CMSC: The net profit growth rate of A-shares in Q1 2026 turned positive year-on-year, and the profitability is expected to continue to recover.

CMSC releases in-depth analysis of the performance of A-shares in 2025 annual report and Q1 2026. The research report is based on the 2025 annual report and Q1 2026 A-share reports, examining dimensions such as profitability, supply and demand constraints, and cash flow ratio, and giving ratings. It comprehensively assesses the position of various industries in the cycle and the supply-demand pattern, and selects sub-sectors with good performance and upward momentum. A-shares saw a positive year-on-year growth in net profit in Q1 2026, with non-financial oil and petrochemical profits showing noticeable improvement. With mild inflation recovery, ongoing anti-internal concave policies, and high demand for TMT and new energy industry chains, overall A-share profits are expected to continue to recover. As the economy is showing relatively strong external demand and continued weak recovery in internal demand, high-growth sectors like AI and new energy are strong, while traditional infrastructure and consumption sectors are weak in this K-shaped differentiation period. The optical communication and chip industry chains are currently in a typical prosperous period, with performance differentiation in outbound chains, and industries resonating internally and externally are in an upward and prosperous period, while real estate and some late-cycle consumer industries are in a downward period. Key points from CMSC: For 60 sub-sectors that can be tracked frequently, seven indicators such as contract liability growth rate (sustained performance ability), net profit growth rate (profitability), gross profit margin, ROE (profit quality), supply level (inventory growth rate percentile), capacity expansion (capital expenditure growth rate percentile), and free cash flow to revenue ratio are examined, and corresponding weights are given to get the weighted average scores for each industry. Industries with the highest overall scores include resource sectors (oil and petrochemicals, chemical fibers, decoration building materials, minor metals, etc.), consumption services (liquor, beverage dairy products, seasonings, medical devices, papermaking, etc.), and high-tech sectors (such as semiconductors, airport aviation, software development, wind power equipment, computer equipment, etc.) (This is only for scoring calculation and does not represent recommendations). Profit Outlook: A-shares saw a positive year-on-year growth in net profit in Q1 2026, with non-financial oil and petrochemical profits showing noticeable improvement. With mild inflation recovery, ongoing anti-internal concave policies, and high demand for TMT and new energy industry chains, overall A-share profits are expected to continue to recover. Profit breakdown: Overall, the rise in ROE is mainly driven by industries like colored metals, electronics, chemicals, and power equipment in the "price hike chain," as well as industries like electronics, military, and computers; meanwhile, consumer sectors like agriculture and animal husbandry, home appliances, food and beverages, and automobiles, as well as real estate, steel, and construction sectors are the main drag. Analysis indicates that the increase in ROE for listed non-financial oil and petrochemical companies is due to the growth contribution of net profit margin and asset turnover. Demand differentiation: 1) High-growth sectors are mainly concentrated in TMT, resource sectors, and some mid-to-high-end manufacturing industries such as energy metals, industrial metals, minor metals, semiconductors, batteries, communication equipment, consumer electronics, computer equipment, etc.; 2) Most industries are in a moderate growth phase, including some manufacturing industries, petrochemicals, and some consumption sectors, with typical industries like seasonings, beverages and dairy products, hotel catering, electrical equipment, automation equipment, engineering machinery, automation equipment, wind power equipment, chemical raw materials, chemical fibers, etc.; 3) Low-growth industries mostly have excess capacity and demand remains soft, such as livestock, liquor, photovoltaic equipment, household goods, basic construction, etc. Inventory cycle: Active inventory replenishment cycle initiated. As of Q1 2026, the inventory decline for listed non-financial companies further narrowed to -0.1%, while the year-on-year revenue growth rate expanded to 5.1%, indicating a clear trend in inventory replenishment. At the industry level, active inventory replenishment is mainly concentrated in TMT and some mid-to-high-end manufacturing industries such as general equipment, photovoltaic equipment, automation equipment, engineering machinery, semiconductors, software development, etc. Most real estate chains are still in the destocking phase. Capacity cycle: Listed non-financial companies have entered a new round of capacity expansion. As of Q1 2026, the year-on-year growth rate of in-construction projects for A-share non-financial public companies is rebounding, with capital expenditure growth rates narrowing quarter by quarter since 2025, and turning positive to 3.2% in Q1 2026. Capital expenditure growth rates lead in-construction project growth rates by approximately one year, and both are currently in a turning point upward trend, indicating a new round of capacity expansion cycle. At the industry level, most industries have gone through a period of capacity digestion in the past three years, with capital expenditure growth rates generally turning positive or narrowing, except for utility capital expenditure growth rates which are still expanding. Information technology, midstream manufacturing, and resource sectors are the main drivers of capacity expansion. Based on supply and demand dimensions and six indicators, industries are positioned in different cycle stages: industries in the budding stage are mainly in consumption/pharmaceuticals; industries in the upswing stage are primarily in some manufacturing and resource sectors; industries in the supply-demand prosperous period are mainly in some TMT and resource sectors; industries in the turning downward stage are those reliant on weak internal and external demand; industries in the downward stage are concentrated in utility and some downstream industries with consistently low demand; industries in the clearing stage are focused on real estate chains. Due to the current economy showing relatively strong external demand and continued weak recovery in internal demand, high-growth sectors like AI and new energy are strong, while traditional infrastructure and consumption sectors are weak in this K-shaped differentiation period, the optical communication and chip industry chains are currently in a typical prosperous period, outbound chains are showing differentiation, internally and externally resonating industries in an upward and prosperous period, while real estate and some late-cycle consumer industries are in a downward phase. Three-tier recommendations based on financial indicators: 1) Sectors with high growth potential, such as chemical fibers, semiconductors, precious metals, wind power equipment, ground armaments, etc.; 2) Sectors with improved supply-demand dynamics, such as decoration building materials, chemical pharmaceuticals, papermaking, automation equipment, batteries, chemical raw materials, etc.; 3) Directions with relatively stable cash flow, such as seasonings, airport aviation, shipping ports, industrial metals, coal, precious metals, etc. Risk warning: Macroeconomic fluctuations, policies falling short of expectations, and overseas policies tightening beyond expectations.