Entering May, the release of quarterly earnings reports has significantly dampened further downward revisions to profit expectations, with pessimistic sentiment largely exhausted. During this earnings blackout period—when the broader index lacks overall elasticity—the market’s focus is expected to shift further toward sectors offering high earnings visibility.
We recommend focusing on three key themes: (1) highly cyclical sectors benefiting from supply-side constraints; (2) AI-driven hard tech beneficiaries of computing power dividends; and (3) broad-based dividend-oriented strategies that offer a premium for high earnings certainty.
In a research report, CITIC Securities noted that Hong Kong-listed companies’ fundamentals evolved from 'intense domestic competition and margin pressure' in 2025 to 'bottoming out and stabilizing' by Q1 2026. In 2025, broad-market profitability was weighed down by domestic price wars and weak domestic demand, yet profits increasingly concentrated in upstream resources and overseas-focused segments.
Q1 2026 earnings confirmed a bottoming and recovery trend in fundamentals, still characterized by strong external demand versus weak domestic demand: globally priced commodities, the overseas expansion premium narrative, and AI core supply chains benefiting from spillovers in overseas computing infrastructure have emerged as key drivers of earnings momentum. In contrast, domestically oriented traditional sectors—such as infrastructure, property-related chains, and automotive—continue to bottom out amid persistent overcapacity and intense domestic competition.
Entering May, the release of quarterly earnings reports has significantly dampened further downward revisions to profit expectations, with pessimistic sentiment largely exhausted. During this earnings blackout period—when the broader index lacks overall elasticity—the market’s focus is expected to shift further toward sectors offering high earnings visibility. We recommend focusing on three key themes: (1) highly cyclical sectors benefiting from supply-side constraints; (2) AI-driven hard tech beneficiaries of computing power dividends; and (3) broad-based dividend-oriented strategies that offer a premium for high earnings certainty.
The main viewpoints of CITIC Securities are as follows:
Hong Kong-listed companies’ 2025 earnings showed widening divergence, with aggregate profits under pressure.
In 2025, Hong Kong-listed equities exhibited resilient revenue growth but significant earnings pressure. Dragged down by AI-related capital expenditure erosion, domestic price wars, and weak consumer demand, earnings growth for the Hang Seng Composite Index and the Hang Seng Index plummeted to 2.4% and 0.6%, respectively. Excluding financials, EBIT turned negative across the board, and ROE declined to 10.1%. Although Hang Seng Tech revenue rose by 10.8%, its earnings contracted by 9.5% year-over-year. Overall earnings delivery deteriorated markedly, falling short of Bloomberg consensus estimates (comparable net profit and ex-financial EBIT were 2.77% and 3.85% below expectations, respectively). Structurally, large-cap stocks demonstrated earnings resilience, while small- and mid-cap firms faced pronounced profit pressure—a clear bifurcation.
Profits increasingly concentrated in upstream resources and overseas-focused premium segments; healthcare and financials delivered independent outperformance.
Sector performance in Hong Kong equities diverged sharply in 2025. Compared to 2024, the materials sector nearly doubled its net profit margin from 4.0% to 7.8%, with ROE rising by 2.6 percentage points—highlighting an extreme cyclical upswing in upstream industries. Although industrial earnings were capped by peaking freight rates, robust engineering project execution drove total EBIT above expectations, underscoring the overseas expansion premium. Both financials and healthcare beat expectations on both revenue and earnings, delivering absolute outperformance: healthcare EBIT growth surged by 42.9 percentage points year-over-year to 51.0%, making it—alongside materials—the only two sectors to see simultaneous improvements in both profit margins and ROE.
In contrast, the discretionary consumption sector saw its net profit margin decline sharply by 1.9 percentage points compared to 2024, and 70% of property and construction stocks missed earnings expectations. Most sectors faced profit compression and were further constrained by rising retained earnings and refinancing pressures, trapping them in a cycle of declining ROE.
Cyclicals exhibited divergent performance, with raw materials and industrial engineering reporting accelerating earnings growth. In 2025, raw materials achieved nearly a 100% profit surge (positive earnings surprise of 8.2%) despite a high base in 2024; gold revenues surged 21.6% year-over-year driven by rising gold prices, while profits soared by 87.1%; industrial engineering posted resilient growth of 28.9%, collectively forming a robust pricing-power defense. However, base metals saw growth slow sharply to 9.2%, with rigid costs causing earnings to fall short of expectations; transportation sector sentiment deteriorated more than anticipated, turning profits negative (-22.2%); oil & gas and coal remained mired in contraction, with 71% and 86% of companies, respectively, missing earnings expectations; and 90% of construction firms underperformed, reflecting severely pressured fundamentals.
