50% chance of shutdowns lasting three to six months during license conversion, affecting approximately 150,000 tons per annum of lithium carbonate equivalent (LCE) [4]. Coal Industry - Coal production has decreased by 5% since overproduction inspections in July, with a slight decline in supply expected towards year-end [10]. - Total coal demand is projected to rise by 1-2% year-on-year in 2025, with thermal prices expected to fluctuate between RMB 640-700 per ton, indicating limited downside [10]. - Approximately 20% of coking coal mines are currently loss-making, and potential volume increases from Mongolia are limited by port inventory capacity and rising costs [10]. Additional Important Points - The pace of recovery in profitability across different segments will vary based on the mix of state ownership and market conditions [2]. - The report emphasizes the importance of monitoring production adjustments and demand trends in these sectors to identify potential investment opportunities and risks [2][4][10].

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the **China Express** industry, particularly discussing the **"anti-involution"** initiatives and recent price hikes affecting the parcel delivery sector in China [1][2]. Recent Developments - **Price Hikes**: Approximately **70%** of the industry parcel volume has been affected by recent price hikes, with successful implementation expected to sustain and potentially expand coverage [9]. - Price increases in **Guangdong, Zhejiang, and Fujian** regions range from **Rmb0.1 to Rmb0.4** per parcel since August. - Regions including **Hunan, Hubei, Jiangxi, Henan, Hebei, Beijing, and Tianjin** have seen hikes of **Rmb0.2 to Rmb0.4** per parcel since September, with further increases planned in Hubei and Jiangxi effective from October. - Discussions for price hikes are ongoing in **Shandong and Jiangsu** [9]. Market Dynamics - **Market Share Lock-Up Period**: The lock-up period for market share has been extended in several regions, including Guangdong, Zhejiang, and Fujian. Most regions have a lock-up period following price hikes, except for Hunan and Hubei [9]. - The current lock-up period is shorter in regions outside Guangdong, which has a lock-up from **August 5 to September 20**, but may be extended further [9]. Industry Volume Growth - **Volume Growth Deceleration**: Both **ZTO** and **YTO** have reported a deceleration in industry volume growth as of August [5]. Future Catalysts - Potential catalysts for further price hikes include: 1. The trend of industry volume growth post-price hikes, which may influence local regulators' decisions on executing further price increases. 2. Market share dynamics once the lock-up periods conclude [9]. Analyst Insights - Analysts from **Morgan Stanley** are closely monitoring these developments, indicating a cautious but optimistic outlook on the industry dynamics and pricing strategies [6][7]. Important Considerations - The report emphasizes the importance of understanding the regulatory environment and market dynamics that could impact pricing strategies and overall industry performance [7][9]. This summary encapsulates the critical insights and developments discussed in the conference call regarding the China Express industry and its pricing strategies.

Summary of Key Points from the Conference Call Industry Overview - The focus is on the Chinese stock market and its recent performance, with a notable rally of over 50% in the past year and 30% year-to-date in USD terms [1][2]. Core Insights and Arguments 1. **Regulatory Measures**: Chinese financial regulators are considering stock market cooling measures, including the potential removal of some short selling curbs. This is aimed at consolidating the market's positive momentum while promoting long-term value and rational investment [1][2]. 2. **Market Strategy**: Beijing aims for a "slow bull" market, encouraging both household and institutional investors to allocate more to equities, which currently stands at 8-9% for households compared to 50% for real estate. This shift is expected to occur due to demographic changes and low interest rates [2][3]. 3. **Margin Financing Concerns**: The growth of margin financing in China has exceeded 50% year-on-year, which is a warning signal for speculative positioning. The current margin finance growth is at 64% year-on-year, indicating potential for a market consolidation phase [3]. 4. **Cyclical Outlook**: Despite short-term positioning extremes, the macro and policy cycle remains supportive for a positive stance on China over a 3-6 month horizon. Key supportive factors include low interest rates, improving industrial policy, and increasingly supportive fiscal policy [4]. 5. **Investment Recommendations**: Two sectors are highlighted for constructive investment: - **AI Internet**: Companies like Tencent, Alibaba, and Kuaishou are well-positioned to leverage AI technologies through cloud services and advertising [5]. - **Large Consumer Leaders**: Companies such as Galaxy, CR Beer, Anta, and Yum China are favored due to their attractive valuations, with EV/EBITDA ratios under 10x [5]. Additional Important Content - The report emphasizes the importance of monitoring margin finance growth as a key indicator of market health and potential speculative risks [3]. - The discussion on the demographic shift in China suggests a long-term trend towards increased equity investment, which could reshape the market landscape [2]. - The cyclical support for the market is reinforced by favorable monetary and fiscal policies, which are expected to continue driving growth [4]. This summary encapsulates the critical insights and recommendations regarding the Chinese stock market and its investment landscape, highlighting both opportunities and risks.

