Authors: Xun Yugen, Wu Xinkun (Xun Yugen is a director of the China Chief Economist Forum, chief economist and director of the research institute of Haitong Securities)
Investment Essentials
Core conclusions: (1) From the perspective of exports, added value and profits of industrial enterprises, high-end manufacturing has better fundamentals and is a bright spot in the economy. (2) The competitiveness of China's high-end manufacturing lies in the most complete industrial chain + engineer dividend, and the demand growth comes from emerging economies such as ASEAN and the Middle East. (3) High-end manufacturing is expected to become a new driving force for economic growth, and the white horse stocks represented by it are expected to become the new main line of A-shares.
Bright spot in the real economy: high-end manufacturing. From the perspective of demand, China's exports are relatively resilient, and high-end manufacturing has performed well. Since 2023, China's exports have maintained a strong growth trend, and the share of mainland exports in the world has also continued to grow. In addition, since June 23, the year-on-year growth rate of industrial enterprises' production and sales rate and export delivery value has diverged significantly, which shows that exports have been stronger than domestic demand in the near future. Since 2022, real estate investment has continued to grow negatively, but manufacturing investment has maintained a high growth rate of about 5%-10%, which shows that manufacturing exports have become a bright spot in the real economy. From the perspective of export structure, the export performance of high-end manufacturing represented by the "new three", automobiles, home appliances, etc. is outstanding. In 2023, the "new three" exports will hit a record high, an increase of 24% over the previous year, significantly higher than the overall export growth rate, and related high-end manufactured products will contribute the most to the export growth rate in the first quarter of 24. From the perspective of supply, the fundamentals of mid-to-high-end manufacturing-related industries are more dominant. The growth rate of the added value of the high-end manufacturing industry and the profits of industrial enterprises is significantly faster than the overall growth rate, and at the same time, from the perspective of listed companies, the profits of some high-end manufacturing-related listed companies also maintain a high prosperity.
China's high-end manufacturing has strong international competitiveness. China's high-end manufacturing has strong international competitiveness. From the perspective of supply, the comparative advantage of China's high-end manufacturing lies in the integrity of the industrial system and the engineer dividend. In terms of industrial base, China has a complete manufacturing system. In terms of human capital, the continental engineer dividend is replacing the demographic dividend. More importantly, the mainland's manufacturing industry has gradually moved from low-end manufacturing to high-end manufacturing, and the share of related industries and products in the global market has been rising. From a demand perspective, emerging countries have strong demand and high dependence on China, or new growth in China's exports. In the past period, emerging countries have played an increasingly important role in driving China's exports. In the medium and long term, on the one hand, emerging countries have large populations and GDP, and the per capita GDP level is in the stage of rapid industrialization, so the demand for mid-to-high-end manufacturing imports is high; On the other hand, emerging countries are highly dependent on Chinese imports, and China's share of mid-to-high-end manufacturing imports is increasing. Therefore, with the support of the dual advantages of supply and demand, China's high-end manufacturing has broad prospects.
High-end manufacturing is the dawn of the real economy and capital market. From an economic point of view, high-end manufacturing is expected to become a new driving force for China's economy. On the one hand, from the perspective of domestic demand, a series of active industrial policies vigorously support large-scale equipment renewal, which is expected to actively guide the increase of advanced production capacity and improve production efficiency; On the other hand, from the perspective of external demand, the mainland's export advantages are expected to continue to transform into China's manufacturing advantages, empowering China's economic growth with new driving force. At present, China's economy has entered a stage of high-quality development, and high-end manufacturing is expected to replace real estate as a new driving force for economic growth. From the perspective of the stock market, high-end manufacturing in white horse stocks is expected to become the medium-term main line of A-shares. As macro and micro fundamentals continue to accelerate repair, the undervalued A-share market is expected to usher in a reversal from a medium- to long-term perspective. In the A-share rising environment, the white horse sector with low valuation and greater performance elasticity may gradually usher in better layout opportunities and usher in incremental capital replenishment. Among them, combined with our previous analysis, China's advantageous manufacturing may be the brightest direction among white horse stocks.
