Every round of fund quarterly reports contains unique, high-value insights hidden among thousands of filings, waiting to be discovered.

This year is no exception.

After thoroughly reviewing quarterly reports from several prominent fund managers, one report stands out for its exceptional depth: the Q4 report of Peng Hua Industry Select managed by Chen Jinwei.

On one hand, as a recognized expert in stock and sector selection, Chen Jinwei's moves are closely watched. In the past year of 2025, his fund outperformed its benchmark by 28 percentage points.

On the other hand, Chen’s year-end portfolio reveals significant innovations. More importantly, his quarterly commentary is exceptionally comprehensive and systematic. From a third-party perspective, reading it is akin to attending a live presentation.

It is particularly worth introducing to readers.

Reiteration: Top Two Preferred Directions

In the Q4 report, Chen Jinwei explicitly stated his outlook for the year: "For 2026, the two most promising directions are midstream cyclicals and domestically-oriented consumer healthcare."

His bullish view on midstream cyclicals stems from their expected benefit from "anti-involution" policy orientations. Although this investment theme showed some performance in the second half of 2025, he believes a substantial expectation gap remains.

Regarding consumer healthcare, Chen notes that consumption and healthcare have been the worst-performing sectors over the past five years. However, he anticipates they might offer the greatest potential and largest expectation gaps in the next five years. Consequently, after largely reducing holdings in innovative pharma, his current healthcare stocks are primarily domestically-focused consumer medical plays.

Chemicals Possess Resource-Like Attributes

Using the chemical industry as an example, Chen elaborated his complete logic for favoring midstream cyclical sectors in the report.

He first presents his strongest argument: chemicals actually possess resource-like attributes.

He stated that unlike upstream resources such as non-ferrous metals, chemicals are often perceived as easily expandable. However, this perception of midstream sectors having unlimited capacity expansion might be an illusion born from being in China.

"If we dissect global chemical industry capital expenditures over the past five years, there has been almost no new capital spending outside China. If China can effectively control incremental capacity through anti-involution policies, then chemicals would take on resource-like characteristics," he said.

Chen also believes that building a chemical plant in other countries is extremely difficult. Beyond common advantages of Chinese manufacturing—such as infrastructure, quality labor, and efficient government—the unique "network effect" of chemical clusters is a distinctive domestic advantage.

This explains why, in discussions about "manufacturing going global," there are relatively few instances of Chinese chemical companies establishing overseas plants in developing countries. Those that do are often concentrated in sectors like tires, urea, or modified plastics, which typically feature "relatively short industrial chains and single downstream applications."

However, most chemical companies produce interconnected "networks" rather than linear "chains." For instance, chemical A might produce by-product B, which can easily find downstream users domestically, but might have no downstream demand in other countries.

China's current chemical network is unparalleled globally and cannot be replicated elsewhere for a long time. Chen cited an example where a foreign country recently revoked high tariffs on Chinese chemical products because they found most capacity was in China, with no stable suppliers available elsewhere. These are essential basic chemicals with unavoidable demand.

Chen concluded: "The advantage of China's chemical industry is difficult to颠覆 in the next decade or even longer. This is the foundation for this sector's re-rating."

Feasibility of "Anti-Involution" Underestimated

Chen also argued that some investors misjudge "anti-involution" policies.

Firstly, they define anti-involution purely as a supply-side policy, emphasizing that it "requires demand-side policy coordination to be effective." They often cite that the "supply-side reform" a decade ago succeeded only when paired with demand stimulus, leading to分歧 on anti-involution's effectiveness.

But Chen believes anti-involution itself can stimulate demand-side changes. He stressed recognizing two key facts: the increasing weight of external demand in many industries, and the near-monopoly pricing power in some sectors.

He noted that some Chinese industries account for over 80% of global capacity yet operate at overall losses. Anti-involution policies would monetize this pricing power, transferring benefits from overseas consumers—via anti-involution—to shareholder returns, employee wages, and supplier profits. This constitutes the most direct demand stimulus, arguably more sustainable than other anticipated measures.

Although some argue anti-involution contradicts game theory, Chen pointed out: "Past price coordination attempts, if failed, were often abandoned short-term. This time, even without consensus, anti-involution efforts generally continue in alternative forms."

The reason lies in changed industry structure—"capital expenditures over the past five years were almost entirely from leading companies," reducing the field from "fifty companies" to "five major players." Current leaders generally recognize that "price competition cannot eliminate others," shifting the game from "one-off" to "indefinitely repeated," making coordination easier. "Crucially, if industry profitability returns to reasonable levels, it benefits every participant, creating incremental value."

This Midstream Cycle Focuses on Duration, Not Peak

Based on the above, Chen firmly believes "the investment opportunity in this midstream cycle lies not in price peaks, but in price sustainability."

