Mainland China and Hong Kong equity markets have delivered solid performance this year, but CLSA Chief Equity Strategist Alexander Redman noted that with China's Producer Price Index (PPI) contracting for 34 consecutive months, Chinese enterprises face challenges in driving revenue growth. Current earnings per share increases are primarily benefiting from margin improvements and share buybacks. Without revenue enhancement, corporate earnings growth is difficult to sustain, leading to skepticism about optimistic expectations for Chinese corporate profit growth. Rather than upgrading Chinese stocks to overweight across the board, the firm will selectively hold individual Chinese equities.

Redman indicated that the current rally in Chinese stocks has been largely driven by liquidity. Following last year's valuation re-rating, Chinese stocks are no longer considered cheap, and the valuation re-rating narrative has concluded. Whether viewed from current levels or projected levels, earnings per share growth for Chinese stocks is insufficient to justify current stock price performance.

While markets expect anti-involution policies to improve corporate operating environments, Redman believes that after real estate investment peaked in 2021, authorities have promoted manufacturing fixed asset investment. However, capacity utilization rates in industries including automotive, electronics, and electric machinery have declined, impacting manufacturing profits and making it difficult to fully resolve overcapacity issues through exports alone.

CLSA remains bullish on BYD COMPANY, CATL, CSPC Pharmaceutical Group, Nongfu Spring, Tencent, and Xiaomi.