According to a research report released by CICC, a comprehensive analysis of income statements, balance sheets, and cash flow statements across listed companies indicates that corporate fundamentals have been on an improving trajectory since the fourth quarter of 2024. In the second quarter of 2026, non-financial corporate earnings grew by 20%, marking the strongest quarterly profit growth in nearly five years.
However, this robust earnings growth masks significant divergence beneath the surface. Geopolitical factors have driven up oil prices and resource costs, pushing profit margins in upstream industries to their highest levels in nearly a decade. Meanwhile, the hardware segment of the AI supply chain has also experienced substantial earnings expansion amid supply shortages. On the other hand, traditional industries continue to underperform despite a low comparison base from the previous year.
In the second quarter of 2026, A-share earnings grew 25.7% year-on-year, the highest single-quarter growth rate in five years. For the first half of the year, net profits attributable to shareholders for the entire A-share market, financial sectors, and non-financial sectors rose 16.2%, 17.1%, and 15.4% year-on-year, respectively. Looking at the second quarter alone, the corresponding net profit growth rates were 25.7%, 32.4%, and 19.9%, all of which accelerated from the first quarter, with figures adjusted for the impact of CXMT.
Within the financial sector, sustained active capital market trading drove non-bank financial earnings up 134.9% year-on-year, with securities firms growing 80%. The insurance sector, buoyed by rising equity markets and a larger market participation base from the prior year, posted a 163% year-on-year surge in second-quarter earnings. For non-financial companies, second-quarter revenue growth reached 6.9%, accelerating from the first quarter, mirroring the trend in nominal GDP growth driven by rising prices, and indicating that earnings improvement is being driven by both higher revenue and expanding margins.
Worth noting is that the renminbi has been appreciating since the second half of 2025, with the pace quickening in the first half of this year. During the same period, foreign exchange losses for non-financial enterprises grew steadily, reaching RMB 107 billion in the first half, representing 5.5% of net profit attributable to shareholders, the highest level in a decade. This has eroded profits for some non-financial companies, particularly those with overseas operations.
The performance divergence was stark in the second quarter. Despite the 20% growth in single-quarter earnings, 40% of industries still reported year-on-year profit declines. The proportion of industries growing more than 20% or 30% did not broaden compared with the previous two quarters. Breaking this down, one major theme was geopolitical tensions in the Middle East pushing up crude oil and certain chemical product prices, while another was AI-driven demand raising prices for some tech hardware and upstream resource materials. Electronics, non-ferrous metals, oil & petrochemicals, and basic chemicals contributed 9.4, 6.5, 4.1, and 2.7 percentage points respectively, meaning these four industries accounted for the bulk of earnings growth in the non-financial sector during the second quarter.
From an upstream-to-downstream perspective, profit divergence widened further in the second quarter, with upstream, midstream, and downstream industries seeing year-on-year earnings growth of 74.6%, 1.0%, and 12.4% respectively. Across board segments, the STAR Market, ChiNext, and Main Board (non-financial) grew 103.5%, 40.8%, and 15.1% year-on-year respectively. Sector-wise, upstream energy & raw materials and TMT delivered exceptional results, with several distinct growth characteristics:
1) Energy & raw materials: Most industries in this segment grew across the board in the second quarter. The US-Iran conflict boosted crude oil and chemical prices, while expanding demand from AI and other emerging industries, combined with supply constraints, kept copper and aluminum prices elevated. Non-ferrous metals, basic chemicals, and oil & petrochemicals saw earnings growth of 106.0%, 73.2%, and 58.8% respectively. Industrial metals grew over 80%, though gold price pullback in the second quarter slowed precious metals profit growth to 20.6%, versus 108% in the first quarter. Coal earnings grew 62.5% year-on-year, supported by limited supply elasticity and a low base. Steel and building materials, tied to the property chain, lagged with earnings down 9.6% and 32.7% year-on-year respectively.
2) Midstream manufacturing: Power equipment & new energy posted 15.3% year-on-year earnings growth. Lithium battery production improved sequentially, while energy storage benefited from overseas demand and data center orders, propelling battery earnings up 73.3%. Wind power equipment, however, fell 57% year-on-year, and the photovoltaic supply chain continued to post losses with widening year-on-year declines. Among other industries, transportation saw earnings drop 14.6% year-on-year, dragged by aviation losses, while shipping grew nearly 30% on rising freight rates, and rail, road, and logistics performed steadily. Machinery and light manufacturing grew 7% and 1.8% respectively. Power & utilities and defense underperformed with 14% and 18% declines, with thermal power's ignition price spread narrowing significantly, resulting in a roughly 35% year-on-year decline.
