Second-quarter earnings show a polarized picture of an accelerating innovation economy and stagnant traditional domestic demand

Overview

The report analyzes second-quarter 2026 results for Chinese equities. Its core conclusion is that the economy and market continue to display a “two-screen” pattern: earnings are accelerating in innovative fields such as AI, semiconductors, CXO, and innovative drugs, while mass-market consumer, real estate, and solar photovoltaics remain stagnant or are contracting. Based on earnings and thematic exposure, J.P. Morgan maintains an overweight position on Chinese equities and expects the AI sector to rebound during the remainder of the third quarter.

Core views

As of August 18, 2026, approximately 18% of constituents in both the MXCN and CSI 300 had reported second-quarter results, and the early results already showed a clear two-tier market. Actual second-quarter EPS for the CSI 300 increased 32.0% year over year, margins expanded by 140 basis points, and 54% of companies beat expectations; consensus forecasts its EPS growth to rise further to 34.1% in the second half of 2026. MXCN companies that had reported results delivered second-quarter EPS growth of only 4.0%, with margins contracting by 93 basis points, although the market still expects growth to improve to 14.7% in the second half. For next-twelve-month EPS, the MXCN healthcare and information technology sectors were revised upward by 7.9% and 7.5%, respectively, quarter to date, both above the overall index's 2.6%, indicating that earnings improvement is concentrated in innovative industries rather than reflecting a broad-based recovery. There is also significant divergence within information technology. Consensus expects second-quarter EPS for CSI 300 information technology to increase 64.7%, mainly driven by semiconductors and AI hardware; MXCN information technology EPS, however, declined 18.4%, primarily dragged down by a 42.6% decline in Xiaomi's adjusted net profit. The report views this as a company-specific disruption caused by rising memory costs and losses in the electric vehicle business, rather than a weakening of the entire technology sector. Earnings were strongest in the upstream and midstream portions of the AI value chain. SMIC's revenue reached a record US$3.01 billion, up 36% year over year and 20% quarter over quarter, significantly exceeding the company's quarter-over-quarter guidance of 14% to 16%; its 25.3% gross margin also exceeded guidance of 20% to 22%. Hua Hong Semiconductor's revenue was US$718 million, up 27% year over year, with a gross margin of 16.5%, above management guidance of 14% to 16%. GigaDevice's first-half revenue was RMB11.57 billion, up 179% year over year, while net profit was RMB6.86 billion, up 1,092%; driven by increases in both memory-chip volume and pricing, second-quarter net profit was RMB5.40 billion, up 269% quarter over quarter. Hygon Information Technology recorded first-half revenue of RMB9.1 billion and net profit of RMB1.8 billion, up 67% and 50% year over year, respectively; second-quarter net profit reached a record RMB1.11 billion, up 61% quarter over quarter. Not all AI hardware companies received equal recognition. Cambricon recorded first-half revenue of RMB6.0 billion and net profit of RMB2.3 billion, up 108% and 123% year over year, respectively, but second-quarter revenue increased only 7.8% quarter over quarter, operating cash flow fell 66% to RMB310 million and turned negative in the second quarter, and inventory rose to RMB8.25 billion. Its share price fell 6.3% after the results announcement. AMEC had previously guided for first-half revenue of RMB6.69 billion, up 35% year over year, and net profit of RMB2.7 billion to RMB2.9 billion, up 282% to 311%; however, net profit excluding non-recurring gains was only RMB1.0 billion to RMB1.2 billion, up 86% to 123%, indicating that one-off gains amplified reported profit. Downstream AI platforms face dual pressure from capital expenditure and traditional businesses. Tencent's second-quarter revenue was RMB204.8 billion, up 11% year over year, while adjusted net profit was RMB68.4 billion, up 9% and above consensus expectations. However, RMB52.8 billion of capital expenditure pushed free cash flow into negative territory for the first time, at negative RMB13.8 billion, after which the share price fell 4.5%. Baidu's second-quarter revenue was RMB31.3 billion, down 4% year over year and below expectations, while net profit was RMB2.32 billion, down 68%. Meanwhile, AI revenue reached RMB12.5 billion, accounting for 50% of core revenue, and AI cloud infrastructure revenue increased 50% to RMB7.3 billion, indicating accelerating AI monetization, although traditional search and iQIYI remained drags. The valuation logic for pure-play large-model companies is changing. As the duration priced by the market shortens, investors have shifted their focus from open-ended ARR growth to the path toward breakeven, thereby limiting near-term valuation multiple expansion. According to management statements, Z AI's MaaS ARR reached RMB1.7 billion, approximately US$250 million, as of March 2026, increasing 6.4-fold in four months; MiniMax's ARR doubled from February to April, with API revenue accounting for more than 50%. However, the market now requires this revenue growth to translate into operating leverage and margin improvement. J.P. Morgan expects Z AI to break even in 2028 and MiniMax in 2030, broadly consistent with client feedback that the overall industry will break even in 2028 to 2029. Therefore, near-term rerating depends more on a margin inflection point than on ARR growth alone. Healthcare represents another major growth theme. WuXi AppTec's first-half revenue was RMB28.90 billion, up 38.9% year over year, with continuing operations growing 48.0%; adjusted net profit was RMB10.57 billion, up 89.4%, while second-quarter revenue and adjusted net profit growth accelerated further to 47.7% and 93.6%, respectively. GenScript's first-half