Zhitong Decision Reference | This week's three major events are pending, and large funds are still observing

[Editor’s Market View]

Before many events materialize, capital continues to remain in a wait-and-see state, and the Hang Seng Index has also adjusted for four weeks.

Last Friday, the U.S. October non-farm payrolls surprised again, with an increase of 12,000 jobs, compared to an estimate of 105,000, and a downward revision of 31,000 from the previous value to 223,000. This is the lowest monthly employment increase since December 2020. Coupled with hurricanes and strikes, this data can be explained. After the data was released, the probability of the Federal Reserve cutting interest rates by 25 basis points in November rose to 99.7%. U.S. stocks also found a lifeline.

This week, there are three major events in the market: 1. The 12th meeting of the Standing Committee of the 14th National People's Congress will be held from November 4 to 8. 2. The results of the U.S. presidential election are expected to be announced as early as noon Beijing time on November 6. 3. The Federal Reserve will hold a monetary policy meeting from November 6 to 7, with results announced in the early hours of November 8 Beijing time.

Among these, the most critical is the suspense of the U.S. presidential election, as the policies set by different leaders vary greatly. Currently, U.S. media are hyping up Harris's lead in the polls. However, it is difficult to unveil the mystery until the end.

Therefore, this week, large funds will wait for the election to become relatively clear before officially entering the game. If there are short positions, there is no need to be too nervous, as the second batch of the CSI A500 ETF has been "lightning" approved. This will inject more incremental funds into the market.

Others will bet on the favorable news related to the NPC meeting. Industry experts point out that the new round of debt replacement may reach 6 trillion to 10 trillion yuan; local governments may restart the issuance of "replacement bonds" or continue to issue "special refinancing bonds" and "special new special bonds" to alleviate the risk of local debt defaults. It is expected to focus mainly on debt reduction, real estate, and other pro-cyclical directions.

In the automotive sector, the Ministry of Commerce: The EU will send personnel to China for price commitment negotiations regarding the electric vehicle anti-subsidy case. We will closely monitor whether there is progress in the negotiations.

For innovative drugs: Among the list for this year's medical insurance negotiations, many are new drugs that were launched in the first half of the year; this medical insurance negotiation strongly encourages innovative drugs to be included at reasonable prices, vigorously supporting the development of innovative drugs through accelerated clinical applications and other means.

As for the countermeasures in areas like rare earths and self-controllable technologies, it mainly depends on the fermentation of sentiment.

[This Week's Golden Stock]

Innovent Biologics (01801)

Innovent Biologics (01801) announced that Fortvita and Lostrancos have jointly agreed to terminate the subscription agreement.

In the third quarter, the company achieved total product revenue exceeding RMB 2.3 billion, representing a significant year-on-year growth of over 40%. In this quarter: 1) Tyvyt® (sintilimab injection) maintained strong growth momentum, with an increasingly solid market-leading position, and sales of other major products also maintained rapid growth. This is mainly due to the company's broad indications and advantages in national medical insurance catalog coverage and access channels; 2) The company's approved product portfolio has expanded to 11 products, with the new innovative targeted cancer drug, Daberanib® (fursezarese tablets, KRASG12C inhibitor), approved for market launch, making the company's pipeline in lung cancer mutation treatment increasingly complete and the team more mature; and 3) Thanks to competitive products and effective market strategies, the market penetration of the company's new products has accelerated, contributing new driving forces for revenue growth The company is committed to creating key growth drivers for long-term growth in the field of oncology and a comprehensive product line (covering cardiovascular and metabolic, autoimmune, and ophthalmology areas). As of now, the company has obtained approval for 11 products to be marketed, with 5 varieties under review by the National Medical Products Administration, 3 new drug molecules entering Phase 3 or critical clinical studies, and approximately 17 new drug varieties having entered clinical research.

【Industry Observation】

Regarding rare earths, the situation in Myanmar: The Kachin Independence Army (pro-American forces) occupies the rare earth production areas in Kachin State, such as Banwa. Due to the war, mines are halted, ports are closed, and ore shipments have stopped. Our oxalic acid exports have ceased, and technical personnel have been withdrawn. Negotiations for a new supply order are ongoing, with the first round of talks having failed; moreover, it is a sensitive period due to the U.S. elections, and the ownership of Myanmar's rare earth mines still needs to be clarified, making it difficult to resume production before the Spring Festival.