He acknowledged two concerns despite his bullish view: first, current players are mostly large enterprises with flatter cost curves, implying lower price elasticity; second, the lack of a strong industry-wide supply-demand gap prevents steep price surges.

He specifically cautioned: most sectors lack rigid supply-demand gaps short-term, so expectations for price peaks should be tempered. Misinterpreting anti-involution as collusion to inflate prices违背 its初衷. The goal is orderly supply-demand rebalancing in advantaged industries, achieving win-win outcomes for employees, shareholders, customers, and suppliers.

He suggested: "We can be more optimistic about price sustainability. Combining the above analysis with the paths of chemicals like fluorochemicals, monosodium glutamate, and vitamins in recent years, many industries might genuinely no longer need to engage in involution after this cycle."

Three Cognitive Biases in Domestic Consumption

Regarding his second focus—"domestically-oriented consumption and healthcare"—Chen admitted: "Consumption and healthcare were the worst-performing sectors over the past five years. But they might offer the greatest potential and largest expectation gaps in the next five years." His current healthcare holdings are "mostly domestically-focused consumer medical," with an overall strategy centered on consumption analysis.

He identified three cognitive biases regarding domestic consumption:

First, consumption recovery is structural, not synchronous across the population.

He opposed using "unimproved income expectations" as a reason to broadly pessimize consumption: income changes aren't synchronous across 1.4 billion people but show structural, sequential recovery.

He categorized current main income groups into four: first, high-net-worth individuals affected by real estate, "with negative impacts easing... drag bottoming"; second, "personally deleveraged" post-95s, elderly, and residents from lower-tier cities, "whose industries were less impacted in recent years"; third, high-income groups from tech industry upgrades, "they are structural bright spots in consumption, currently small but rapidly growing"; fourth, manufacturing workers, "who, after anti-involution, are expected to become the backbone of future consumption recovery."

Second, new consumption opportunities aren't in last cycle's star stocks.

"Some investors equate consumption with certain star stocks from five years ago... but we hold reservations." He noted the previous consumption bull market was essentially "investment-driven trickle-down effects," while this cycle should focus on "income redistribution directly driving consumption."

For goods consumption, "we prefer mass-market products"; for service consumption, "fundamentals have already turned positive, with immense future potential." He emphasized: "If goods consumption relates to 'disposable income,' service consumption is also influenced by 'disposable time.'"

As average working hours peak and decline, "service consumption that spends disposable time and offers self-indulgence, like gaming, tourism, sports, and entertainment, will become new 'long slopes and thick snow.'" Among these, "scenic spots and gaming, which feature 'productizable' characteristics, are our most favored directions."

Third, consumption stocks are far from hitting their ceiling.

Countering the "no room for consumption" argument, he refuted: "Past advantages—excellent business models—still exist; steady-state profitability deserves higher valuations." Current low valuations stem from deflation expectations; "once this expectation reverses, consumption can revert to its intrinsic 'long slope, thick snow' valuation levels."

More importantly, "domestic demand is a must-answer question, not an optional one"—while exports exceeded expectations, "there's limited room for significant aggregate improvement." From a real demand perspective, "many consumption habits commonplace in first-tier cities still have huge penetration potential when viewed across 1.4 billion people. Everyone wants a better life—this is an eternal demand."

He concluded: "2026 is the first year of 'true consumption'—no longer 'consumption for others,' but 'consumption for oneself.'"

Portfolio Structure: Focus on Chemicals, Healthcare, and Service Consumption

After reviewing Chen's Q4 report views, a detailed analysis of his top ten holdings becomes particularly intriguing.

The Q4 report shows his Peng Hua Industry Select heavily concentrated in midstream manufacturing, domestically-oriented healthcare, and service consumption.

Among them, Huafon Chemical, Luxi Chemical, and Lion (I assume利安弄refers to Lion, perhaps利安隆?) clearly represent the chemical sector. Huafon Chemical is a leading spandex producer whose performance closely correlates with spandex prices; Luxi Chemical, a subsidiary of a central SOE, is a diversified basic chemical company often called a "chemical supermarket," with performance tied to the basic chemical industry and anti-involution policies; Lion is similar.

Additionally, Chen allocated to healthcare services like Cofoe Medical, GBAP (国邦医药), and Yixintang Pharmacy within the broader healthcare sector. Cofoe Medical produces medical devices and test strips, including hearing aids, posture correctors, thermometers, and ventilators; GBAP primarily produces pharmaceutical intermediates; Yixintang is a pharmaceutical retailer.

Cross-referencing these heavy holdings with Chen's quarterly commentary clearly reflects the fund manager's consistent configuration style.