Summary of Key Points from the Conference Call Industry Overview - The focus of the conference call was on the materials sector in China, specifically steel, coal, copper, and macroeconomic conditions [1] Core Insights - **Impact of Anti-Involution**: The anti-involution policy is expected to have a nuanced impact on the macro level, with larger companies likely to benefit from broader supply consolidation. This consolidation may lead to lower investment and job losses, affecting demand [2] - **Supply Consolidation Journey**: A multi-year supply consolidation is anticipated, with a gradual shift towards consumption. Policymakers are expected to implement the anti-involution campaign at a calibrated pace, particularly in downstream industries [3] - **Steel Production Control**: The National Development and Reform Commission (NDRC) has set production control measures for the steel industry, aiming for flat year-over-year production. In the first seven months of 2025, China's crude steel apparent consumption decreased by 5.9%, while production fell by 3.1% year-over-year [4] - **Market Stabilization Measures**: Overproduction inspections are more about stabilizing the market rather than strict enforcement. The National Energy Administration may intervene if coal prices deviate significantly [5] Company-Specific Insights China Shenhua Energy (1088.HK/601088.SS) - **Production Cost Management**: Shenhua expects the annual unit coal production cost increase to be below the previously guided 6%. The company is implementing measures to optimize production processes and reduce costs [10] - **Asset Injection Update**: Shenhua is undergoing due diligence for a net asset injection close to RMB 100 billion, which includes 13 projects [11] - **Dividend Policy**: The company has increased its dividend payout to 79% in 1H25, up from 73% at the end of 2024, addressing market concerns about maintaining dividends amid large acquisitions [12] - **New Mining Projects**: Construction has begun at Xinjie mines 1 and 2, with production expected to start in 2029 [13] MMG Ltd (1208.HK) - **Nickel Mine Acquisition**: MMG's acquisition of a nickel mine from Anglo American is aimed at long-term profit contributions, with potential for producing battery-grade nickel. The mine is currently cash flow positive despite lower prices [15] - **Production Guidance**: The production guidance for Las Bambas remains unchanged at 400kt, with management cautious about potential disruptions due to the upcoming presidential election in Peru [17] Additional Important Points - **Customer Base Stability**: MMG's customer base is diversified, with 25% in the US, 25% in the EU, and 50% in Asia. The EU market shows a preference for green nickel, which commands a price premium [16] - **Future Growth Opportunities**: MMG is exploring opportunities for further growth, including potential acquisitions of smaller mines near Las Bambas [18] This summary encapsulates the key insights and developments discussed during the conference call, providing a comprehensive overview of the current state and future outlook of the materials sector in China.

Summary of Key Points from the Conference Call Industry Overview - The focus of the conference call was on the lithium and aluminum value chains within the China Materials sector, specifically during the "Anti-Involution Trip" [1] Lithium Sector Insights - Yongxing confirmed that a revised mineral reserves report will be submitted by September 30, as required by the local government. The previous report was based on a 0.2% Li2O cutoff grade, aligning with current standards [2] - Management anticipates minimal impact on lithium carbonate production costs, estimating an increase of several hundred RMB per ton if the mineral classification changes to lithium [2] - There is a potential risk of temporary shutdowns for other Yichun lepidolite mines due to mining license issues, with a possibility of a 1-2 year delay in reclassification processes [3] Aluminum Sector Insights - Chalco projects a ~3% increase in China's total aluminum demand for 2025, with potential upward revisions due to stronger-than-expected demand in July and August. Demand is particularly robust in the wire, automotive, and energy storage markets [4] - The long-term growth forecast for aluminum demand is expected to decline slightly to 1.5-2% annually in the domestic market and 1-1.5% globally [4] - The Chinese government is considering controlling alumina capacity, which may support prices, although no specific measures have been announced yet [5] - Limited overseas aluminum supply increases are anticipated in the next three years due to underdeveloped industry environments and infrastructure in Southeast Asia, the Middle East, and Africa [6] Additional Considerations - The local government is expected to standardize mineral type classifications and provide a grace period for compliance, reducing the likelihood of production curbs or suspensions [2] - Both Yongxing and another converter associated with the suspended Jianxiawo mine have approximately two weeks of lepidolite inventory, indicating a short-term buffer against supply disruptions [2] Conclusion - The conference highlighted the dynamics of the lithium and aluminum markets in China, with a focus on regulatory impacts, demand forecasts, and potential supply constraints. The insights provided are crucial for understanding the investment landscape in these sectors.

