Zhitong Decision Reference | Hotspots Focus on Technology Again

[Editor’s Market View]

The Federal Reserve has begun its rate-cutting journey, and although it is only 25 basis points, there are expectations for at least two more cuts this year, with positive market feedback. Last week, the Hang Seng Index maintained a strong performance overall.

Last Friday, the Chinese and U.S. presidents had a phone call, discussing many issues including TikTok. Following the China-U.S. conversation, the overall response from various parties has been positive. The People's Daily published an article titled "China and the U.S. Can Completely Achieve Mutual Success and Common Prosperity," and U.S. stocks continue to hit new highs.

Therefore, unfavorable factors have been eliminated, and the market is expected to return to its original pace. This Monday at 3 PM, the State Council Information Office will hold a press conference on the achievements of the financial industry during the 14th Five-Year Plan period, with major leaders from the People's Bank of China, the Financial Regulatory Administration, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange in attendance. The market anticipates relevant positive developments. Key attention will be on the announcement of the September Loan Prime Rate (LPR) on Monday. A reduction would stimulate the real estate sector.

The focus is once again on technology, with the State Council meeting discussing the implementation of domestic product standards and related policies in government procurement. The Alibaba 2025 Cloud Summit will be held in Hangzhou from September 24 to 26, gathering over 2,000 guests from more than 50 countries to discuss the latest trends in AI, cloud computing, and industrial applications. The direction of self-controllable AI continues to be strengthened.

The National Healthcare Security Administration has released the 11th batch of centralized procurement documents, optimizing price difference control anchors, no longer simply selecting the lowest bid: 1/4 of the drugs have anchors that are 34% higher than the lowest price, with the highest increase exceeding 170%. Innovative drugs are worth paying attention to.

Musk stated that Tesla plans to hold a meeting next week regarding artificial intelligence, autonomous driving systems, Optimus robot, and vehicle production, observing whether there will be news to stimulate the market.

[This Week's Golden Stock]

FIT HON TENG (06088)

FIT HON TENG Technology, as an important member of the Foxconn system, has shown significant progress in the AI field, especially in areas such as backplane connectors, PCI cables, UQD, NAQD, and liquid cooling products, indicating high profit growth points. The optical modules and 1.6T optical modules developed by the company have been adopted by major clients such as Microsoft, and it is expected to significantly reduce the valuation to around 8 times, highlighting high growth potential. Through a patent cross-licensing agreement with Amphenol, FIT HON TENG has successfully entered the backplane connector market, with expectations for substantial increases in market share and profits. Although the traditional consumer electronics business faces challenges, new business layouts such as liquid cooling systems are highly anticipated. FIT HON TENG's deep cultivation in the AI field and product innovation, coupled with close cooperation with clients, especially in the server field, are seen as key to significant future performance growth, bringing considerable returns to investors. Specifically:

Backplane Line: Early development of self-researched solutions, leading technical capabilities; Optical Communication: Completed the development and sample evaluation of the 1.6T optical module product.

FIT HON TENG's existing cabinet products have a single cabinet value of $30,000 to $40,000—Socket (not considering GPU single cabinet $1,000);

PCIE Cable ($7,000 to $8,000); UQD ($10,000); Busbar ($15,000) Company Highlights: (1) The value per cabinet has increased from $30,000-$40,000 to $130,000-$140,000, with excellent cost control capabilities, and the net profit margin is expected to exceed 20%; (2) Customer relationships: Foxconn's brother company, currently Foxconn has gained a large share of NV cabinets, and Hongteng is expected to leverage its connection with Hon Hai Group to gain a significant share.

Some institutions predict that its main business will reach $150 million in 2026, with existing AI products contributing $200-$250 million, totaling conservatively nearly $400 million. The backplane line is expected to contribute an additional $200 million in profit increment based on a 10% share, corresponding to a current PE of 8.5 times.

【Industry Observation】

According to overseas news, the Democratic Republic of the Congo is considering extending its cobalt export ban for at least two more months. Officials are working to finalize a quota system to replace the current export ban. The Ministry of Mines believes that cobalt prices need to recover further, and implementing a quota-based framework will also require more time. This decision from the Ministry of Mines still needs approval from the presidential office. The current export ban in the DRC began due to dissatisfaction with low cobalt prices. Once the policy process is cleared, subsequent cobalt exports may shift to a quota system, but the tight supply issue is difficult to resolve in the short term, and cobalt prices are expected to remain high in the short term.