How does supply impact prices, and why haven't prices surged? At the end of September, the Myanmar government offered export incentives, and there was a rush to export before the war and closure, resulting in a large incoming volume that could support supply for about a month. If the production halt exceeds one month, prices will show significant movement. Myanmar's mine supply accounts for over 50% of heavy rare earths such as dysprosium and terbium, and about 10% of light rare earths like praseodymium. Therefore, dysprosium and terbium prices have risen, while praseodymium has not yet shown a significant response.

Looking ahead at supply, some supply has become ineffective, and resuming production is highly unlikely to reach past levels. The implementation of the "Management Regulations" will impose higher-level constraints on imported ores and secondary utilization. Due to environmental protection and looser regulations, Myanmar's mines, which previously served as a "substitute" for domestic heavy rare earth quotas, may see the "Management Regulations" favoring the state-owned system of southern and northern rare earths + Shenghe. Under strong regulation and traceability, some low-cost sources may become ineffective supply, making it difficult for Myanmar's mine supply to return to past high levels.

The industry cost curve is gradually rising. Myanmar's mines typically sit at the bottom of the industry cost curve: under the implementation of the "Management Regulations," some low-cost ore sources that are non-compliant will be abandoned, thus the industry cost curve is expected to rise.

Terminal demand is decent, and supply-demand improvement is clear. Demand for new energy vehicles, two-wheelers, home appliances, and industrial robots is strong, with estimated terminal demand growth of 10-15%; future demand is also expected to maintain an annual growth rate of over 10%. The growth rate of quotas has significantly decreased, with the estimated annual supply growth being only 2-3%.

Both inventory and prices have clearly bottomed out this year. Prices have dipped twice this year to 350,000 yuan/ton, and even the selling pressure before the "Management Regulations" took effect has not broken this level; prices have fallen for two consecutive years, with traders selling off and magnetic material manufacturers reducing inventory cycles, leading to an absolute low point in industry inventory over a five-year dimension.

Key stocks to watch in Hong Kong include Jinli Permanent Magnet (06680), China Aluminum (02600), China Rare Earth (00769), and Minmetals Resources (01208).

【Data Monitoring】

The Hong Kong Stock Exchange has announced that the total number of open contracts for the Hang Seng Index futures (November) is 105,217, with a net open position of 32,109 contracts. The settlement date for the Hang Seng Index futures is November 28, 2024.

From the distribution of bull and bear certificates for the Hang Seng Index at the 20,506 point level, the dense area of bull and bear certificates is close to the central axis, with the Hang Seng Index waiting at the 20,000 point level for the results of the U.S. elections. The chance of a 25-point rate cut at the FOMC meeting is very high, and the context of Powell's press conference is also very important for the market. The Hang Seng Index is bearish this week

[Editor's Note]

CITIC Securities has research reports indicating that in recent years, trade frictions between China and the United States have continued, and foreign capital's risk-averse attitude towards Hong Kong stock assets has persisted. Compared to early 2019, the current proportion of foreign capital holdings in small and mid-cap stocks has decreased by 18 percentage points to 58%, far exceeding the foreign capital sell-off in large-cap stocks. Meanwhile, southbound funds have continuously increased their holdings in Hong Kong stocks during this period, especially with the proportion of holdings in small and mid-cap stocks rising from 7% at the beginning of 2019 to the current 21%. Combined with domestic institutions in Hong Kong, the overall proportion of Chinese capital holdings in small and mid-cap stocks has reached as high as 42%. From the perspective of cumulative capital flow, since 2019, southbound funds have been the main source of incremental capital for small and mid-cap stocks in Hong Kong, and the excess return interval for small and mid-cap stocks has a low correlation with changes in capital flows outside of southbound funds. During the bull market from 2020 to 2021, when small and mid-cap stocks significantly outperformed, southbound funds surged into small and mid-cap stocks at the highest historical rate. Therefore, it can be basically concluded that southbound funds are the main driving force behind the current small and mid-cap market. Based on recent capital flows and valuations, southbound funds may gain pricing power in small and mid-cap stocks.

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