3) Consumer sectors: Agriculture, forestry, animal husbandry, and fisheries remained in losses in the second quarter on falling hog prices. Consumer industries weakened on soft domestic demand and policy tapering, with food & beverage, autos, retail, and home appliances seeing year-on-year profit declines of 27.2%, 20.2%, 14.3%, and 6.2% respectively. Textiles & apparel and consumer services grew 6.9% and 27.3% respectively from a low base. Pharmaceuticals grew 10.6% year-on-year, with innovative drugs benefiting from BD and internationalization trends. CXO order expectations improved, driving a 38.7% year-on-year increase in second-quarter earnings for the CSI Innovative Drug Index constituents.
4) TMT: Earnings generally maintained high growth in the second quarter. Strong AI computing demand kept hardware product prices rising, with CSI Artificial Intelligence Index constituents posting 95% year-on-year earnings growth. Electronics grew 98.6%, with semiconductors, components, and optical optoelectronics growing 202%, 65%, and 39% respectively. From a theme perspective, sci-tech chips, optical modules, and PCBs saw second-quarter earnings surge 234%, 140%, and 98% year-on-year. Computer sector earnings grew 122%, with computer equipment and internet up 172% and 51% respectively, while media grew 16.4%.
In the context of renminbi appreciation in the first half of 2026, foreign exchange losses grew rapidly for non-financial A-share companies, hitting export-oriented businesses particularly hard. Home appliances, machinery, power equipment & new energy, electronics, and autos saw first-half FX losses equivalent to 1.1%, 1.0%, 0.8%, 0.8%, and 0.7% of their respective revenues.
In summary, the top five industries by year-on-year earnings growth in the second quarter were non-bank financials, computers, non-ferrous metals, electronics, and basic chemicals, while the bottom five were agriculture, construction, building materials, food & beverage, and autos.
Earnings Quality: Upstream Sectors Drive ROE Recovery with Healthy Balance Sheets and Cash Flow
1) Non-financial ROE stabilized and rebounded in the second quarter of 2026, driven primarily by upstream industries. After peaking in the second quarter of 2021, the ROE downturn cycle began to show improvement in 2026, with non-financial A-share ROE (TTM) rebounding approximately 0.5 percentage points from the fourth quarter of 2025. Upstream industries saw significant ROE recovery, while midstream and downstream remained largely unchanged. After four years of decline, the bottom of the ROE cycle for non-financial A-share companies appears confirmed, though internal divergence remains pronounced, especially in traditional domestic demand and consumer sectors.
From a DuPont analysis perspective, the non-financial net profit margin (TTM) has stabilized and rebounded 0.2 percentage points. Upstream industries, in particular, have seen their net profit margins recover for two consecutive quarters, cumulatively up 1.2 percentage points to 7.15%, surpassing the 2022 peak. Foreign exchange losses from renminbi appreciation since the second half of last year have impacted net profit margins by about 0.2 percentage points. Midstream and downstream margins remain weak, showing only tentative signs of stabilizing.
Asset turnover for non-financial companies remained roughly flat sequentially, suggesting this ROE rebound is primarily price-driven. Asset turnover for both new and old economy sectors has seen little change, though old economy industries experienced more pronounced declines over the past two years. In terms of leverage, the asset-liability ratio for non-financial companies was roughly flat year-on-year, but notably, new economy industries saw a clear increase, possibly linked to expansion and leveraging in the AI supply chain.
In summary, the ROE bottom for A-share markets appears further confirmed versus the first quarter. Upstream profit margin expansion is the primary contributor, with some leveraging trends visible in new economy sectors, while asset turnover remains the relatively weak link. Industries with two consecutive quarters of ROE (TTM) improvement include power equipment & new energy, computers, electronics, basic chemicals, consumer services, oil & petrochemicals, and non-ferrous metals, with non-ferrous metals improving 4.9 percentage points to 18.7%.
2) Non-financial capital expenditure continues positive growth, supported by improving financing cash flow. Non-financial A-share capex turned to positive year-on-year growth in the fourth quarter of 2025 and grew another 3.8% in the first half of this year, with both new and old economy sectors showing improving trends. The ratio of corporate financing cash flow to revenue, often a leading indicator for capex, has shown continuously narrowing declines since stabilizing in early 2025, reflecting improved financing conditions and supporting further capex growth recovery in 2026.
The decline in operating cash flow to revenue does not necessarily signal fundamental weakness. It likely reflects increased working capital requirements, as many industries rebuild inventories, which absorbs some operating cash flow. Free cash flow levels have consequently declined, though the free cash flow to equity ratio remains at historically elevated levels.
