Chinese equities

18 September 2026, 00:00 UTC Chief Investment Office GWM Investment Research

From China H to China A: Following earnings and margins strength Chinese equities Authors: Eva Lee, CFA, Head Greater China Equities, UBS AG Hong Kong Branch; Summer Xia, CFA, CIO Equity Strategist, UBS AG Hong Kong Branch; Allen Pu, CFA, CIO Equity Strategist, UBS AG Hong Kong Branch

• China A takes lead: We upgrade China A to Attractive and downgrade China H to Neutral. A- shares offer stronger earnings revisions, greater exposure to advanced technology, exporters, and shareholder returns, in our view. H-shares face weaker internet and consumer-sector revisions, while rising AI investment is limiting distributions.

• Margins favor innovation: A-share revenue, earnings, and margins have accelerated, led by AI semiconductors, hardware, non-bank financials, and export leaders. These segments offer stronger pricing power, operating leverage, and earnings visibility, while consumer businesses remain constrained by weak demand, Source: UBS promotions, and cost pressures.

• Position across four pillars: We favor technology leaders exposed to AI infrastructure; health care innovators and CDMOs benefiting from commercialization and global expansion; large banks, insurers, and brokers offering resilient earnings, dividends, and improving returns; and copper-related materials companies with production growth and attractive valuations.

We downgrade Chinese H-shares to Neutral and Table 1 - Our stock picks upgrade A-shares to Attractive as earnings momentum, sector composition, and capital-allocation trends diverge. Following the 2Q26 results season, China H earnings revisions turned negative, with downgrades concentrated in internet and consumer sectors. Together, these sectors account for more than 40% of MSCI China, leaving the index exposed to weak household demand, subdued pricing power, and a narrow recovery outside financials.

Source: Factset, UBS as of September 2026 Note: Price and valuation as of 15/9/2026; +Financials' valuation refers to trailing P/B

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Figure 1 - H-shares lean toward domestic Sharp divergence in H-share vs. A-share earnings consumption and A-shares toward IT and A-shares: Stronger earnings and margins, but sector divergence persists industrials The 2Q26 results reinforced our constructive view on A- Index composition of MSCI China and CSI 300 (by sector) shares, with improving revenue and profitability providing firmer fundamental support. Overall A-share earnings rose 29.4% year over year, accelerating from 9.3% in 1Q, while revenue growth strengthened to 9.8% from 5.1%. The large-cap CSI 300 also improved: Revenue growth accelerated from 3.3% to 6.35%, while gross margins reached 20.11%, up 22bps sequentially and 123bps year over year.

Figure 3 - China A has led the earnings growth Comparison of earnings growth in 2Q26 and 1Q26 (by indices)

Source: MSCI, Wind, UBS as of Sep 2026

We believe A-shares offers a more favorable earnings mix than H-shares. Upward revisions remain strong and are broadening beyond technology, while exposure to advanced technology and industrials provides access to AI, advanced manufacturing, and overseas demand. Export-oriented technology and industrial companies are generating profits Source: Factset, Wind, MSCI, CSI, GS Research, UBS as of Sept 2026 internationally, helping offset domestic revenue pressure and supporting a healthier margin outlook. The earnings outlook remains supportive, although the recovery is uneven. AI-related demand, overseas expansion, Figure 2 - A-shares have registered stronger and a richer product mix should sustain revenue and margin earnings upward revisions than prior years growth among technology and export leaders. Efforts Comparison of A-share earnings revisions in 2026 vs. prior years to curb excessive competition could also support pricing…