Core Perspective: The impact of micro trading disruptions is expected to be short-lived. Blindly selling off at current levels is inadvisable, as Chinese equity markets are approaching a significant bottom and an attractive entry zone. China's supportive accommodative stance, coupled with its diversified reserves and growth drivers, can help accelerate the dissipation of risk narratives.

Investment Highlights ▶ Chinese equity markets are anticipated to form a major bottom and present a strategic entry point, with stability as the foundation and confidence being crucial. While the Shanghai Composite Index has fallen below key levels, and despite relatively modest pullbacks in the CSI 300 and ChiNext Index, significant divergence exists. The average adjustment across all A-shares is close to 9%, with the CSI 1000 Index declining by 10%. The recent market correction stems from two primary factors: First, inflation risks and expectations of financial tightening. Uncertain developments between the US and Iran have triggered substantial energy-led inflation, sparking concerns about monetary contraction. Second, a loosening in the microstructure of stock market trading. Although external conflicts do not directly impact China logically, the uncertain outlook has reduced market risk appetite. The recent synchronous adjustment in stocks and bonds, alongside narrowing floating profits and expanding losses in 'fixed income plus' products, has imposed investment constraints on institutions with relatively rigid liabilities and higher positions since the start of the year. The effects of this micro trading shock are projected to be brief. Panic selling at current levels is not recommended, as Chinese markets are poised for a significant bottom and entry zone. While inflation risks have yet to peak, it is essential to recognize that Chinese assets benefit from both improving technological productivity and a relatively stable security situation, socio-economic environment, and capital markets. China's diversified energy reserves and varied growth drivers are稀缺 assets even from a global perspective.

▶ How will risks from energy shocks and financial tightening expectations be priced? A three-stage evolution: Expectation Shock -> Reality Shock -> Return to Growth Logic. During recent roadshows, some investors expressed deep concern over energy price shocks and financial tightening expectations. A key historical reference is the US stock market in 2022, which navigated the Russia-Ukraine conflict and multiple substantive Fed rate hikes with significant volatility but also demonstrated remarkable resilience and recovery, avoiding collapse. Risk pricing generally unfolds in three stages: Stage 1, Expectation Shock (Mar-Jun 2022): The Russia-Ukraine conflict erupted, oil prices surged, and the Fed initiated substantive rate hikes in the same month, leading to a US stock market decline. Stage 2, Reality Shock (Post-June 2022): While the conflict persisted, its intensity did not escalate further. Oil prices began to decline from highs, and risk pricing largely concluded. However, due to sticky inflation and continued Fed hikes, the US market experienced rebounds and fluctuations. Stage 3, Return to Growth Logic (Starting Jan 2023): Positive advancements in the US AI industry, coupled with rising capital expenditure and earnings, drove the stock market higher. This process offers two key insights for market pricing: 1) Risk pricing does not require the complete resolution of a risk, but concludes when the intensity of the risk stops increasing. 2) After risk pricing ends, the critical factor is whether the market itself possesses growth capacity. Currently, the US may exhibit higher tolerance for inflation, while the People's Bank of China has emphasized a supportive monetary stance. Stronger certainty of accommodative policy in China, combined with increased technological investment and stabilized domestic demand, can help break the risk narrative more swiftly.

▶ Sector Comparison: Finance and stable sectors remain the preferred choice. Chinese tech manufacturing and stable domestic demand are key to countering stagflation risk narratives. 1) Finance & Stable Sectors: These act as crucial market stabilizers, with high dividend yields offering allocation value. Recommendations include: Banks, Electric Utilities, Expressways, and Coal. 2) Tech Manufacturing & Energy Transition: Chinese capital goods and equipment companies with global competitiveness and cost advantages benefit from energy shocks and the transition. Recommendations include: Electrical Equipment, New Energy Vehicles, and Construction Machinery. The potential for AI is vast. With China ramping up tech investment by 2026, domestically produced supply chains are expected to accelerate growth. Recommendations include: Semiconductors, Communication Equipment, and Machinery Equipment. 3) Domestic Demand Value: Policy measures aimed at stabilizing investment, coupled with a potential rebound in inflation driving restocking demand, are positive. Recommendations include: Building Materials, Construction, Hotels, and Consumer Staples.

▶ Thematic Recommendations: 1. Energy Transition: Geopolitical conflicts disrupt key energy supplies. Policy focuses on building a new energy system and future energy sources. Favor: Power Grids, New Energy Storage, and Nuclear Fusion. 2. Computing-Power Synergy: Integrating computing power, electricity, and source-grid-load-storage systems. Favor: Computing Facilities, Grid Digitalization, and Green Power-Computing Operators. 3. AI Model Exports: Chinese large language models lead in global usage volume. Favor: Leading LLM companies, AI Data Center power equipment, and Domestic Computing Power. 4. Commercial Aerospace: Establishing aerospace as a new pillar industry. Favor: Medium-to-large rocket manufacturing, launch services, and related supply chains.

▶ Risk Warning: Overseas economic recession exceeding expectations, and global geopolitical uncertainty.