Second-quarter earnings remain divergent: AI and healthcare innovation lead, while domestic demand, real estate, and solar remain under pressure

Overview

The report reviews 2Q26 earnings for Chinese equities, with the core conclusion that the market continues to exhibit a pronounced two-speed structure: AI, semiconductors, and healthcare innovation are driving earnings growth, while traditional-economy areas such as consumer, real estate, and solar remain under pressure. Based on earnings divergence, thematic exposure, and liquidity conditions, J.P.Morgan maintains its Overweight view on Chinese equities and favors onshore indices with greater exposure to AI and “physical AI.”

Core views

First, 2Q26 earnings further confirm the “split-screen” pattern in China's economy and equity market. Innovative sectors such as the AI ecosystem, CXOs, and innovative drugs maintained strong earnings growth, while weak domestic demand continued to weigh on consumer staples and mass-market real estate-related businesses. Quarter-to-date, next-twelve-month EPS estimates for MXCN healthcare and information technology were revised upward by 7.9% and 7.5%, respectively, well above the overall index's 2.6%. Meanwhile, solar companies represented a high proportion of the constituents with the largest 2026 EPS downgrades, indicating uneven progress in the industry's anti-involution efforts. As of August 18, 2026, approximately 18% of the constituents in both MXCN and the CSI-300 had reported earnings. CSI-300 companies that had reported recorded 32.0% YoY EPS growth in 2Q, a 140-bp margin expansion, and earnings beats at 54% of companies; consensus expects their EPS growth to accelerate further to 34.1% in 2H26. In comparison, MXCN companies that had reported saw 2Q EPS grow only 4.0%, with margins contracting by 93 bps, although consensus expects growth to improve to 14.7% in 2H26. Divergence was also evident within sectors: driven by semiconductors and AI hardware, consensus 2Q EPS growth for the CSI-300 information technology sector reached 64.7%. MXCN information technology EPS declined 18.4%, primarily due to a 42.6% decline in Xiaomi's adjusted net profit as a single-stock effect, which the report did not regard as a broad-based deterioration across the industry. Upstream segments of the AI supply chain delivered the strongest results. SMIC's revenue reached a record US$3.01 billion, up 36% YoY and 20% QoQ, significantly exceeding guidance of 14%-16% QoQ growth, while its 25.3% gross margin also exceeded guidance of 20%-22%. Hua Hong Semiconductor reported revenue of US$718 million, up 27% YoY, and a gross margin of 16.5%, exceeding guidance of 14%-16%. Among chip companies, GigaDevice's 1H revenue was Rmb11.57 billion, up 179% YoY, while net profit was Rmb6.86 billion, up 1,092% YoY; 2Q net profit was Rmb5.40 billion, up 269% QoQ, mainly driven by higher memory-chip volumes and prices. Hygon Information reported 1H revenue of Rmb9.1 billion and net profit of Rmb1.8 billion, up 67% and 50% YoY, respectively, while 2Q net profit reached a record Rmb1.11 billion, up 61% QoQ. However, earnings quality and cash flow differed significantly among AI companies. Cambricon reported 1H revenue of Rmb6.0 billion and net profit of Rmb2.3 billion, up 108% and 123% YoY, respectively, but 2Q revenue grew only 7.8% QoQ, operating cash flow fell 66% to Rmb310 million and turned negative in 2Q, and inventory rose to Rmb8.25 billion; its share price declined 6.3% after the results. AMEC guided for 1H revenue of Rmb6.69 billion, up 35% YoY, and net profit of Rmb2.7 billion to Rmb2.9 billion, up 282%-311% YoY, but net profit excluding non-recurring gains was only Rmb1.0 billion to Rmb1.2 billion, up 86%-123% YoY, indicating that one-off gains inflated reported growth. Downstream, Tencent reported revenue of Rmb204.8 billion and adjusted net profit of Rmb68.4 billion, up 11% and 9% YoY, respectively. Net profit exceeded consensus, but capital expenditure of Rmb52.8 billion caused free cash flow to turn negative for the first time at negative Rmb13.8 billion and triggered a 4.5% share-price decline. Baidu's 2Q revenue was Rmb31.3 billion, down 4% YoY and below expectations, while net profit was Rmb2.32 billion, down 68% YoY. Its AI revenue nevertheless reached Rmb12.5 billion, accounting for 50% of core revenue, while AI cloud infrastructure revenue grew 50% to Rmb7.3 billion, although traditional search and iQIYI were drags. The valuation focus for pure-play foundation model companies is shifting from ARR expansion to the realization of profitability. Z AI's MaaS ARR reached Rmb1.7 billion, or 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, in a liquidity environment that remains ample but is no longer extreme, the market is unwilling to extrapolate open-ended revenue stories indefinitely, and recent valuation rerating depends more on margin inflection points and operating leverage. J.P.Morgan expects Z AI to break even in 2028 and MiniMax in 2030, broadly consistent with clients' expectations that the overall industry will break even in 2028-2029. Healthcare is another strong theme. WuXi AppTec's 1H revenue was Rmb28.90 billion, up 38.9% YoY, including 48.0% growth in continuing operations. Adjusted net profit was Rmb10.57 billion, up 89.4% YoY, with 2Q standalone revenue and