continuing-operations revenue was US$404 million, up 27.3% year over year, and adjusted net profit was US$62.5 million, up 203.3%; however, GAAP net loss widened to US$129 million due to share-based compensation. BeiGene's second-quarter revenue was US$1.705 billion, up 30% year over year, while GAAP net profit was US$237 million, up 151%; first-half net profit under the A-share reporting standard was RMB3.27 billion, up 627%, and second-quarter global sales of zanubrutinib were US$1.2 billion, up 31%, prompting the company to raise its full-year revenue guidance to US$6.6 billion to US$6.8 billion. CSPC Innovation's first-half revenue was RMB3.24 billion, up 208.7% year over year, and net profit was RMB1.26 billion, marking a return to profitability; CSPC Pharmaceutical Group, meanwhile, guided for first-half attributable profit of RMB5.9 billion to RMB6.2 billion, up 131% to 143% year over year, a clear rebound from the 41.8% decline in first-quarter profit. Progress in “anti-involution” varies by industry, with companies oriented toward globalization, premiumization, and exports benefiting first. Transsion Holdings' first-half revenue was RMB35.43 billion, up 21.9% year over year, and net profit was RMB1.77 billion, up 46.2%, mainly driven by higher average selling prices in emerging markets. Xiaomi's second-quarter revenue was RMB108.9 billion, down 6.1% year over year, while adjusted net profit was RMB6.22 billion, down 42.6%; although revenue from electric vehicles and innovative businesses increased 17% to RMB24.9 billion, an RMB2.6 billion loss in the electric vehicle business, together with higher memory costs, offset the growth contribution. CATL's first-half revenue was RMB276.9 billion, up 54.8% year over year, and net profit was RMB43.28 billion, up 42.0%, with energy-storage revenue increasing 87.5% to RMB53.3 billion. Geely's first-half revenue was RMB173.6 billion, up 15% year over year, and core net profit was RMB9.68 billion, up 46%, benefiting from premiumization and overseas expansion. Fuyao Glass's revenue increased modestly by 2.4% to RMB21.97 billion, but approximately RMB1.4 billion in foreign-exchange losses caused net profit to decline 17.4% to RMB3.97 billion. Solar photovoltaics has not yet shown the same improvement and is also frequently represented among the companies subject to 2026 EPS downgrades. Xinyi Solar's first-half revenue was RMB8.43 billion, down 22.9% year over year, while falling glass prices reduced net profit to only RMB39 million, down 94.8%. Trina Solar's first-half net loss narrowed from RMB2.92 billion in the same period last year to RMB270 million, but its adjusted loss remained RMB2.89 billion, indicating that the reported improvement has not yet translated into a recovery in core profitability. Consumer and real estate remain under pressure, reinforcing the assessment of “two-speed growth.” Kweichow Moutai's first-half revenue was RMB92.28 billion, up 1.3% year over year, while net profit declined 1.95% to RMB44.52 billion, marking its first half-year profit decline in five years; sell-through in traditional channels was weak, and despite 274% growth in direct sales through iMoutai, the pressure was not offset. Retail sales increased only 0.6% year over year in July, below June's 1.0%, and grew a cumulative 1.2% in the first seven months of 2026. Poly Developments' first-half revenue was RMB102.90 billion, down 12.0% year over year, while net profit was RMB1.93 billion, down 39.0%; simultaneous declines in delivery volume and margins indicate that the real estate correction has not yet bottomed. Macroeconomic data likewise reflect a structure of strong innovative manufacturing and external demand but weak domestic demand. Industrial production increased 4.5% year over year in July, including 13.8% growth in high-tech manufacturing and 9.7% growth in equipment manufacturing; exports in US dollar terms increased 23.9% year over year, continuing to provide an important buffer for GDP. The report regards export growth as a key threshold for the scale of policy support: surveyed onshore investors believe that if export growth falls from the current level above 20% to the mid-single digits, the external-demand buffer will weaken, potentially prompting policymakers to introduce more aggressive fiscal stimulus, such as consumer subsidies, real estate easing, and accelerated infrastructure investment, with greater urgency. In terms of allocation, J.P. Morgan maintains an overweight position on Chinese equities in its emerging-market and Asian portfolios and maintains its year-end 2026 base-case targets of 100 points for the MXCN and 5,200 points for the CSI 300, corresponding to consensus EPS growth of 14% and 25%, respectively. Liquidity remains ample but has not returned to the excessive levels of June; AI's relative fundamental advantages are expected to support a rebound in related stocks during the remainder of the third quarter of 2026, although liquidity volatility may make the process uneven. Given their greater exposure to AI and physical AI, the report favors the CSI 300, STAR 50, and ChiNext, while placing relatively less emphasis on the Hang Seng China Enterprises Index and Hang Seng Index. At the individual-stock level, the report recommends domestic AI supply-chain companies such as Moore Threads H, AccoTEST Technology A, JCET A, AMEC A, and NAURA Technology Group A to capture domestic supply-chain share gains and opportunities arising from the total addressable market for large models. It expects Z AI, as well as global supply-chain companies such as Zhongji Innolight A and Victory Giant Technology H, to benefit from improved risk-reward profiles and a new round of ARR growth. Diversified non-AI allocation choices include Meituan, Bank of China H, Bank of Ningbo, CICC H, Innovent Biologics, BYD H, and China Resources Land. The report also believes that policy measures balancing equity financing and share repurchases may support the high-shareholder-return theme in the second half of 2026.

