China Equity Strategy_ Sector Allocation & Focus List Changes - Rotating from Defensive to Tech Adoption

Summary of Key Points from the Conference Call Industry and Company Focus - Industry Focus: The report primarily discusses the China equity market, with a specific emphasis on sectors such as Media & Entertainment, Information Technology, and Consumer Discretionary. It also addresses Materials, Energy, Telecoms, and Utilities sectors. - Companies Highlighted: Key companies mentioned include Alibaba, Meitu, Espressif Systems, HKEX, and Ningbo Tuopu Group. Core Insights and Arguments - Sector Upgrades: - Media & Entertainment and IT sectors upgraded from Equal Weight (EW) to Overweight (OW) due to anticipated inflows driven by China's tech competitiveness and lower AI costs [2][10]. - Consumer Discretionary sector also upgraded to OW with increased active risk, favoring companies that are quick to adopt technology [2][10]. - Sector Downgrades: - Materials downgraded to Underweight (UW) due to construction slowdowns and capex delays [3][10]. - Energy sector downgraded to UW based on cautious oil price outlook [3][10]. - Telecoms and Utilities moved to EW, reflecting a less defensive stance [3][10]. - Valuation Improvements: - Structural improvements in Return on Equity (ROE) and a shift in valuation regime for offshore Chinese equities are expected, with MSCI China's 12-month forward P/E ratio projected to sustain a range of 10-12x, up from 8-10x [4][10]. Notable Company Additions and Rationale - Meitu (1357.HK): - Maintains over 50% market share in China's photo application market, with a successful monetization strategy and improving governance. Expected to achieve a 44% CAGR in net profit by 2026 [14][10]. - HKEX (0388.HK): - Anticipated growth in trading volume due to a more sustainable growth model in China and rising IPO volumes [15][10]. - Alibaba (BABA.N): - Positioned to capture AI cloud opportunities with a forecasted doubling of cloud revenue from Rmb118 billion in F25 to Rmb240 billion in F28 [16][10]. - Espressif Systems (688018.SS): - Expected to benefit from edge AI opportunities and a comprehensive product portfolio, despite current supply-demand imbalances [17][10]. - Ningbo Tuopu Group (601689.SS): - Positioned to capitalize on the commercialization of humanoid robots, with a projected 31% YoY earnings growth in 2025 [20][10]. Performance Metrics - Focus List Performance: - The China/HK Focus List and China A-share Thematic Focus List have performed on par with their respective benchmarks over a rolling 12-month basis. However, both underperformed by 4.3 percentage points and 4.4 percentage points respectively over the last month [25][26]. Additional Important Insights - Market Sentiment: The report indicates a shift in market sentiment towards a more positive outlook for China equities, driven by technological advancements and government support for the private sector [4][10]. - Investment Strategy: The focus is on companies that are proactive in tech adoption and have strong market momentum, while avoiding traditional business models that are negatively impacted by deflation [2][10]. This summary encapsulates the key points from the conference call, highlighting the strategic shifts in sector allocations, company-specific insights, and overall market performance metrics.