Risk warning: the progress of the implementation of the steady growth policy is less than expected, and the domestic economic recovery is less than expected.
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In the first quarter of 2024, the mainland's real GDP growth rate will be 5.3%, but the nominal GDP growth rate will be 4.0%, and a negative GDP parity index means that demand still needs to be further boosted. The good news is that China's export growth remains strong, especially the increasing competitiveness of China's high-end manufacturing in the international market. We believe that China's high-end manufacturing is expected to become a new dawn in the real economy and capital market, and this topic will be discussed in depth.
1. Bright spot in the real economy: high-end manufacturing
From the perspective of demand, China's exports are relatively resilient, and high-end manufacturing has performed well. In the course of China's economic ups and downs, exports have maintained a strong growth trend. In 2023, China's exports as a whole will remain relatively resilient, with a slight year-on-year decrease of 4.7% in US dollar terms, a year-on-year increase of 0.6% after excluding the impact of exchange rate factors, and a year-on-year increase of 1.5% in US dollar terms in the first quarter of 24, and a year-on-year increase of 4.9% after excluding the impact of exchange rate factors, both of which have rebounded significantly from the fourth quarter of last year (-1.2%, 0.8%), and the share of mainland exports in the world has also continued to grow, according to Trademap statistics, From January to February 2024, the mainland's share of the world's total exports was 18.8%, up 1.9 percentage points from 16.9% in 2023 and a record high since 2004. In addition, recent economic data also show that exports are stronger than domestic demand, from the year-on-year growth rate of industrial enterprise production and sales rate and export delivery value, it can be seen that since June 23, the trend of the two has diverged significantly, and the production and sales rate of industrial enterprises in 24Q1 increased by -1.3% year-on-year, which is lower than the year-on-year growth rate of 1.4% in export delivery value. In recent years, China has accelerated the transformation of its economic structure, pursued high-quality development, gradually reduced the ratio of real estate in the national economy, and turned to the development of export-oriented manufacturing industry, especially since 2022, China's economy has seen some twists and turns, the real estate industry as a whole has declined, and real estate investment has continued to grow negatively, but manufacturing investment has maintained a high growth rate of about 5%-10%, which shows that manufacturing exports have become a bright spot in the real economy.
In 2023, exports of electric passenger vehicles, lithium-ion batteries, and solar batteries hit a record high, up 24% from the previous year, significantly higher than the overall export growth rate (Figure 5). As of the first quarter of 24, the share of "new three" exports increased to 4.1%, an increase of about 3 percentage points compared with 2020. In addition, the mainland's exports of other high-end manufacturing products remain strong, in the first quarter of 24 China's exports of integrated circuits (24Q1 cumulative export value growth rate of 20%, the same below), ships (106%), automobiles (18%), home appliances (12%), general machinery and equipment (16%) The growth rate contributed the most, which shows that high-end manufacturing is still the main export force.