Looking at the breakdown, traditional industry capex recovery was driven by transportation (51.5% growth), building materials (37.1%), and non-ferrous metals (36.2%) in the second quarter, with basic chemicals, coal, and oil & petrochemicals also turning positive. Real estate, autos, and steel saw capex declines exceeding 20%. Among emerging industries, computers and electronics in the AI supply chain saw notable capex acceleration at 45% and 25% respectively in the second quarter, with components, communication equipment, and semiconductors up 125%, 82%, and 47% respectively. Glass, fiberglass, and minor metals as AI upstream materials also grew over 60% year-on-year. Media, pharmaceuticals, and defense saw capex declines in the second quarter.
Overall, financing demand and investment confidence among A-share companies have improved, with increased willingness for capital expenditure, particularly in high-growth tracks like the AI supply chain and price-driven upstream sectors. However, capacity cycle divergence is evident. While more areas are approaching supply-demand balance after three years of capacity reduction, property chain, auto chain, and photovoltaic sectors with historical oversupply issues continue to contract capex.
3) Balance sheet conditions continue to improve. At the aggregate level, A-share listed companies have returned to balance sheet expansion. Total asset growth for non-financial enterprises has rebounded since bottoming in the third quarter of 2024, with growth excluding real estate rising from a trough of 5.0% to 7.0% in the second quarter of 2026. Financial sector asset expansion began earlier and was larger in magnitude but moderated to around 9% in the second quarter, down 1 percentage point from the fourth quarter of 2025.
A bottom-up aggregation of A-share non-financial companies (excluding real estate, construction, and the three major oil companies) plus high-growth industries (TMT) reveals several notable balance sheet trends:
a) Operating assets and liabilities have further recovered. Advance receipts and contract liabilities, which have some forward-looking significance for revenue, rose to 9.2% growth in the second quarter since bottoming in the third quarter of 2024, showing no significant weakening. Prepayments also rebounded to 21.8% growth, indicating improved operational vitality, with the TMT sector seeing prepayments surge 55.5% year-on-year.
b) Inventory growth continues to rise. Non-financial enterprises saw inventory growth reach 15.2% in the second quarter, with TMT inventory growth at 29.2%, indicating a rapid restocking phase.
c) Construction in progress turned from negative to positive growth at 2.6%, while fixed asset expansion slowed, consistent with capacity cycle patterns.
d) On the liability side, both short-term and long-term borrowings have increased, reflecting improved financing appetite, particularly evident in the TMT sector.
Where to Find Opportunities: Growth and Cyclical Improvement
A-share earnings growth has outperformed macroeconomic performance, and structural divergence continues to intensify. Through a comprehensive analysis of income statements, balance sheets, and cash flow statements in financial reports since 2025, corporate fundamentals have been improving since the fourth quarter of 2024. Second-quarter non-financial earnings grew 20%, the strongest quarterly performance in five years. This high growth masks significant divergence, with geopolitical factors lifting oil and resource prices to push upstream margins to decade highs, and AI hardware chains experiencing substantial earnings growth amid supply shortages, while traditional industries remain weak despite a low base.
Looking ahead to the second half of the year, earnings growth may moderate from second-quarter levels due to a rising base, fading PPI price effects, persistently weak traditional industry fundamentals, and slowing improvement in advance receipt growth. AI supply chains may continue to maintain high momentum, with structural divergence likely to remain pronounced. Additionally, after years of capacity reduction across many A-share industries, an increasing number of sectors are achieving supply-demand gap convergence and capacity clearance. While traditional industries may appear weak on the surface, their fundamentals are actually better than in 2023-2024. Capacity cycle improvement remains an important bottom-up stock selection theme over the next one to two years.
AI supply chain hardware segments are rapidly increasing capital expenditure. Going forward, capacity deployment progress warrants close attention. For segments with lower barriers, if demand growth slows, significant supply-demand imbalance risks may emerge. From growth and cyclical improvement perspectives, combined with semi-annual report information, the following main themes and industries are worth watching:
1) Growth: AI hardware chain earnings are broadly growing strongly, but may face divergence as narratives evolve. Segments with lower barriers and faster capacity deployment face higher risks, while areas with certain demand and difficult-to-relieve capacity bottlenecks should continue to benefit. Optical communications, semiconductor equipment, and upstream power bottleneck-related industries are recommended. Beyond AI, innovative drugs (especially CXO) and grid equipment maintain high industry momentum.
2) Cyclical improvement: More sectors are recovering from cyclical bottoms. Based on capacity cycle perspectives, areas with improving supply-demand patterns such as chemicals, petrochemicals, and construction machinery are worth attention. Non-ferrous metals generally have solid fundamentals, though Federal Reserve tightening risks may affect financial attributes. Export-oriented industries have already priced in sufficient FX loss impact from renminbi appreciation. If appreciation decelerates, trading opportunities may emerge. Pure domestic demand industries continue to recover at a relatively slow pace and require further observation.