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the **Global Solar Industry**, particularly the implications of China's anti-involution policies on the solar value chain [1][2]. Core Insights and Arguments - **Consolidation of Solar Value Chain**: The consolidation of China's main solar value chain is expected to occur in a more commercial and market-oriented manner, with moderate government guidance. The recovery pace will depend significantly on the progress of the polysilicon industry consolidation [1][2]. - **Price Stabilization**: Prices across the value chain (polysilicon, wafer, cell, module) are likely to stabilize at current levels until early 2026, close to the production costs of top players, due to reduced demand in the second half of 2025 following market tariff reforms [2][3]. - **Challenges in Module Segment**: The solar module segment faces challenges in passing through price recoveries from upstream segments due to weak domestic demand and a fragmented competitive landscape. This may hinder significant price recovery and profitability for Chinese module manufacturers [3][4]. - **Forecasts for Polysilicon and Module Prices**: The base case scenario forecasts polysilicon prices to gradually recover to Rmb49/kg in 2026 and Rmb58/kg in 2027, while module prices are expected to reach Rmb0.72/w and Rmb0.78/w in the same years. Gross margins for integrated module players are projected to improve to 2% in 2026 and 11% in 2027, compared to -7% in 2025 [4]. Investment Implications - **Preferred Stocks**: The analysis favors investments in companies such as **Reliance Industries** in India, **Gulf Development** in Southeast Asia, and US players like **First Solar** and **Shoals Technologies**. Chinese solar auxiliary materials and solar glass players like **Hangzhou First**, **Flat Glass**, and **Xinyi Solar** are also recommended due to their balanced supply-demand dynamics [5][11]. - **Underweight Recommendations**: There is an underweight recommendation for Chinese solar manufacturing equipment suppliers like **Jingsheng** and **Maxwell**, as well as integrated module players such as **LONGi** [7]. Additional Important Insights - **Acquisition Fund Likelihood**: There is a reasonable likelihood of an acquisition fund being initiated by leading polysilicon manufacturers, although the consolidation process may require multiple negotiation rounds to address the interests of acquired companies and regional governments [2]. - **Valuation Metrics**: The report includes various valuation metrics for companies in the solar value chain, indicating a range of P/E ratios and other financial metrics for 2025, 2026, and 2027 [9][11]. - **Stock Performance**: The stock price performance over the past month, three months, and year is provided, showing varying trends across different companies in the solar sector [11]. This summary encapsulates the key points discussed in the conference call, providing a comprehensive overview of the current state and future outlook of the global solar industry, particularly in relation to China's market dynamics.

Summary of Key Points from the Conference Call Industry Overview - The focus of the conference call was on the **coal industry in Shanxi, China** [1] - The coal market has experienced a price rebound in July and August, but profitability remains an issue for many mines [1] Core Insights - Approximately **40-50% of state-owned enterprise (SOE) coal mines** are still operating at a loss, with loss-making coking coal mines accounting for about **20% of industry capacity** [1] - Following an overproduction inspection in July, coal production from sampled mines has decreased by **5%**, contributing to a rise in thermal coal prices to over **Rmb700/ton** by late August [3] - Despite the expected decline in supply towards year-end, a significant drop is not anticipated due to the need for coal during the winter heating season [3] - Thermal coal prices are projected to fluctuate between **Rmb640-700/ton**, indicating limited downside potential [3] Demand and Supply Dynamics - Total coal demand is expected to increase by **1-2% year-on-year in 2025**, driven by higher thermal power demand due to extreme temperatures and a colder winter forecast [4] - The steel and cement industries are identified as major factors dragging down overall coal demand [4] - Coal imports are projected to decline to **360-370 million tons in 2025**, down from **420 million tons in 2024**, with a **14% year-on-year decrease** noted in the first seven months of 2025 [5] - Increased imports from Indonesia are expected, but overall imports will continue to decline due to India's preference for higher calorific value coal [5] Regional Insights - The potential for increased coal volume from Mongolia is limited by port inventory capacity and demand in China [6] - Mongolian coal is not a substitute for Shanxi coking coal due to its lower strength, primarily serving as blended coal for coke production [7] Additional Considerations - The report indicates that the coal industry is currently viewed as **attractive** by Morgan Stanley [9] - The insights provided are based on comprehensive data and analysis, reflecting the current state and future outlook of the coal industry in Shanxi [1][3][4][5][6][7][9]