From the perspective of supply, the fundamentals of mid-to-high-end manufacturing-related industries are more dominant. Demand determines supply, and the high growth of mid-to-high-end manufacturing exports has brought related enterprises to take the lead in recovery, and the rate of profit recovery has exceeded the overall level. On the one hand, from the perspective of industrial added value, the industrial added value in 24Q1 increased by 6.1% year-on-year, of which the output value of high-end manufacturing grew faster, the added value of automobile manufacturing increased by 9.7% year-on-year, the manufacturing of railway, shipbuilding and aviation equipment was 10.0%, and the manufacturing of computer and communication equipment was 13.0%, which was significantly higher than the overall. On the other hand, from the perspective of industrial enterprise profits, the profits of industrial enterprises in 24Q1 increased by 4.3% year-on-year, but the profits of railway, shipbuilding and aviation equipment manufacturing enterprises increased by 45.8% year-on-year, the automobile manufacturing industry increased by 32.0% year-on-year, and the profits of computer and communication equipment manufacturing increased by 82.5% year-on-year, and the recovery rate of high-end manufacturing was more impressive. From the perspective of listed companies, the profits of some high-end manufacturing-related listed companies also maintained a high prosperity. The overall profit growth rate of A-shares has been repaired, and the cumulative year-on-year growth rate of net profit attributable to the parent company in 23Q4 and 24Q1 was -2.6% and -4.7% respectively, but in the high-end manufacturing sector, there are also many bright spots in some subdivided industries or industrial chains in the near future, such as automobile (23Q4/24Q1 net profit attributable to the parent company with cumulative year-on-year growth rates of 47.7% and 16.2% respectively, the same below), machinery and equipment (-0.3%, 2.7%), household appliances (13.6%, 10.6%), electronics (-33.5%, 75.1%).
2. China's high-end manufacturing has strong international competitiveness
From the perspective of supply, the comparative advantage of China's high-end manufacturing lies in the integrity of the industrial system and the engineer dividend. In the future, if Made in China wants to continue to go abroad, open up a broader overseas market, and support the high-quality development of China's economy, it must have a deep "moat" to cope with fierce global competition and complex overseas trade environment. We believe that at present, China's manufacturing has incomparable advantages on the supply side that most countries cannot match:
At present, China has 41 major industrial categories, 207 medium industrial categories, and 666 industrial sub-categories, with a complete industrial system, and is the only country in the world that has all the industrial categories in the United Nations Industrial Classification. In recent years, the added value of the mainland's manufacturing industry has continued to rise, accounting for more than 30% of the global proportion in 2022 (the same below), surpassing the United States (16%), the European Union (16%) and other countries and regions, ranking first in the world. In 2021, there were as many as 14 industries in the top 10 in the world in terms of added value in the manufacturing sub-sectors, with an average share of 30.5%, ranking first in the world.
The Ministry of Education estimates that the number of graduates from ordinary colleges and universities in mainland China will be 11.79 million in 2024, and if the proportion of graduates in 2020 (62% of graduates majoring in STEM majors) is calculated, the number of graduates of STEM majors (science, technology, engineering and mathematics education-related majors) will exceed 7 million, and the positive effect of the engineer dividend on economic growth will gradually appear. According to the 2023 Ranking of World-Class Subjects released by Ranking, among the 23 disciplines in the field of engineering, mainland universities ranked first in 15 of them, and the level of engineering education is the foundation for the cultivation of engineer talents, and the mainland's engineer dividend will be continuously strengthened.
(1) In the field of new energy, China has a leading edge in the global market. By the end of March 2024, the country's installed renewable energy capacity reached 1.585 billion kilowatts, a year-on-year increase of 26%, accounting for about 52.9% of the mainland's total installed capacity; Among them, the installed capacity of photovoltaic has ranked first in the world for 10 consecutive years as of 2023. According to IEA data, in 21 years, China's module production capacity accounted for 75% of the world's total, 85% for cells, 97% for silicon wafers, and 79% for polysilicon. (2) In the field of new energy vehicles, the sales of new energy vehicles in mainland China increased by 38% year-on-year in 23 years, and the cumulative year-on-year growth of 32% in the first quarter of 24 years, continuing the high growth trend of last year, is the world's largest new energy vehicle market, and the core components of the industrial chain such as power batteries, motors, and electronic control have gradually occupied a dominant position, according to the data of SNE research cited by the energy industry, Chinese companies have a market share of more than 6% in power batteries in 23 years. (3) In the field of semiconductors, China is gradually leading the expansion of the semiconductor industry, and the share of global semiconductor production capacity is increasing, according to SEMI in its "2024 World Wafer Fab Forecast Report", China's monthly wafer production capacity will reach 7.6 million wafers in 2023, accounting for 26% of global production capacity, ranking first in the world. With Chinese chipmakers starting to operate 18 projects in 2024, China's production capacity is expected to increase by 13% year-on-year in 2024, exceeding the global growth rate by 7 percentage points, and continuing to expand its production capacity lead. (4) In the field of shipbuilding, the global shipbuilding market is dominated by China, Japan and South Korea, of which China occupies a dominant position, from the perspective of the three major indicators of the global shipbuilding industry, in 2023, China's shipbuilding completion, new orders, and hand-held orders will account for 52.6%, 64.5% and 51.1% of the global total in terms of deadweight tonnage, respectively, and the three major indicators will grow in an all-round way, and the international market share will continue to lead. (5) In the field of rail transit, the global rail transit industry has a high market concentration, and China has occupied a leading position in it, and in 2021, CRRC's share of the global rail transit market has reached 54% (the same below), surpassing Bombardier (11%), Alstom (10%), Siemens (8%), etc.
