GF Securities Co.,Ltd. released a research report stating that A-share non-financial interim report revenue growth remains in negative territory, with profit growth slowing down. The quarter-over-quarter growth rate in Q2 reached the lowest level since 2010. The firm expects full-year A-share non-financial earnings forecasts to remain in low single digits, indicating that performance recovery is still challenging.

Meanwhile, the firm believes that structural highlights in sector comparisons are increasingly emerging, including: sectors with higher overseas profitability that hedge against insufficient domestic demand and support high revenue and gross margins; sectors where contract liabilities plus advance receipts indicate rising order growth, with stock prices positively correlated to advance payment growth; and sectors where anti-involution demonstrates strong necessity and supply-demand structures urgently need improvement.

For reversal strategies, the firm favors wind power cables/turbines/offshore wind, overseas automotive (lighting control/IGBT), military (FPGA/missiles), AI (liquid cooling transformers), and lithium battery equipment.

Regarding prosperity strategies, the firm believes AI/non-US exports/US export alpha/semiconductor equipment/lithium batteries/some edge-side hardware/price-rising chemical products are expected to maintain prosperity, with earnings continuing to grow 30-40% or higher in the second half and next year. SOC/motorcycles/construction machinery/switches/power supplies and other sectors with abundant cash reserves show potential supply expansion to sustain prosperity.

**Key Viewpoints:**

**After Q1 outperformance, interim reports slow again; performance recovery remains challenging**

A-share non-financial interim report revenue growth remains in negative territory, with profit growth slowing. Q2 quarter-over-quarter growth reached the lowest level since 2010. Given that the "broad fiscal expansion → PPI → ROE" performance transmission path has not changed significantly this year, full-year A-share non-financial earnings forecasts are expected to remain in low single digits, indicating performance recovery is not straightforward.

Broad-based indices show large-cap outperforming small-cap, growth outperforming value, with the 2025 STAR Market and ChiNext boards' earnings advantage over CSI 300 turning upward again.

**ROE declined for 16 consecutive quarters, with initial signs of bottoming stabilization in the interim report**

Leverage ratio improvement provides important support, profit margins tend to stabilize, while turnover rates remain a negative drag, reflecting the necessity of anti-involution from another perspective. Companies are actively contracting supply (assets), but revenue recovery is slow. Substantial changes require administrative guidance for supply contraction (anti-involution) or further demand-side stimulus (domestic demand policies).

**Three financial statements reflect improved entrepreneur expectations and confidence compared to 2024**

Income statement: Gross margins improved since mid-2023, but net margins only gradually stabilized six months ago. This reflects companies' cost control measures showing recent effectiveness, with significant declines in expense ratios. Profit margin redistribution occurs between upstream, midstream, and downstream - upstream concedes profits, midstream materials and some manufacturing recover, while downstream temporarily cannot inherit benefits.

Balance sheet: An important indicator of entrepreneur confidence changes, leverage ratios ended the continuous decline cycle from 2020-2024. Companies gradually adding leverage indicates changing confidence in the future. Reduced accounts receivable pressure and increased advance receipts (representing orders) also point to improved operating cash flow.

Cash flow statement: Pressure was significant in 2024, but marked improvement appeared in 2025. Cash circulation normalized - operating cash flow recovered (sales pickup), investment cash flow stabilized at bottom (sectors with structural capacity expansion), financing cash flow recovered compared to last year (broad credit and debt resolution showing effects).

**Business cycles: Inventory cycle continues bottoming out, capacity cycle near bottom inflection point**

Inventory cycle: The brief inventory rebuilding trend in H1 2024 could not continue, currently still hovering at bottom. Structurally, besides export chain inventory rebuilding, midstream materials show structural inventory rebuilding driven by downstream.

Capacity cycle: At the inflection point of a new cycle startup. This means some overcapacity sectors finally approach clearance inflection points (like ChiNext, new energy), while some emerging industries drive technology chain expansion, providing capital expenditure momentum.

**Looking ahead, structural highlights in sector comparisons are increasingly emerging:**

①**Overseas more profitable sectors hedging domestic demand insufficiency, supporting high revenue and gross margins** Screening criteria: ①Overseas gross margins higher than domestic; ②Overseas revenue ratio >20%; ③Supporting revenue growth stabilization or recovery: wind power, construction machinery, motorcycles, passenger vehicles, medical services, etc.

②**Sectors where contract liabilities + advance receipts indicate rising order growth, with stock prices positively correlated to advance payment growth** In Q1, the firm screened sectors with improved orders including component PCB, motorcycles, wind power equipment. From interim reports, sectors with continuous order improvement and historically positive correlation between stock prices and this indicator include: batteries, lithium battery equipment, wind power, motorcycles, construction machinery, computer equipment, IT services, automation equipment, semiconductors, military electronics, etc.

③**Anti-involution sectors with strong necessity and urgent supply-demand structure improvement needs**: coal, logistics, steel, solar, cement, some chemical products.

**New industry comparison framework and outlook for second half:** The firm divides industry fundamental cycles into seven stages: decline → initial clearance → mid-clearance → late clearance → recovery → expansion → peak formation.

Latest industry "positioning" shows: (1) US export chains, national subsidy chains, new consumption, some categories in pig cycle entering peak formation phase, starting to decelerate in Q2; (2) In expansion phase: AI chains, non-US export chains, batteries, edge-side hardware, wind power segments, CXO, some alpha in US export chains/new consumption/chemical products/military; (3) Some segments in offshore wind/military/lithium batteries/overseas automotive/energy storage chains entering late clearance phase; (4) Pro-cyclical leaders moving from initial to mid-clearance phase, with capacity utilization initially stabilizing, awaiting further clarity in demand/policy signals.

**Prosperity strategy: Which categories can continue maintaining expansion phase in second half?** ①Expected to maintain prosperity with 30-40% or higher earnings growth in second half and next year: AI/non-US exports/US export alpha/semiconductor equipment/lithium batteries/some edge-side hardware/price-rising chemical products; ②Abundant cash reserves with potential supply expansion sustaining prosperity: SOC/motorcycles/construction machinery/switches/power supplies.

**Reversal strategy with improved orders and high earnings growth in second half:** wind power cables/turbines/offshore wind, overseas automotive (lighting control/IGBT), military (FPGA/missiles), AI (liquid cooling transformers), lithium battery equipment.

**Risk warnings:** Geopolitical conflicts exceeding expectations, monetary easing below expectations, growth stabilization efforts below expectations, etc.