Analysis framework

The report first compares second-quarter EPS, margins, the proportion of earnings beats, and next-twelve-month earnings revisions for the MXCN and CSI 300 to confirm broad market divergence. It then analyzes revenue, profit, cash flow, inventory, and breakeven paths layer by layer across the upstream, midstream, and downstream portions of the AI value chain and pure-play large-model companies, followed by cross-validation against corporate results in healthcare, new energy vehicles, smartphones, solar photovoltaics, consumer, and real estate. Finally, it combines exports, industrial production, retail sales, and liquidity conditions to translate industry earnings differences into index preferences, thematic views, and stock selection.

Methodology notes

• Corporate Fundamentals and Financial Framework

  Quarterly Earnings Breakdown and Consensus Estimate Revisions

  The report combines EPS growth, margin changes, the proportion of earnings beats, and next-twelve-month EPS revisions to determine whether earnings improvement is broad-based or concentrated in a small number of industries.

• Industry/Value Chain Analysis FrameworkUpstream, Midstream, and Downstream Value Chain Transmission

  Upstream, Midstream, and Downstream AI Value Chain Breakdown

  The report separately examines equipment, foundries, chips, large models, and internet platforms to explain how AI demand translates into revenue, profit, capital expenditure, and cash flow across different parts of the value chain.

• Corporate Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Conversion of ARR into Operating Leverage and Breakeven

  For pure-play large-model companies, the report no longer focuses solely on revenue growth, but instead examines whether revenue growth can drive margin improvement and when the companies can break even.

• Industry/Value Chain Analysis FrameworkVolume-price decomposition

  Breakdown of Sales Volume, Pricing, and Cost Factors

  The report uses rising memory-chip volumes and prices, higher average selling prices at Transsion, falling photovoltaic glass prices, and rising memory costs at Xiaomi to distinguish the specific drivers of changes in revenue and profit.

• Event-Driven Strategy and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of Actual Results, Company Guidance, and Consensus Expectations

  The report analyzes post-earnings market reactions and potential rerating conditions through differences such as SMIC and Hua Hong exceeding guidance, Tencent beating expectations, and Baidu falling short of expectations.