From a demand perspective, emerging countries have strong demand and high dependence on China, or new growth in China's exports. According to the IMF's criteria for the definition of emerging countries, after taking into account factors such as per capita income, diversity of exports of goods and services, and degree of integration with the global financial system, it includes 39 countries or regions other than advanced economies into the group of "emerging market and developing economies", including countries in Southeast Asia, countries in the Middle East and Central Asia, Russia, countries in Latin America, and countries in sub-Saharan Africa in addition to China. In the past period, emerging countries have played an increasingly important role in driving China's exports. In the first quarter of 2024, the amount of mainland exports to the Middle East, Southeast Asia, and Russia increased by 4.2%, -5.0%, and 46.9% year-on-year, respectively, surpassing developed countries such as the United States (-13.1%) and the European Union (-10.2%). In the first quarter of 2024, the share of mainland exports to Southeast Asia will be 17% (the same below), surpassing the United States (14%) and the European Union (15%), becoming the mainland's most important export object. At the same time, Russia and the Middle East have become the main contributors to mainland exports in recent years, and as of the first quarter of 24, the share of mainland exports to Russia and the Middle East increased to 3% and 7% respectively (the same below), both of which were several times higher than the share level in 1995 (1% and 2%). In addition, regional trade cooperation has formed a strong boost to mainland exports, and in 2023, imports and exports between the mainland and the "Belt and Road" countries accounted for 46.3% of the mainland's total foreign trade value. Judging from the export data in the first quarter of 24, Southeast Asia, Russia and other regions have become the new main destination countries for mainland exports, and the proportion of imports and exports to the "Belt and Road" countries in the total import and export value of the mainland has further increased to 46.6%.
On the one hand, emerging countries have large populations and GDP, and their per capita GDP is in the stage of rapid industrialization. If only the 10 ASEAN countries [1] and the 15 countries in the Middle East [2] are considered, according to IMF statistics, in 2023, the population and GDP of the 10 ASEAN countries will account for 8.7% and 3.6% of the world's total, respectively, and the population and GDP of the 15 countries in the Middle East will account for 7.2% and 4.5% of the world's total, respectively, and the two regions will contribute about 8% of the world's GDP and 16% of the total population. In addition, in 2023, the overall per capita GDP of the 10 ASEAN countries and the 15 countries in the Middle East will be about 5,611 US dollars and 8,305 US dollars respectively, which are comparable to China's around 2010 and 2015, respectively. On the other hand, emerging countries are highly dependent on Chinese imports, and China's share of mid-to-high-end manufacturing imports is increasing. China as a global export power, many emerging countries in Asia, Africa and Latin America are highly dependent on China's imports, in 2023, emerging countries will import more than 20% of the total import amount to Chinese mainland, and from China's strong manufacturing advantage, emerging economies have become more and more dependent on imports from China in the field of high-end manufacturing in recent years, in 2022 Indonesia (China accounted for 47% of high-end manufacturing imports, the same below), Egypt (45%), the United Arab Emirates (40% China's share of high-end manufacturing imports has exceeded 40%.
