**Market Analysis**

Last Friday, China unleashed its rare earth "trump card," employing a strategy of fighting fire with fire, directly causing a massive selloff across US stock markets. The Nasdaq plummeted 3.56%, the S&P 500 dropped 2.72%, technology stocks collectively tumbled, and the VIX fear index surged over 31%. Affected by capital outflows, Hong Kong stocks fell 1.52% today, though the decline remained controlled with support at the bottom.

Why did this trigger such a dramatic US stock market crash? The key lies in the latest policy that sealed all rare earth loopholes, leaving no room for exploitation. Beyond rare earths' critical role in military and new energy vehicles, for semiconductors alone, rare earths are core materials for manufacturing photoresist, polishing solutions, and magnetron sputtering targets, directly affecting chip manufacturing precision and yield rates.

Taiwan Semiconductor's 3-nanometer core production lines require 90% of heavy rare earths from mainland China, while 7-nanometer and 5-nanometer production lines source over 80% of light rare earths from the mainland. China's rare earth control policy stipulates that any chip exports containing over 0.1% mainland rare earth components require permits from mainland China's Ministry of Commerce. Taiwan Semiconductor's production of 14-nanometer and below logic chips, and 256-layer and above memory chips involving relevant rare earth materials will struggle to continue serving US clients without proper permits.

Previously, the US prevented Taiwan Semiconductor from manufacturing chips for China. Now, US chips face similar restrictions. If strictly enforced, companies like NVIDIA and Apple would be significantly impacted. AI development would be hindered, and the driving force behind US stock market gains would disappear, making future US market performance quite challenging.

This puzzle seems nearly unsolvable because developing US rare earth capabilities would require massive investment over five years minimum. By the time that's achieved, China's chips would be fully autonomous and controllable. However, without rare earths, the US couldn't sustain operations for even one year, let alone five.

Consequently, Trump became unhinged, irrationally threatening 100% tariffs on China starting November 1st, and even hinting at potentially canceling high-level China-US talks during the APEC summit. However, these measures are essentially ineffective.

Tariffs aren't real leverage. Despite US tariff increases, China's exports remain robust. Customs data shows that in US dollar terms, China's September exports grew 8.3% year-over-year, imports increased 7.4%, both significantly exceeding expectations, with a trade surplus reaching $90.5 billion. September's export growth surpassed economists' median forecast of 6.6%, indicating foreign trade remains unaffected.

Having exhausted options and facing reality, Trump's attitude noticeably softened. Today he posted about China-US relations, clearly stating that China, like him, doesn't want economic recession, emphasizing America's position is to "help China, not harm China." US Vice President Vance stated in an interview that Trump "values" friendship with China and hopes not to use more leverage against China. If China remains rational, America will reciprocate.

Additionally, US Trade Representative Jamison Greer "complained" that China upgraded rare earth export controls without prior US notification and refused communication attempts. They're feeling aggrieved now.

Only when hit where it hurts do they become rational and understand the proper way to deal with us. Undoubtedly, tariffs are superficial with little significance. The key is semiconductors - everyone has cards, but ours are bigger. We're just not being too absolute, preserving room for further negotiations. If Trump shows genuine sincerity, we can sit down and negotiate properly. This way, US stocks at least have hope.

Our firm stance this time has produced obvious effects, with other countries' attitudes shifting. On the 11th, Manitoba Province Premier Kinew wrote to Canadian Prime Minister urging the federal government to cancel the 100% tariff on Chinese electric vehicles. Kinew stated that Canada's tariff approach "sparked a bilateral trade war, particularly severely affecting western Canada." China's countermeasures have caused Canadian canola prices to plummet significantly and devastated the pork production industry.

This exemplifies the principle of delivering one decisive blow to avoid a hundred punches later.

Today's market decline mainly stems from concerns about deteriorating bilateral game dynamics triggering chain reactions. On October 13th, spot gold opened with rapid gains, once breaking above $4,060, setting new historical highs. CHIFENG GOLD (06693) rose over 9%, SD GOLD (01787) gained over 7%.

Some compare the current situation to April 7th, but conditions are much better now. Back then, there was uncertainty because semiconductors hadn't achieved major breakthroughs, and there were fears about surviving worst-case scenarios. Now, multiple lithography machine development lines are progressing. The latest development is the 2025 Bay Area Semiconductor Industry Ecosystem Expo scheduled for October 15-17 at Shenzhen Convention & Exhibition Center (Futian). Based on various market indications, Xinkaile should unveil significant developments.

Today, A-share Xinkaile concept stocks hit daily limits across the board. In Hong Kong stocks, HUA HONG SEMI (01347) and SMIC (00981) rose over 8% and 3% respectively, while SHANGHAI FUDAN (01385) also gained over 3%.

