Daiwa: The profit growth rate of Hong Kong stocks slows down in the first half of the year, with strong performance in upstream and TMT industries, while the automotive industry's profit momentum cools down

Daiwa published a report on the Hong Kong and A-share markets, summarizing the performance in the first half of this year, highlighting dual profit drivers corresponding to still weak domestic demand. The firm indicated that in the Hong Kong market, companies' revenue and profit growth slowed to -1.2% and +3.9% respectively in the first half of this year (for the first half of 2024, it is +1.9% and +4.7%). Relative to market expectations, about 60% of Hong Kong-listed companies' performance in the first half of 2025 fell short of analysts' consensus forecasts, higher than the 26.7% in the A-share market. The turnaround in upstream industries and the continued growth in TMT (Technology, Media, and Telecommunications) accelerated the profit recovery in the A-share market, while insufficient demand suppressed consumption and the profitability of domestic banks, with the automotive industry experiencing a significant decline in profits due to price wars.

The firm noted that A-share performance unexpectedly accelerated, although revenue growth year-on-year remained flat under weak domestic demand, net profit growth year-on-year rebounded rapidly from -0.1% in the first half of 2024 to +2.5% in the first half of 2025, mainly driven by upstream industries. Consequently, the proportion of loss-making enterprises in the manufacturing sector dropped rapidly from 13% in the first quarter of 2025 to 11.4% in the second quarter, but this improvement is still insufficient to reverse China's "deflationary spiral."

"Dual-line drive": Strong performance in upstream industries and TMT. Benefiting from the low base in the first half of 2024, more effective cost control (cement, non-ferrous metals), falling raw material costs (steel), and product structure upgrades (steel), sectors such as materials (from steel to building materials) and paper-making achieved robust profit recovery in the first half of 2025; soaring gold and copper prices also benefited non-ferrous metal companies like Zijin Mining (02899.HK).

In the TMT sector, benefiting from regulatory relaxation and a strong product pipeline (such as the release of "Ne Zha 2"), online gaming (Perfect World (002624.SZ)) and film and television (Light Media (300251.SZ)) saw profit improvements. At the same time, the global tech upturn driven by AI, the "domestication" trend, and product upgrades continued to drive profits in electronics (Cambricon (688256.SH), Foxconn Industrial Internet (601138.SH)), communication equipment (Zhongji Xuchuang (300308.SZ)), and computers (Hikvision (002415.SZ)), especially after the U.S. imposed tariffs, which further catalyzed front-loaded demand.

In addition to these two main lines, government stimulus policies also drove profit expansion in machinery, defense, and home appliance sectors in the first half of 2025; non-bank financial enterprises also benefited from improved performance due to a booming stock market. Furthermore, most Hong Kong-listed internet platforms also recorded ideal performance in the first half of this year, mainly driven by revenue growth from new businesses (KUAISHOU-W (01024.HK), Alibaba (09988.HK)).

"Domestic demand-driven industries" remain a drag. In contrast, overcapacity and insufficient domestic demand continued to weigh on profit growth in coal, real estate, and broad consumption (excluding home appliances). Although banks turned from loss to profit in the second quarter of 2025, performance was still constrained by weak credit growth and narrowing interest margins. Notably, despite strong exports, the automotive industry saw a significant cooling of profit momentum in the second quarter due to price wars