On the whole, on the one hand, the advantage of China's high-end manufacturing lies in the integrity of the industrial system and the dividend of engineers. On the other hand, for emerging economies, due to their high dependence on China's high-end manufacturing, they are inseparable from the import of China's high-end manufacturing in their rapid industrialization and consumption upgrading. With the support of the dual advantages of supply and demand, China's high-end manufacturing has broad prospects.
3. High-end manufacturing is the dawn of the real economy and capital market
As mentioned in the previous part, the recent high-end manufacturing related fields have shown good performance in the fundamentals, and from the perspective of supply and demand, high-end manufacturing has unique advantages in the mainland. So when it is implemented in the real economy and capital market, what subdivisions should we start from to seize the opportunity of high-end manufacturing?
From an economic point of view, high-end manufacturing is expected to become a new driving force for China's economy. High-end manufacturing covers new energy-related products represented by the "new three", intelligent manufacturing equipment such as semiconductors and electronics, transportation equipment such as shipbuilding and rail transit, and consumer manufacturing products such as home appliances and automobiles. On the one hand, from the perspective of domestic demand, in February 2024, General Secretary Xi Jinping emphasized at the fourth meeting of the Central Financial and Economic Commission that "accelerating product upgrading is an important measure to promote high-quality development, and it is necessary to encourage and guide a new round of large-scale equipment renewal and consumer goods trade-in", followed by a series of positive industrial policies to vigorously support large-scale equipment renewal, the State Council issued the "Action Plan for Promoting Large-scale Equipment Renewal and Consumer Goods Trade-in" in March 24, and seven departments including the Ministry of Industry and Information Technology issued the "Action Plan for Promoting Large-scale Equipment Renewal and Consumer Goods Trade-in" in March 24, and seven departments including the Ministry of Industry and Information Technology issued the " Notice on the issuance of the implementation plan for promoting the renewal of equipment in the industrial field, while promoting the consumption and upgrading of high-end manufactured products from a long-term perspective, it is expected to actively guide the increase of advanced production capacity and improve production efficiency. On the other hand, from the perspective of external demand, in recent years, China's exports have been resilient, manufacturing exports have gradually become an important driving force to boost the real economy, and the fundamentals of mid-to-high-end manufacturing-related industries are more dominant. As mentioned above, with the unique competitive advantage of the mainland in the development of high-end manufacturing, and the superposition of peripheral emerging economies, which are inseparable from the import of high-end manufactured goods from the mainland, in the long run, through the capital goods manufacturing industry such as heavy trucks and industrial machine tools, which accounts for a high proportion of exports, the export advantage is expected to continue to transform into China's manufacturing advantage and empower China's economic growth with new driving force.
In "New Quality Productivity: Building New Drivers of Economic Growth-20231215", we argue that the slowdown in economic growth reflects that the extensive development model driven by capital investment may be unable to meet the requirements of high-quality economic development in the new era. Since 2021, the "old economy" represented by real estate has continued to decline, but real estate and related industries still account for 25.9% of GDP in 23 years. At present, there is still a large gap between the old and new economies, and the growth of the new economy is difficult to fully compensate for the impact of the slowdown of traditional industries in the short term. However, on a positive note, the ROIC of China's high-end manufacturing has gradually increased in recent years, from 1.7% in 2005 to 7.3% in 2023, which shows that the competitiveness of high-end manufacturing is constantly strengthening. In the context of the strong competitive advantage of high-end manufacturing, since 2009, the proportion of manufacturing industry in the total investment in fixed assets has been stable at about 30%, and the proportion of real estate investment is close to 25%; Since 2021, as the real estate has entered a downward cycle, the proportion of real estate investment has fallen from a high level to 16% in March 2024, while the proportion of manufacturing investment has risen to 35% in March 2024. Looking to the future, combined with the above analysis, China's high-end manufacturing has a deep "moat", which is difficult to be truly replaced, and emerging countries are expected to continue to drive China's high-end manufacturing exports, so the export and investment of high-end manufacturing are expected to gradually hedge the impact of the real estate decline, drive the total demand of the real economy to stabilize, and then get out of the dilemma of falling prices.