Therefore, choosing this moment to show strength fully demonstrates confidence. With lithography machines no longer a concern, there's nothing to fear. As for tariffs, whatever will be, will be. The market needn't be overly panicked.

Today's market essentially followed counter-retaliation themes, with rare earths leading the charge. Baotou Steel and Northern Rare Earth announced: raising Q4 2025 rare earth concentrate related transaction prices. This timely news benefited JLMAG (06680), which rose over 13%.

Semiconductors were mentioned above, and another theme is domestic software substitution. According to CCTV Finance reports, Microsoft will stop providing security updates and technical support for Windows 10 starting October 14th. Domestic operating systems gaining market share is a major trend. As of H1 2025, domestic operating systems comprised 15% of China's overall PC market, with new computers reaching 30%. Related stock CHINASOFT INT'L (00354) benefits from deep cooperation with Huawei, providing domestic HarmonyOS.

Additionally, Ministry of Commerce Document No. 61 regarding export controls on overseas rare earth items was formatted in WPS, not Word or PDF. It also specified that application documents must be in Chinese. Office software substitution enters deep waters. WPS, with its free strategy and localized functions (massive Chinese templates, PDF editing), achieved over 650 million monthly active devices in consumer markets, with enterprise versions penetrating over 55% of government and enterprise markets. KINGSOFT (03888) clearly benefits, surging nearly 14% today.

After the National Day holiday, lithium hexafluorophosphate average prices rose 8,500 yuan to 69,500 yuan, with peaks reaching 73,000 yuan and exports at 80,000 yuan. Three-day gains exceeded September's total increase. GANFENGLITHIUM (01772) rose over 8%, TIANQI LITHIUM (09696) gained nearly 5%.

**Sector Focus**

Democratic Republic of Congo cobalt export enterprise quota details landed. CMOC (03993), Glencore, and Eurasian Resources secured the top three quotas at 35.9%, 27.3%, and 21.6% respectively. Other Chinese enterprises receiving substantial quotas include China Nonferrous Group, Shengdun Mining, Huayou Cobalt, and NORTH MINING (00433).

Consequences include: 1. Supply tightening and cost increases: Through total volume control and strict export rules, cobalt raw materials (especially cobalt intermediates) outflow is controlled from the source, creating "supply scarcity." 2. Value redistribution: Export rights are highly concentrated among few large mining enterprises and government platforms, significantly enhancing these "quota holders'" bargaining power in the supply chain. Smelters without direct quotas must purchase export quotas or raw materials from quota holders, effectively adding "quota rent" to raw material costs.

Key Hong Kong stock varieties: CMOC (03993), NORTH MINING (00433), CHINFMINING (01258).

**Individual Stock Analysis**

**SHANGHAI FUDAN (01385): Domestic Substitution Heating Up, Demand Expected to Continue Growing**

The company achieved H1 2025 revenue of 1.839 billion yuan, up 2.49% year-over-year; net profit attributable to shareholders of 194 million yuan, down 44.38% year-over-year; adjusted net profit of 182 million yuan, down 40.96% year-over-year.

**Commentary**: The company is a leading domestic FPGA product supplier, currently offering three chip sub-series: FPGA, PSoC, and FPAI (Programmable AI chips), along with EDA development tools. Currently, the company's product lines focus on billion-gate FPGA and PSoC chips represented by 28nm processes as main products, while actively advancing customer introduction and mass production of ultra-large-scale FPGA, RF-FPGA, and RFSoC products based on 1xnm FinFET advanced processes and 2.5D advanced packaging.

The company's FPAI heterogeneous fusion architecture chip integrates CPU, FPGA, and NPU, serving as the company's reconfigurable intelligent chip for customized edge and fusion-end inference applications. The company has built chip design platforms and application development software platforms for these heterogeneous fusion intelligent chips, laying out spectrum product development with computing power from 4TOPS to 128TOPS. The first 32TOPS computing power chip shows good promotion progress.

In H1 2025, the company recorded various impairment losses of approximately 172 million yuan, including inventory writedowns of 143 million yuan. Currently, the company is actively adjusting inventory structure and reducing inventory levels for certain products, with improvements expected in H2.

H1 2025 product line revenues were: security and identification chips approximately 393 million yuan, non-volatile storage approximately 440 million yuan, smart meter chips approximately 248 million yuan, FPGA and other products approximately 681 million yuan, testing service revenue (after consolidation elimination) approximately 77 million yuan. Except for non-volatile storage business declining year-over-year, all other product lines showed varying degrees of year-over-year growth, with FPGA and other product line revenue growing 23.15% year-over-year, providing important operational support.