Core Viewpoint - The outlook for European corporate health has improved, with European blue-chip indices reaching highs due to a better-than-expected earnings season [1] Group 1: Earnings Forecasts - European companies are expected to report a 1.1% drop in fourth-quarter earnings for 2025, a significant improvement from the previously anticipated 3.1% decrease [1] - This projected decline would still represent the worst earnings performance in the past seven quarters [2] Group 2: Market Sentiment and Performance - Market forecasts for fourth-quarter earnings deteriorated significantly after the announcement of tariffs by U.S. President Donald Trump, with expectations for STOXX 600 company earnings dropping from around 11% growth to a contraction of up to 4.2% [3] - Recent weeks have seen a slight rebound in forecasts, with 60% of companies reporting better-than-expected results, compared to the typical 54% [4] Group 3: Revenue Outlook - The outlook for revenue has worsened, with STOXX 600 companies now expected to see revenues 3.4% lower than the same period last year, compared to a previous forecast of a 3.2% decrease [4] Group 4: Positive Contributors - Positive results from luxury group Hermes and EssilorLuxottica, along with optimistic guidance for 2026 from Anheuser-Busch Inbev and Siemens, have contributed to improved sentiment in Europe [5]

Financial Data and Key Metrics Changes - The company reported adjusted earnings per share (EPS) of $3.07, an increase of 8% year-over-year, and segment margins reached a record 25%, up 70 basis points from the previous year [6][21] - Quarterly revenue was $7 billion, with organic growth of 7%, driven by strength in aerospace and Electrical Americas, partially offset by weakness in short-cycle markets [20][21] - The backlog grew by $2 billion, or 20%, to $12 billion, providing strong visibility for organic growth [22][88] Business Line Data and Key Metrics Changes - **Electrical Americas**: Organic sales growth of 9%, primarily driven by data centers, which saw a 40% increase. Operating margin was 30.3%, up 20 basis points year-over-year [21][22] - **Electrical Global**: Total growth of 10%, with organic growth of 8%. Operating margin increased to 19.1%, up 40 basis points from the prior year [22][23] - **Aerospace**: Organic sales growth of 13%, with operating margin expanding by 150 basis points to 25.9%. Orders increased by 11% on a rolling 12-month basis [24] - **Vehicle Segment**: Experienced a decline of 9% on an organic basis, primarily due to weaknesses in the North America truck and light vehicle markets [25] Market Data and Key Metrics Changes - Orders in Latin America accelerated by 7% on a rolling 12-month basis, with a backlog growth of 20% year-over-year [5] - The global liquid cooling market is expected to grow around 35% annually through 2028, driven by increasing power demands from AI chips [12] - EMEA orders increased by more than 30%, driven by data center orders, including sizable orders in the Middle East [23] Company Strategy and Development Direction - The company outlined a strategy with three pillars: lead, invest, and execute for growth, focusing on capitalizing on key megatrends [8] - The acquisition of Boyd's thermal business is aimed at enhancing the company's position in the liquid cooling market, which is expected to generate $1.7 billion in sales next year [9][10] - The company aims to provide comprehensive solutions for data centers, integrating power distribution and cooling technologies [13][15] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in sustained growth due to strong demand indicators and a robust backlog, particularly in the data center market [5][19] - The company reaffirmed its 2025 guidance, expecting organic growth of 8.5%-9.5% and margin guidance of 24.1%-24.5% [26][27] - Management highlighted the importance of integrating various systems to drive technical performance and rapid deployments in data centers [15] Other Important Information - The company is experiencing unprecedented demand, reflected in continued order acceleration and growing backlogs [29] - The company is well-positioned for strong growth in 2026 and beyond, with confidence in its guidance for the remainder of the year [29] Q&A Session Summary Question: Outlook for Electrical Americas LTM orders - Management indicated strong visibility into Q4 orders, expecting continued growth based on momentum and project tracking [36][37] Question: Quarterly orders estimation for Electrical Americas - Management confirmed external estimates are in the ballpark, leaning towards the higher end of expectations for Q3 [39][40] Question: AI data centers sales per megawatt - Management stated that with recent acquisitions, total Eaton sales per megawatt could approach $3 million at the high end [52][56] Question: Drivers of aerospace performance and margins - Management highlighted historical wins in defense platforms and ongoing improvements in operational efficiency as key drivers [92][94]

