Investment Rating - The report maintains a neutral/cautious outlook on the near-term performance of the China market due to earnings risks and unattractive valuations, while remaining structurally bullish on China's long-term turnaround [1]. Core Insights - The China market outperformed in 1Q25 but traded sideways in 2Q25, with MSCI China showing a flat performance of +0.7% compared to significant gains in global indices [2][16]. - The report emphasizes a focus on bottom-up earnings stories, particularly in mid-small-cap stocks, while avoiding sectors heavily reliant on policy stimulus or exports [1][4]. - Key macroeconomic indicators show signs of weakness, with credit growth modestly increasing but insufficient to drive meaningful GDP recovery [3][12]. Market Performance - In 2Q25, MSCI China lagged behind global peers, with a P/E valuation of 11.4x, near long-term averages [2][9]. - Best-performing sectors included Healthcare (+11.5%), Financials (+11.1%), and IT (+9.5%), while Consumer Discretionary (-11.2%), Real Estate (-3.1%), and Consumer Staples (-1.6%) underperformed [2][16]. Macro Environment - Credit growth rose from 8.0% YoY in 2024 to 8.7% in May 2025, but loan growth declined from 7.0% to 6.7% [3][54]. - The property market showed recovery in late 2024 but declined again in 2Q25, indicating ongoing challenges in the real estate sector [3][15]. - The report anticipates nominal GDP growth to decelerate to 3-4% in 2H25 amid trade tensions and insufficient credit growth [47][48]. Sector Model Portfolio - For 3Q25, the report favors sectors focused on domestic demand, such as financials and internet, while downgrading liquors and real estate due to earnings risks [4][14]. - The model portfolio includes banks and brokers for better downside protection, while tech hardware and gold sectors are upgraded [4][14]. Valuation and Earnings Revision - The average 12-month forward P/E valuation for the CSI 300 rebounded to 13x, while the MSCI China Index remained above 11x, indicating a discount to long-term averages [38][39]. - In 2Q25, consensus earnings for MSCI China were revised down by 0.9% QoQ, with significant downgrades in Real Estate, Utilities, and Energy sectors [42][42].