• Industry/Value Chain Analysis FrameworkSupply-demand framework

  Domestic Demand, External Demand, and Industry Pricing Pressure

  Based on weak consumer and real estate demand, the buffer provided by exports, and falling solar photovoltaic prices, the report assesses the cyclical conditions and policy pressures facing different industries.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chinese equities, MXCN, and CSI 300

  The report maintains an overweight position on Chinese equities and keeps its year-end 2026 base-case targets for the MXCN and CSI 300 at 100 points and 5,200 points, respectively.

  Strengths

  AI, semiconductors, healthcare, and export-related manufacturing provide earnings support, while market liquidity remains ample.

  Weaknesses

  Earnings in consumer, real estate, and certain traditional industries are weak, and margins among MXCN companies that have reported results are still contracting.

  Comparison

  The report favors the CSI 300, STAR 50, and ChiNext, while placing relatively less emphasis on the Hang Seng China Enterprises Index and Hang Seng Index.

  Risks

  Liquidity volatility may make the path of an AI rebound uneven, while slower exports could also weaken the economic buffer.

• Domestic AI supply chain: Moore Threads H, AccoTEST Technology A (688372.SH), JCET A (600584.SS), AMEC A (688012.SS), NAURA Technology Group A (002371.SZ)

  The report recommends these companies to capture domestic supply-chain market-share gains and expansion of the total addressable market for large models.

  Strengths

  Second-quarter results showed strong growth across semiconductor equipment, foundry, and chip segments; AMEC's reported profit growth was high.

  Weaknesses

  AMEC's non-recurring gains amplified reported profit, and adjusted profit growth was significantly lower than disclosed net profit growth.

  Comparison

  Compared with pure-play large-model companies, upstream hardware companies have already demonstrated more direct earnings realization.

  Risks

  The size of the large-model market remains subject to debate, and thematic performance will also be affected by liquidity volatility.

• Z AI-H (2513.HK) and MiniMax

  ARR is growing rapidly, but the market's pricing focus has shifted toward operating leverage and the timing of breakeven.

  Strengths

  Z AI's MaaS ARR increased 6.4-fold in four months to RMB1.7 billion; MiniMax's ARR doubled in two months, with API revenue accounting for more than 50%.

  Weaknesses

  An open-ended revenue-growth narrative is insufficient to support near-term valuation expansion, and the companies still need to demonstrate that margins can improve.

  Comparison

  The report expects Z AI to break even in 2028 and MiniMax in 2030, while clients estimate that the industry overall will break even in 2028 to 2029.

  Risks

  If a margin inflection point is slow to emerge, near-term rerating potential may remain limited.

• CXO and Innovative-drug Companies

  The report views healthcare as a major structural growth theme alongside AI.

  Strengths

  WuXi AppTec, GenScript, BeiGene, and CSPC Innovation all showed rapid revenue or adjusted profit growth, and some innovative-drug companies have entered the profitability stage.

  Weaknesses

  GenScript's GAAP net loss widened to US$129 million due to share-based compensation.

  Comparison

  Healthcare next-twelve-month EPS was revised upward by 7.9% quarter to date, above the overall MXCN index's 2.6%.

  Risks

  The report did not identify other explicit risks for this asset group.

• Transsion Holdings, CATL, and Geely

  Globalization, premiumization, and export orientation make these companies relative beneficiaries of the limited progress in “anti-involution.”

  Strengths

  Transsion benefited from higher average selling prices in emerging markets; CATL's energy-storage revenue grew 87.5%; Geely benefited from premiumization and overseas expansion.

  Comparison

  The three companies performed better than Xiaomi and Fuyao Glass, which were dragged down by domestic competition, costs, or foreign-exchange factors.

• Consumer, Real Estate, and Solar Photovoltaic Sectors

  These sectors continue to reflect weakness in the traditional economy and mass-market domestic demand and represent the pressured side of the market's polarization.

  Strengths

  Trina Solar's reported net loss narrowed from the same period last year, while direct sales through iMoutai increased 274%.

  Weaknesses

  Moutai recorded its first half-year profit decline in five years, Poly Developments experienced simultaneous declines in delivery volume and margins, and Xinyi Solar's net profit fell 94.8%.

  Comparison

  Their earnings trends are significantly weaker than those of AI, semiconductors, CXO, and innovative drugs.

  Risks

  Domestic demand remains persistently weak, the real estate correction has not yet bottomed, and falling photovoltaic glass prices continue to suppress earnings.