adjusted net profit growth accelerating to 47.7% and 93.6%, respectively. GenScript's 1H revenue from continuing operations was US$404 million, up 27.3% YoY, and adjusted net profit was US$62.5 million, up 203.3% YoY, although its GAAP net loss widened to US$129 million due to share-based compensation. Among innovative drug companies, BeOne Medicines reported 2Q revenue of US$1.705 billion, up 30% YoY, and GAAP net profit of US$237 million, up 151% YoY. Its 1H net profit under A-share accounting standards was Rmb3.27 billion, up 627% YoY; global sales of zanubrutinib reached US$1.2 billion in 2Q, up 31% YoY, and the company raised its full-year revenue guidance to US$6.6 billion-US$6.8 billion. CSPC Innovation reported 1H revenue of Rmb3.24 billion, up 208.7% YoY, and net profit of Rmb1.26 billion, turning profitable. CSPC Pharmaceutical guided for 1H net profit attributable to shareholders of Rmb5.9 billion-Rmb6.2 billion, up 131%-143% YoY, a significant rebound from the 41.8% profit decline in 1Q. New-economy companies displayed a divergence between strong beneficiaries of globalization and weak companies under pressure from domestic competition and costs, suggesting some progress in anti-involution efforts, albeit still limited in scope. Transsion Holdings benefited from higher ASPs in emerging markets, generating 1H revenue of Rmb35.43 billion and net profit of Rmb1.77 billion, up 21.9% and 46.2% YoY, respectively. Xiaomi's 2Q revenue was Rmb108.9 billion, down 6.1% YoY, while adjusted net profit was Rmb6.22 billion, down 42.6% YoY. Higher memory costs and Rmb2.6 billion in electric-vehicle losses offset the contribution from 17% growth in electric-vehicle and innovative-business revenue to Rmb24.9 billion. In the new energy vehicle supply chain, CATL reported 1H revenue of Rmb276.9 billion and net profit of Rmb43.28 billion, up 54.8% and 42.0%, respectively, while energy-storage revenue grew 87.5% to Rmb53.3 billion. Geely Automobile leveraged premiumization and overseas expansion to generate 1H revenue of Rmb173.6 billion and core net profit of Rmb9.68 billion, up 15% and 46%, respectively. Fuyao Glass's 1H revenue grew only 2.4% to Rmb21.97 billion, while net profit declined 17.4% to Rmb3.97 billion, mainly due to approximately Rmb1.4 billion in foreign-exchange losses. Solar remained weak: Xinyi Solar's 1H revenue was Rmb8.43 billion, down 22.9% YoY, while falling glass prices reduced net profit to Rmb39 million, down 94.8% YoY. Trina Solar's 1H net loss narrowed from Rmb2.92 billion in the prior-year period to Rmb270 million, but its adjusted loss remained Rmb2.89 billion. Consumer and real estate continued to represent the main pressures on the old economy. Kweichow Moutai's 1H revenue was Rmb92.28 billion, up 1.3% YoY, while net profit declined 1.95% YoY to Rmb44.52 billion, marking its first half-year profit decline in five years. Although direct sales through iMoutai grew 274%, sell-through in traditional channels remained weak. Retail sales grew only 0.6% YoY in July, below 1.0% in June, with cumulative growth of 1.2% in the first seven months of 2026. Poly Developments reported 1H revenue of Rmb102.90 billion, down 12.0% YoY, and net profit of Rmb1.93 billion, down 39.0% YoY. Simultaneous declines in delivery volume and margins indicated that the real estate adjustment had not yet bottomed. Macro data further reflected how external demand and manufacturing offset weak domestic demand. Industrial production grew 4.5% YoY in July, including 13.8% growth in high-tech manufacturing and 9.7% growth in equipment manufacturing. Exports in US-dollar terms grew 23.9% YoY, providing an important buffer for GDP. The report regards export growth as a key threshold for the intensity of policy support: surveyed onshore investors indicated that if export growth slows from the current level of more than 20% to the mid-single digits, the external-demand buffer would weaken and policymakers might introduce more aggressive fiscal stimulus, such as consumer subsidies, real estate easing, and accelerated infrastructure spending, with greater urgency. Strategically, J.P.Morgan maintains an Overweight allocation to Chinese equities within emerging markets and Asia and maintains its year-end 2026 base-case targets of 100 for MXCN and 5,200 for the CSI-300, supported by consensus YoY EPS growth of 14% and 25%, respectively. Liquidity remains ample but has not returned to the excessive levels observed in June. Leading AI fundamentals could support a rebound in ecosystem-related stocks during the remainder of 3Q26, although liquidity disruptions could make the process volatile. Based on exposure to AI and “physical AI” themes, the report favors the CSI-300, STAR 50, and ChiNext Index over the Hang Seng China Enterprises Index and Hang Seng Index. It also recommends domestic AI supply-chain companies including Iluvatar CoreX, V-Test, JCET, AMEC, and NAURA, and expects Z AI, Zhongji Innolight, and Victory Giant to catch up on improved risk-reward and renewed ARR acceleration. Top diversified non-AI picks include Meituan, Bank of China H-shares, Bank of Ningbo, CICC H-shares, Innovent Biologics, BYD H-shares, and China Resources Land. Policymakers' measures to balance equity financing and share buybacks could also support the high-shareholder-return theme in 2H26.

