Xiaomo's preferred stock for the second half of the year has been released! The current Chinese stock market is similar to Japan 27 years ago, and there is room for improvement!

The Zhitong Finance App learned that J.P. Morgan Chase released a research report saying that in the second half of 2025, the Chinese stock market will benefit from the three driving forces of continued capital inflows from the south, easing trade between China and the US, and opening up financial markets. The bank believes that the current level of the MXCN index is similar to the night before the restructuring of the Japanese banking industry in 1998. It will fluctuate in the 70-80 range in the near future, and there is room for improvement in the second half of 2025. The target levels of the MXCN/Shanghai and Shenzhen 300 Index at the end of the year under the benchmark scenario are expected to be 80/4150 points (increase 5.1%/5.8%), respectively, and the optimistic scenario could reach 89/4,420 points (increase 16.8%/12.7%). In the second half of the year, Xiaomo recommended 10 preferred targets, including Tencent Holdings (00700).

Xiaoma's main views are as follows:

Looking ahead to the second half of 2025, J.P. Morgan believes that the following factors will drive the upward trend: continued strong inflow of capital from the south into the Hong Kong market, US-China trade reaching a solution to a certain extent, and the opening up of financial markets may improve the macro-narrative, and boost the outlook for 2026 as the Federal Reserve cuts interest rates.

J.P. Morgan compared the MXCN with the Topix Index (Topix) and found that the current level of MXCN is equivalent to Topix in July 1998. Although no two markets are trending exactly the same, after the Japanese banking recapitalization in October 1998, the TSE Index returned 81% in the following 16 months.

Since the central bank of China has previously provided support for A shares (September 2024) and H shares (January 2025) and set a higher bottom, if an upward option does take effect, J.P. Morgan expects that the upward space for the MXCN/ Shanghai and Shenzhen 300 Index will be more moderate than Topix's, but it is still significant.

Under the benchmark scenario, J.P. Morgan predicts that by the end of 2025, the MXCN/Shanghai and Shenzhen 300 indices will reach 80/4150 (up 5.1%/5.8% from last Friday's closing price, respectively); under the optimistic scenario, they will reach 89/ 4420 (up 16.8%/12.7% from last Friday's closing price, respectively). According to the benchmark scenario forecast, the 2025 consensus earnings per share (EPS) increased 6%/15% year over year, and the forward price-earnings ratio (FTM P/E) was 11.9 times/14.3 times.

Earnings outlook and industry weight

J.P. Morgan believes that MXCN's EPS has more room to rise than consensus, while the Shanghai and Shenzhen 300/Shanghai Shenzhen 500/Shanghai and Shenzhen 1000 consensus EPS growth forecast has room to decline. The reason is that the former is more involved in emerging innovation industries, while the latter is more involved in the real estate ecosystem and the renewable energy/NEV ecosystem with overcapacity, and the reporting standards for small and medium capitalization stocks are stricter.

In terms of industry weight, after suspending the increase in holdings in May-June, J.P. Morgan Chase re-listed information technology (IT) as an increase in holdings, continued to increase its holdings in communications services, optional consumption, healthcare, and materials, and reduced its holdings in energy and utilities. For companies with business in Hong Kong and overseas, the rise of stablecoins as a mainstream use case will benefit issuers in the financial industry, enablers of IT infrastructure, and Internet platforms with huge networks. These companies will benefit from increased demand, lower payment fees, increased interest income, and increased customer relationship stickiness.

Topics and Preferred Targets

From “affordable enjoyment” to “affordable experience”: Since “affordable enjoyment” (such as anime games, bubble mart, and premium products) surpassed the market by a large margin on February 11, 2025, we have emphasized the attractive relative value of “affordable experiences” (learning and family entertainment).

IT/Biotech Innovators: As investments over the past decade have begun to pay off, the sector continues to show China's engineering dividends.

High-dividend stocks: In a context where domestic risk-free interest rates are lower than overseas, domestic investors continue to favor high-dividend stocks that seek higher returns.

The financial sector's preferred targets and industry integrators with overcapacity in the second half of 2025 will benefit from reform options.

Preferred targets for the second half of 2025 (Figure 1): Tencent and Tencent Music in the communications services sector; Alibaba, Good Future, and MGM China in the consumer sector; Futu Holdings and Huatai Securities in the financial sector; Cinda Biotech and Cornerstone Pharmaceuticals in the healthcare sector; Ningde Era (H shares) in the industrial sector; and Zhongji Xuchuang in the information technology sector. Among them, Cornerstone Pharmaceuticals, Futu Holdings, Huatai Securities, Cinda Biotech, Alibaba, Good Future, MGM China, and Tencent were all our preferred targets for the second quarter of 2025 (the report was published on March 26, 2025).

Figure 1: J.P. Morgan Chase's top 10 preferred targets in the second half of the year

Figure 2: “Affordable Experience” targets covered by J.P. Morgan Chase, with a market capitalization of over $5 billion and a forward price-earnings ratio (FTM P/E) of less than 25 times

Figure 3: Top Targets Among IT Innovation Companies Covered by J.P. Morgan Chase

Figure 5: J.P. Morgan Chase's Preferred Financial Sector Companies

Morgan Stanley China Index (MXCN): Benchmark/Optimistic/Pessimistic Scenario Target Level is 80/89/70

The baseline scenario takes into account the following factors:

1) Global liquidity is favorable, and the dollar is weakening;

2) A more relaxed policy environment for private enterprises (PoES);

3) The trend of capital inflows from the south is good. The People's Bank of China (PBOC) has increased the asset allocation for Chinese stocks listed in Hong Kong stocks through the State Administration of Foreign Exchange (SAFE), which forms the policy backbone.

The pessimistic scenario takes into account: 1) market competition is more severe than expected, dragging down agreed earnings per share (EPS); 2) the obstacles to reaching an agreement between the US and China are high, leading to increased domestic overcapacity and a decline in business confidence.

The optimistic scenario takes into account: 1) the application of artificial intelligence promotes the favorable expansion of net interest spreads (NPM), and the Internet sector weighs more than 40% in the MSCI China Index; 2) the changes/reforms that may be brought about by the Sino-US negotiations, including financial market opening and industrial policy adjustments, or triggering industry integration.

Since the end of May, IBES's consistent forecast for MXCN's 2025 earnings per share has basically stabilized at HK$6.2. The year-on-year growth rate of earnings per share in 2025 is currently around 6%, due to the high base after the index was adjusted a year ago. As for 2025, Komo believes that MXCN's agreed earnings per share are at upward risk because the application of artificial intelligence continues to increase, which will help drive earnings per share growth, especially for heavily weighted Internet companies.