• Diversified Non-AI Allocation: Meituan (3690.HK), Bank of China H (3988.HK), Bank of Ningbo A (002142.SZ), CICC H (3908.HK), Innovent Biologics (1801.HK), BYD H, China Resources Land (1109.HK)

  The report lists these companies as diversified allocation choices outside AI.

  Comparison

  In the company table, Meituan is rated Neutral, while the other listed companies with ratings are rated Overweight.

Key data

• Earnings Reporting ProgressApproximately 18% for both the MXCN and CSI 300Percentage of constituents by number as of August 18, 2026
• CSI 300 Second-quarter EPSUp 32.0% year over yearMargins expanded by 140 basis points, and 54% of companies beat expectations
• MXCN Second-quarter EPSUp 4.0% year over yearMargins contracted by 93 basis points
• Second-half 2026 Consensus EPS ForecastCSI 300 growth of 34.1%; MXCN growth of 14.7%Both are year-over-year growth forecasts
• MXCN Next-twelve-month EPS RevisionsHealthcare +7.9%; information technology +7.5%; index +2.6%Quarter to date in 2026
• SMIC Quarterly Revenue and Gross MarginUS$3.01 billion; 25.3%Revenue increased 36% year over year and 20% quarter over quarter, both significantly above guidance
• GigaDevice First-half ResultsRevenue of RMB11.57 billion; net profit of RMB6.86 billionUp 179% and 1,092% year over year, respectively
• Tencent Second-quarter Free Cash Flow-RMB13.8 billionCapital expenditure reached RMB52.8 billion, and free cash flow turned negative for the first time
• Large-model Breakeven Forecasts2028 for Z AI; 2030 for MiniMaxThe general expectation from industry clients is 2028 to 2029
• WuXi AppTec First-half Adjusted Net ProfitRMB10.57 billionUp 89.4% year over year, with second-quarter growth of 93.6%
• BeiGene Full-year Revenue GuidanceUS$6.6 billion to US$6.8 billionSecond-quarter revenue grew 30%, and the company raised its full-year guidance
• July Export GrowthUp 23.9% year over yearIn US dollar terms, providing an external-demand buffer for economic growth
• Year-end 2026 Index TargetsMXCN at 100 points; CSI 300 at 5,200 pointsBase-case targets corresponding to consensus EPS growth of 14% and 25%

Impact & implications

The report believes that earnings opportunities in Chinese equities remain concentrated primarily in innovative industries rather than arising from a broad recovery in domestic demand. The earnings advantages of AI and healthcare support continued preference for related industries and indices with greater AI exposure, but investors need to distinguish among upstream earnings realization, downstream capital-expenditure pressure, and the lack of operating leverage at pure-play large-model companies. Whether the traditional economy improves will depend more heavily on export resilience and its impact on the scale of fiscal stimulus; if external demand slows materially, the urgency of stronger policies for consumer, real estate, and infrastructure may increase.

Risks

• Although market liquidity is ample, volatility may make the AI sector's rebound during the third quarter of 2026 relatively uneven.
• If pure-play large-model companies cannot translate ARR growth into margin improvement and operating leverage, near-term valuation expansion will remain limited.
• High capital expenditure by downstream AI platforms may continue to squeeze net profit and free cash flow.
• If export growth falls from the current level above 20% to the mid-single digits, the buffer provided by external demand to the economy and corporate earnings will weaken significantly.
• Consumer and real estate have yet to establish a clear bottom, while falling solar photovoltaic prices continue to suppress industry earnings.

What to watch

• Track the margin inflection points for Z AI and MiniMax and their paths toward breakeven in 2028 and 2030, respectively.
• Monitor whether strong upstream AI orders and revenue can continue to translate into cash flow, while watching the impact of inventory and non-recurring gains.
• Track whether export growth falls materially from above 20% to the mid-single digits, which is the report's key threshold for assessing the urgency of fiscal stimulus.
• Monitor whether policies such as consumer subsidies, real estate easing, and accelerated infrastructure investment are strengthened after external demand weakens.
• Track whether progress in “anti-involution” spreads from companies benefiting from premiumization and overseas expansion to still-pressured sectors such as solar photovoltaics.
• Monitor whether policies balancing equity financing and share repurchases can continue to support the high-shareholder-return theme in the second half of 2026.