Analysis framework

The report first compares EPS growth, margin changes, the proportion of earnings beats, and 2H26 consensus expectations among reporting MXCN and CSI-300 companies, then breaks down earnings differences across sectors such as information technology, healthcare, consumer, and real estate. It subsequently examines revenue, profit, cash flow, and capital expenditure from upstream to downstream along the AI supply chain and assesses earnings quality based on gaps between companies' actual results and management guidance or market consensus. Finally, the report combines industry results with exports, industrial production, retail sales, liquidity, and thematic index exposure to formulate index preferences, thematic allocations, and stock portfolios.

Methodology notes

• Event-Driven Trading and Behavioral FinanceExpectation Gaps/Expectation Management

  Comparison of actual results with guidance, consensus expectations, and EPS revisions

  By assessing whether earnings exceeded expectations, whether gross margins surpassed management guidance, and whether future EPS estimates were revised upward or downward, the report identifies gaps between market expectations and actual operating results.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Cross-checking net profit, adjusted profit, cash flow, and non-recurring gains

  The report examines not only reported net profit but also adjusted profit, operating cash flow, free cash flow, inventory, and one-off gains to determine whether growth can translate into sustainable profitability.

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

  Layered analysis of the AI supply chain

  The report divides the AI ecosystem into equipment, foundries, chips, models, and downstream platforms, comparing how capital expenditure and demand produce different revenue, profit, and cash-flow outcomes across each segment.

• Industry/Supply Chain Analysis FrameworkVolume-price decomposition

  Decomposition of changes in sales volume, prices, ASPs, and costs

  The report explains changes in companies' revenue and profit using factors such as simultaneous increases in memory-chip volumes and prices, higher ASPs in emerging markets, lower solar-glass prices, and rising memory costs.

• Cycle and Business Momentum FrameworkBusiness Momentum Inflection Analysis

  Identification of industry earnings and margin inflection points

  The report assesses the stage of the business cycle for each industry based on accelerating CXO growth, innovative drug companies turning profitable, continued solar losses, and breakeven timelines for foundation model companies.

• Quantitative/Factor/Portfolio Theory

  Comparison of thematic index exposure

  The report compares the relative exposure of different Chinese equity indices to themes such as AI and “physical AI,” and accordingly favors the CSI-300, STAR 50, and ChiNext Index over the Hang Seng China Enterprises Index and Hang Seng Index.

Asset mapping & comparison

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

• CSI-300

  A preferred Chinese equity index in the report, with a year-end 2026 base-case target of 5,200.