From the perspective of the stock market, high-end manufacturing in white horse stocks is expected to become the medium-term main line of A-shares. This year's government work report made it clear that the GDP growth rate was about 5%, and the growth of residents' income and economic growth were synchronized, which means that this year's growth target is more high-quality requirements, and the importance of stable growth is highlighted. With the continuous development of the steady growth policy, the superimposed inventory cycle has entered the replenishment stage, combined with Haitong's macro forecast, we believe that the year-on-year growth rate of domestic real GDP in 24 years is expected to reach about 5%. At the level of micro-corporate profitability, we expect that the year-on-year growth rate of net profit attributable to the parent of all A-shares in 24 years is expected to reach 5-10%. As of 24/04/30, all A-share PE/PB are at the 33%/1% quantile from high to low since 05. With the disclosure of the first quarterly report coming to an end, the market may enter a new stage of finding consensus for the annual profit, and there is a possibility that the market game will intensify in the short term, but as the macro and micro fundamentals continue to accelerate the repair, the undervalued A-share market is expected to usher in a reversal from a medium and long-term perspective.
With the increase and effectiveness of the steady growth policy, the macro and micro fundamentals are expected to gradually improve, and the white horse sector with low valuation and greater performance elasticity in the A-share rising environment may gradually usher in better layout opportunities. The Mao Index includes the leaders of various industries in the A-share market, so we take the Mao Index as the representative of the White Horse Sector. As of 24/04/30, the PE (TTM)/rolling quantile of the current Mao Index in the past three years is only 18.7 times/10.5%, and it was as low as 16.8 times/0% when the market fell sharply in January, which shows that the current cost performance of the White Horse plate has gradually become prominent. The improvement of fundamentals and capital has boosted the upward movement of the White Horse sector. From a fundamental point of view, macro and micro fundamentals are expected to recover slowly this year, while the performance of the white horse sector during the historical A-share earnings recovery period has often been better. In addition, taking the Mao Index as an example, the total market value of its high-end manufacturing-related industries accounts for more than 40%, which shows that structurally high-end manufacturing occupies an important position in the Baima sector. Combined with our previous analysis, China's mid-to-high-end manufacturing has significant advantages in talent and technology, which can ensure its competitive advantage in overseas markets and reduce the uncertainty caused by the restructuring of overseas industrial chains. At the same time, the demand for mid-to-high-end products and the dependence on imports from China in emerging countries have brought opportunities for the growth of China's advantageous manufacturing business, which shows that high-end manufacturing may have a certain first-mover advantage in the Baima sector. From the perspective of liquidity, the market has advanced the Fed's first interest rate cut to September, and the marginal easing of overseas liquidity is conducive to the improvement of foreign risk appetite, which in turn will return to the A-share market.
To sum up, we expect that the market is expected to enter the early stage of reversal, and the white horse sector with better fundamentals is expected to be replenished by more incremental funds, and the white horse may gradually become the main line of the stock market in the medium term, and China's high-end manufacturing, which occupies a place in the white horse plate, will lead the white horse stocks and take the lead in becoming the new medium-term main line of A-shares.
[1] According to the Ministry of Foreign Affairs, the 10 ASEAN countries include Brunei, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Myanmar, and Vietnam.
[2] According to the Ministry of Commerce, the 15 countries in the Middle East include Bahrain, Iran, Iraq, Israel, Jordan, Lebanon, Kuwait, Oman, Qatar, Yemen, Saudi Arabia, Syria, Turkey, the United Arab Emirates, and Palestine.
Risk warning: the progress of the implementation of the steady growth policy is less than expected, and the domestic economic recovery is less than expected.