Investment Rating - The report maintains an "Overweight" (OW) rating for several key stocks within the "anti-involution" theme, indicating a positive outlook for these investments [10]. Core Insights - The "anti-involution" theme is projected as a significant trade over the next 18-24 months, focusing on rationalizing local government-backed investments and enhancing returns on investments (ROIs) in the Chinese equity market [2][5]. - The report identifies three primary ecosystems for investment: "renewables proxies," "property + macro proxies," and "ecommerce proxies," with a strong preference for renewables due to better topline profiles and execution capabilities [2][5]. - The report highlights that the "anti-involution" policy is crucial for the expansion of the Chinese equity market, as it aims to improve ROIs, which are essential for attracting institutional investments [2][5]. Summary by Sections Anti-Involution Theme - The "anti-involution" policy is compared to previous initiatives aimed at controlling capital expansion, with a focus on reducing over-capacity and improving fiscal discipline [2][5]. - The report anticipates a "Decade of Consolidation" in various sectors, driven by increased M&A activity as local corporatism is curtailed [5]. Stock Performance - Price returns from July 1 to September 5, 2025, show that renewable proxies, particularly battery, lithium, and solar shares, have outperformed with returns of 39%, 37%, and 33% respectively [5][35]. - In contrast, sectors like autos and ecommerce have lagged, with returns flat to -4%, reflecting ongoing competitive pressures and uncertainties regarding subsidies [5][35]. Top Picks - The report lists top stock picks to express the "anti-involution" theme, including Baosteel, CATL, Daqo, and PetroChina, among others, indicating a focus on sectors with strong growth potential [10][5]. - Updated stock screens categorize stocks into renewable proxies, property + macro proxies, and consumption proxies, providing a structured approach to investment selection [5][10]. Market Context - The report notes that households in China held approximately US$24 trillion in cash and deposits as of June 2025, raising questions about the ability of equities to generate sufficient earnings and dividends to absorb this liquidity [18]. - The report emphasizes that the current market environment, characterized by declining fixed income returns and rising volatility, is pushing investors towards equities as a more attractive investment avenue [12][18].

Market Trends - Major US electrical wire producers are raising prices [1] - This price increase occurs shortly after President Trump's decision to exempt basic copper imports from tariffs [1] - Despite plunging metal prices, American consumers may still face higher costs [1]

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the **China Equity Strategy** and the **anti-involution** policy initiated on July 1, 2025, which aims to stabilize pricing and return on investment across various sectors [2][5][16]. Core Insights and Arguments - **Market Performance**: Significant price increases were observed in several sectors from July 1 to July 25, 2025: - Lithium: +22% - Solar: +16% - Cement: +16% - Steel: +15% - Hog: +13% - Coal: +13% - Battery: +12% [2][6]. - **Policy Impact**: The anti-involution policy is expected to be an 18-month trade, with coordinated efforts from central and local governments, financial institutions, and businesses to restore normal pricing and ROI [2][5][16]. - **Valuation Re-rating**: The sectors that have seen the most significant re-rating since July 1 include: - Lithium: P/B re-rating of 22% - Solar: P/B re-rating of 16% - Cement: P/B re-rating of 16% - Autos lagged with a P/B increase of only 2% [13][18]. - **Sector Valuation**: As of July 25, 2025, sectors most discounted by P/B compared to their 10-year averages include Lithium, Solar, and Ecommerce, while Coal, Aluminum, and Autos are the least discounted [13][18]. Additional Important Content - **Government Measures**: Various ministries have implemented granular measures to support the anti-involution policy, including: - Output cuts in steel and hog industries - Pricing regulations in polysilicon and solar sectors - Capacity phase-outs in chemicals [5][17][18]. - **Profitability Concerns**: Loss-making sectors such as Lithium and Solar are under pressure, which may prompt more significant policy measures to address their financial challenges [18][21]. - **Market Capitalization Insights**: The report lists top companies by market capitalization in sectors affected by the anti-involution measures, indicating a focus on industries with poor profitability conditions [21][22]. - **Long-term Outlook**: The report suggests that while loss-making sectors may see a broad-based rally, industries with solid margins may experience internal divergence as stronger players gain market share [5][18]. This summary encapsulates the critical insights and data points from the conference call, providing a comprehensive overview of the current state and outlook of the relevant industries in China.