  Strengths

  Reporting companies recorded 32.0% YoY EPS growth in 2Q and a 140-bp margin expansion, while the index has relatively high exposure to AI and “physical AI” themes.

  Weaknesses

  As of August 18, 2026, only approximately 18% of constituents had reported 2Q earnings.

  Comparison

  The report prefers the CSI-300 over the Hang Seng China Enterprises Index and Hang Seng Index.

  Risks

  Liquidity disruptions could make the rebound volatile.

• MXCN

  One of the overall Chinese equity allocation benchmarks, for which the report maintains a year-end 2026 target of 100.

  Strengths

  Consensus expects 14.7% YoY EPS growth in 2H26, while next-twelve-month EPS revisions for healthcare and information technology are leading.

  Weaknesses

  Reporting companies recorded only 4.0% EPS growth in 2Q, while margins contracted by 93 bps.

  Comparison

  Near-term earnings growth and margin performance are weaker than those of the CSI-300.

  Risks

  Earnings pressure from domestic demand, real estate, and certain leading new-economy companies could weigh on the index.

• STAR 50, ChiNext Index

  Because of their exposure to AI and “physical AI” themes, the report lists them alongside the CSI-300 as relatively preferred indices.

  Strengths

  More direct exposure to the innovation themes that the report believes have leading fundamentals.

  Comparison

  The report prefers them over the Hang Seng China Enterprises Index and Hang Seng Index.

  Risks

  A rebound in the AI theme could be affected by liquidity volatility.

• Iluvatar CoreX 9903.HK, V-Test 688372.SH, JCET 600584.SS, AMEC 688012.SS, NAURA 002371.SZ

  Domestic AI supply-chain companies recommended by the report amid continued debate over the total addressable market for foundation models.

  Strengths

  They benefit from renewed attention among onshore investors to domestic supply-chain market-share gains and from strong growth in upstream equipment, foundries, and chips.

  Weaknesses

  AMEC's reported net profit was boosted by non-recurring gains, while adjusted profit growth was lower.

  Comparison

  The report prefers companies that can benefit from domestic supply-chain market-share gains.

  Risks

  Realization of AI demand, earnings quality, and market liquidity volatility.

• Z AI 2513.HK, Zhongji Innolight A-shares, Victory Giant H-shares

  The report expects these foundation model or global AI supply-chain companies to catch up on improved risk-reward and renewed ARR acceleration.

  Strengths

  Z AI's MaaS ARR reached Rmb1.7 billion as of March 2026, increasing 6.4-fold in four months.

  Weaknesses

  The valuation focus for pure-play foundation model companies has shifted to the realization of profitability; Z AI is not expected to break even until 2028.

  Comparison

  Relative to AI-themed companies that have already rallied, the report believes they have catch-up potential.

  Risks

  If margin inflection points fail to emerge, near-term valuation expansion could remain constrained.

• Meituan, Bank of China H-shares, Bank of Ningbo, CICC H-shares, Innovent Biologics, BYD H-shares, China Resources Land

  The report's top diversified picks outside the AI sector.

  Strengths

  They reduce the portfolio's dependence on a single AI theme.

  Weaknesses

  The report does not detail the operating strengths of each company; Meituan is rated N in the company list, while most of the other listed securities are rated OW.

  Comparison

  They serve as allocation complements outside the AI theme.