Among defensive sectors, consumer retail staged a strong reversal, while agricultural products underwent a sharp correction. In 2025, essential consumer retail rebounded strongly, with earnings growth accelerating to 34.8% year-over-year and 67% of companies beating expectations, making it the standout performer within the sector; telecommunications maintained modest revenue and earnings growth, broadly in line with expectations, acting as a stabilizer; utilities faced revenue contraction (-2.5% YoY), with earnings recovery lagging expectations due to downward pressure on electricity tariffs and demand.
In contrast, the agricultural products segment experienced a severe correction, with revenue growth plummeting from 39.9% in 2024 to just 7.6% in 2025. All companies reported earnings below expectations, with cyclical headwinds far exceeding market optimism.
The financial sector demonstrated resilience, while real estate remained in contraction. The insurance industry sustained double-digit earnings growth of 24.3% in 2025—beating expectations—supported by liability-side improvements and investment income; banks showed exceptional stability, with revenue and earnings rising modestly by 3.0% and 3.4% year-over-year, respectively, in line with forecasts; asset management and brokerage delivered strong results, driving other financials’ earnings growth to 35.9%. In contrast, real estate revenues contracted by 13.2% year-over-year, with earnings growth sliding to -34.0%; over 61% of property developers reported earnings below expectations, as deleveraging and impairment provisions continued to weigh on performance.
Growth sectors such as semiconductors and pharmaceuticals showed signs of bottoming out and recovery, while domestically oriented segments remained under pressure. Semiconductors exhibited early-cycle recovery in 2025, with revenue growth accelerating to 15.1% and earnings turning positive at 47.5%; over 50% of companies outperformed expectations, indicating a stronger-than-anticipated cyclical upturn. Software services posted solid revenue growth of 12.8% year-over-year, maintaining relatively stable earnings despite a negative expectation bias. Other healthcare segments (medical devices and CXO) and support services sustained steady growth with positive earnings surprises. Conversely, traditional domestically focused growth sectors continued to face significant earnings pressure.
Structural divergence persisted into Q1 2026, though overall performance stabilized and began to recover.
In Q1 2026, reported revenue growth for disclosing companies rebounded to 3.7% year-over-year, while earnings and EBIT (excluding financials) saw their declines narrow significantly to -0.9% and -0.2%, respectively, signaling a bottoming-out and stabilization of fundamentals. Strength in cyclicals and financials, along with a recovery in consumer sectors, served as key stabilizing forces. At the sub-sector level, the pattern of strong external demand and weak domestic demand persisted: commodity tailwinds drove metals and gold earnings to surge by 98.8% and 97.0% year-over-year, respectively; the battery supply chain saw revenue jump by 52.5%, continuing to realize overseas premium benefits; securities firms’ asset management arms benefited from improved trading activity, delivering strong revenue and earnings growth; and banks remained稳健 (steady). In contrast, traditional infrastructure and real estate-linked sectors remained pressured by sluggish domestic demand.
Recovery within the growth sector remained highly divergent: AI core supply chains and mature-node semiconductors began to deliver tangible earnings; while derivative issues stemming from weak domestic demand showed no meaningful improvement in Q1, though the pace of deterioration has started to moderate; and high-growth trajectories in CXO and pharmaceuticals decelerated notably.
Investment Advice:
Earnings outlook remains structurally divergent, with focus shifting toward high-certainty opportunities. Following the conclusion of May’s earnings season, downward revisions to 2026 earnings expectations for Hong Kong-listed equities have narrowed substantially, suggesting that pessimistic sentiment has largely been priced in. As the market enters an earnings blackout period and aggregate earnings lack upside elasticity, trading is expected to gravitate toward segments offering high earnings visibility and strengthening sectoral momentum.
Based on earnings growth expectations and adjustment dynamics, we recommend focusing on three key themes: (1) strongly cyclical sectors under supply constraints, including energy, shipping, and strong industrial metals; (2) AI-driven hard-tech segments benefiting from computing power tailwinds; and (3) broadly defined ‘dividend-plus’ sectors with steadily improving earnings outlooks, which may command premium valuation support amid heightened risk premiums and external uncertainties.
Risk Factors:
Global geopolitical conflicts have escalated once again; U.S.-China relations have deteriorated more than expected; earnings expectations for Hong Kong-listed stocks have been broadly revised downward again; and the implementation of domestic policies and economic recovery have fallen short of expectations.
Editor/melody