Summary of Key Market Trends
Recent market trends have shifted: previously, investors flocked to technology growth stocks (such as those in the AI sector), driving their valuations higher by focusing on future prospects. However, now the cohesion among tech stocks has weakened, and funds are beginning to flow towards "traditional sectors" that were once neglected. Not all traditional stocks will see price increases; only those with low valuations and expectations of improved performance (which the market has not yet fully recognized) are worth paying attention to. The underlying logic is that the phase where valuations were driven by low funding costs (low discount rates) is coming to an end, and now stock prices need to be supported by actual corporate earnings.
1. Market Profit-Making Logic: From "Promising Futures to Real Earnings"
Tech stocks surged before because:
- Low funding costs (continuing declines in 10-year Treasury yields): This meant that money was relatively cheap, and investors were willing to pay for future prospects, even if companies were not yet profitable, allowing their valuations to rise.
- High risk appetite: As long as there was a compelling industry narrative (such as AI), investors were willing to take on higher risks.
Things have changed now:
- Treasury yields are no longer declining significantly (they are more volatile), reducing the potential for further valuation increases due to lower discount rates.
- The market is becoming more rational; simply talking about promising prospects is not enough; companies must actually generate earnings.
Therefore, the focus should shift to sectors with low valuations and immediate profit-generation potential. These are often those with underestimated performance expectations, which will likely be reflected in their interim reports.
2. Innovative Drugs: Maximum Potential for Growth in Interim Reports
The innovative drug sector currently has one of the lowest valuations in the past five years (36x PE). Interim report performances are expected to be strong because:
- Upfront payments from business development (BD) agreements: These payments are directly recorded in financial statements. For example, domestic innovative pharmaceutical companies received $5.3 billion in BD payments from January to May 2026, nearly 80% of the total for the entire last year, and the first half of this year definitely surpassed the same period last year.
- Companies like Shijiazhuang Yiling Group received a $1.2 billion upfront payment from AstraZeneca, and Rongchang Bio received $650 million from AbbVie; these payments are directly recognized as profits.
It's important to note that this growth is driven by one-time profits, and whether it can be sustained depends on whether more BD agreements can be secured, transforming these one-time gains into long-term revenue streams.
3. Ships: Stable Performance with High-Value Orders Being Delivered
The shipbuilding sector is a prime example of companies realizing their earnings:
- Previously, shipbuilders received high-value orders but had to wait 1-2 years for delivery due to long construction periods. Now, the delivery period has arrived.
- Large profit margins: Shipbuilding prices are high (especially in the first half of 2024), while the cost of steel used in construction is low, resulting in substantial profits.
- Data supports this trend: China State Shipbuilding Corporation's profits increased by 251% in the first quarter of 2026, and the orders received in the second quarter were also high-value. With low valuations (calculated as market value to outstanding orders), China State Shipbuilding Corporation’s valuation is only 0.33 (a historical low), indicating that its current market value significantly understates the value of its existing orders.
4. CXO (Contract Research Organizations): Clear Order Support, with Leading Companies Benefiting the Most
CXOs help pharmaceutical companies with research and development and manufacturing. Order trends are improving:
- Order volumes: WuXi AppTec’s outstanding orders increased by 23%, and Zhaoyan New Drug’s new orders doubled, with preclinical orders being quickly converted into revenue in interim reports.
- New business initiatives: WuXi AppTec’s oligonucleotide business grew by 96%, and Kylin Pharmaceutical expanded its peptide production capacity, both contributing to additional growth.
- Not all CXOs are benefiting; only the leading companies with stable traditional businesses and emerging new opportunities (such as WuXi AppTec and Kylin Pharmaceutical) will thrive, as industry competition has shifted from focusing on production capacity to emphasizing technology and global collaboration.
5. Lithium Batteries and Photovoltaics: Opportunities in Energy Storage
Lithium batteries and photovoltaics were once affected by overcapacity, but the surge in energy storage demand has saved these sectors:
- Lithium batteries: Energy storage battery shipments are growing at a rate of 60%, and Yiwei Lithium Energy’s profits increased by 95%-110% in the first half of the year. If lithium carbonate prices remain stable (with institutional forecasts above $150,000 per ton), profits are expected to continue to rise in the second half of the year.
- Photovoltaics: Many companies are entering the energy storage market; for example, the energy storage section at the SNEC exhibition exceeded the photovoltaic section for the first time. Companies in this sector that are expanding into energy storage will benefit in their interim reports.
5. Investment Strategies
- Innovative Drugs: Choose stocks with the greatest potential for growth based on interim report performance, but monitor the sustainability of BD agreements.
- Shipbuilding: This sector offers stable earnings, making it a reliable investment option for this round.
- CXOs: With clear order support and high cost-effectiveness, leading CXOs are a good choice.
- Structural Opportunities: For lithium batteries and photovoltaics, focus on companies with strong energy storage capabilities; in the chemical industry, look at niche segments (high-end fluorine and phosphorus chemicals); for machinery and construction materials, focus on companies exporting products overseas; for traditional Chinese medicine, expect performance improvements in the third quarter.
Remember: Not all low-valued stocks will rise; the key is to identify those with actual performance improvements that have not yet been reflected in market valuations.
Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. Investors should proceed with caution.