Key data

• Earnings reporting progressApproximately 18%As of August 18, 2026, approximately 18% of the constituents in both MXCN and the CSI-300 had reported 2Q26 earnings
• MXCN next-twelve-month EPS revisionsHealthcare +7.9%, information technology +7.5%, overall index +2.6%Quarter-to-date revisions
• CSI-300 2Q26 EPS+32.0% YoYMargins expanded by 140 bps, and 54% of companies beat earnings expectations; consensus 2H26 growth is 34.1%
• MXCN 2Q26 EPS+4.0% YoYMargins contracted by 93 bps; consensus 2H26 growth is 14.7%
• Information technology sector divergenceCSI-300 +64.7%, MXCN -18.4%Consensus 2Q26 EPS growth; MXCN was mainly dragged down by Xiaomi as a single-stock effect
• SMIC 2Q revenue and gross marginUS$3.01 billion; 25.3%Revenue increased 36% YoY and 20% QoQ, above guidance of 14%-16% QoQ growth; gross margin exceeded guidance of 20%-22%
• Z AI MaaS ARRRmb1.7 billion, approximately US$250 millionAs of March 2026, a 6.4-fold increase in four months
• Foundation model breakeven forecastsZ AI: 2028; MiniMax: 2030J.P.Morgan forecasts; clients expect the overall industry to break even in 2028-2029
• WuXi AppTec 1H resultsRevenue Rmb28.90 billion; adjusted net profit Rmb10.57 billionUp 38.9% and 89.4% YoY, respectively; revenue from continuing operations grew 48.0%
• BeOne Medicines full-year revenue guidanceUS$6.6 billion-US$6.8 billionRaised after 2Q revenue grew 30% YoY and GAAP net profit grew 151% YoY
• July retail sales+0.6% YoYBelow June's 1.0%; cumulative growth in the first seven months of 2026 was 1.2%
• July exports+23.9% YoYIn US-dollar terms; the report believes this provides an important buffer for GDP
• Year-end 2026 index targetsMXCN 100; CSI-300 5,200The base cases are supported by consensus YoY EPS growth of 14% and 25%, respectively
• Stock ratings shown in the report and closing prices on August 21, 2026AMEC 688012.SS: Rmb362.50/OW; Bank of China H-shares 3988.HK: HK$5.51/OW; Bank of Ningbo 002142.SZ: Rmb34.06/OW; CICC 3908.HK: HK$21.04/OW; China Resources Land 1109.HK: HK$35.38/OW; Iluvatar CoreX 9903.HK: HK$403.80/OW; Innovent Biologics 1801.HK: HK$102.40/OW; JCET 600584.SS: Rmb78.57/OW; Meituan 3690.HK: HK$85.00/N; NAURA 002371.SZ: Rmb714.43/OW; V-Test 688372.SH: Rmb123.05/OW; Z AI 2513.HK: HK$1,129.00/OWPrices and ratings in the report's company list; OW means Overweight and N means Neutral

Impact & implications

The report believes that index and sector performance in Chinese equities will continue to be driven by earnings divergence rather than a broad-based economic recovery. The earnings and EPS revision advantages of AI, semiconductors, CXOs, and innovative drugs support related themes and indices with high exposure, while weakness in consumer, real estate, and solar constrains old-economy sectors. Liquidity is sufficient to support the market but is no longer extremely loose, so the continuation of the AI rally will depend more on the realization of margins, cash flow, and breakeven. If export growth falls materially from above 20% to the mid-single digits, the weakening external-demand buffer could increase the urgency of fiscal stimulus.

Risks

• Although liquidity is ample, it is no longer extreme, and liquidity disruptions could make the AI-themed rebound volatile.
• If pure-play foundation model companies cannot demonstrate that ARR growth can translate into operating leverage and margin improvement, near-term valuation expansion could remain constrained.
• High capital expenditure by downstream AI platforms could weigh on net profit, operating cash flow, and free cash flow.
• Consumer demand and sell-through in traditional channels remain weak, while real estate delivery volumes and margins are declining, and the industry adjustment has not yet bottomed.
• If export growth falls from the current level of more than 20% to the mid-single digits, the external-demand buffer for GDP will weaken significantly.
• Rising memory costs and losses in electric-vehicle businesses could continue to weigh on margins at related consumer electronics companies.
• Lower solar-glass prices and limited progress in the industry's anti-involution efforts could keep solar companies' earnings under pressure.

What to watch

• Watch whether the AI ecosystem can achieve a sustained rebound during the remainder of 3Q26 on the back of leading fundamentals.
• Track margin inflection points and breakeven progress at Z AI, MiniMax, and the broader foundation model industry.
• Monitor whether AI companies' ARR growth can translate into operating leverage, net profit, and free cash flow.
• Monitor whether export growth falls from above 20% to the mid-single digits and whether this triggers consumer subsidies, real estate easing, and accelerated infrastructure spending.
• Watch for signs of a bottom in consumer sell-through, real estate delivery volumes, and margins.
• Track actual progress in anti-involution efforts, premiumization, and overseas expansion across industries such as solar and new energy vehicles.
• Assess the feasibility of MXCN and the CSI-300 achieving consensus EPS growth of 14.7% and 34.1%, respectively, in 2H26.
• Watch whether policy measures balancing equity financing and share buybacks can support the high-shareholder-return theme in 2H26.