The decline in cobalt imports expanded in August. The import volume of cobalt hydrometallurgical intermediate products in August was 5,241.4 tons, down 90%/62% month-on-month/year-on-year, with the year-on-year decline further widening compared to July, indicating that overseas in-transit inventory has basically arrived in the country since the export ban began on February 22.

After seven months of destocking, current industry inventory is at a low level. According to Baichuan Yinhoo, as of September 19, the inventory of cobalt sulfate was 3,810 tons (about one month), down 32% year-on-year; the inventory of four-cobalt was 5,100 tons (about half a month), up 2% year-on-year, maintaining a low level.

Cobalt, like rare earths and tungsten, follows a similar logic, where resource-dominant countries restrict the supply of advantageous minerals, driving up external prices and ultimately maximizing the resource value retained domestically. Especially for cobalt, unlike tungsten and rare earths, which are concentrated in China for supply and processing, the DRC cannot digest its own raw material supply domestically. The "price" is more favorable for realizing resource value than "quantity." Cobalt itself has strategic uses in military and aerospace applications. The U.S. Department of Defense's strategic stockpiling is mainly due to concerns about the disruption of the cobalt supply chain caused by the DRC's mining ban policy, which also endorses cobalt's status as a strategic minor metal.

For the equity side, the pricing of "strategic attributes" has two aspects: (1) Fundamental logic, where supply tightening raises cobalt prices, boosting profitability from non-DRC supplies, driving equity upward from an EPS perspective; (2) Valuation logic, where dominant countries control production in the long term (such as quotas), leading to prolonged price increases and an upward shift in the equity PE center.

Key stocks to watch in Hong Kong include Luoyang Molybdenum (03993), China Nonferrous Mining (01258), Jinchuan International (02362), and Minmetals Resources (01208).

【Data Monitoring】

The Hong Kong Stock Exchange announced that the total number of open contracts for the Hang Seng Index futures (September) is 130,603, with a net open interest of 43,015 contracts. The settlement date for the Hang Seng Index futures is September 29, 2024 The Hang Seng Index is at 26,545 points, with a dense area of bearish certificates above close to the central axis, indicating a bullish momentum for the index. Decision-makers expect the median interest rate in the Federal Reserve's dot plot to reach 3.6% by the end of this year, which is one basis point higher than the expected 3.9% three months ago, anticipating continued interest rate cuts by the Federal Reserve. The Hang Seng Index is bullish this week.

[Editor's Remarks]

From a valuation perspective, Hong Kong stocks are influenced by factors such as the structural shift towards growth dominance in the industry, a significant narrowing of liquidity discounts, and the elevation of valuation centers by low-cost domestic capital, which has weakened the reference of traditional historical percentiles; in horizontal comparison, the AH premium of Hong Kong stocks over A-shares is within a reasonable range, and under the trend of RMB appreciation and USD depreciation, they still offer value relative to the global market (positioned at a mid-level under the PB - ROE framework).

Since September, Hong Hao believes that under the support of policies and liquidity, there is still room for valuation recovery in Hong Kong stocks (the Hang Seng Index is expected to challenge the 30,000-point mark). Sectors such as technology (internet, AI-related), innovative pharmaceuticals, and energy will benefit from liquidity easing and improved industry prosperity, with growth tracks related to "new productive forces" having long-term layout value; Zhang Yidong believes that Hong Kong stocks are accumulating momentum for a rebound, and a slow bull market with upward fluctuations is expected to continue, driven primarily by the revaluation of the Hang Seng Technology Index (valuations at historical lows) and global capital allocation needs (Hong Kong stocks still have valuation advantages in the global stock market). He anticipates that the Chinese stock market will experience a "super long bull" phase, with Hong Kong and A-shares forming a "mutually reinforcing" pattern, supported by the path of financial development with Chinese characteristics, creating positive feedback between the stock market and high-quality economic development, as well as Chinese-style modernization. Zhang Yidong also suggests focusing on technology and innovative pharmaceuticals, believing that fluctuations in a bull market present good opportunities to buy quality assets, and recommends accumulating high-quality targets on dips, while being cautious of short-term volatility but not overly pessimistic