The market experienced a period of consolidation on Friday, May 15th, with the Shanghai and Shenzhen Composite Indices both declining over 1%. More than 3,500 stocks across the market fell, while the combined trading volume for the Shanghai, Shenzhen, and Beijing markets exceeded 3.3 trillion yuan, marking eight consecutive trading days above the 3 trillion yuan threshold.
Against this backdrop, the chemical sector demonstrated resilience. The Huabao Chemical ETF (516020) saw its intraday price rise as much as 1.78% before closing in positive territory despite a broader market pullback. A surge in hydrofluoric acid prices contributed to a rally, with industry leader Do-Fluoride hitting the daily limit-up. Persistent energy market disruptions suggest the chemical industry may be entering a new upward cycle, potentially leading to a revaluation.
Globally, NVIDIA's stock price extended its winning streak to seven days, reaching a new all-time high. As a leading indicator for AI stocks, NVIDIA's continued strength has bolstered optimistic expectations for related hardware supply chains, such as optical modules. This positive sentiment translated to the A-share market, where stocks like TFC Optical Communication and Zhongji Innolight hit new highs during the session. The Huabao GEM AI ETF (159363), which has over 50% exposure to CPO (Co-Packaged Optics) optical modules, closed down 1.14%, testing its five-day moving average. Despite the decline, it recorded a substantial 1.7 billion yuan in turnover, leading all AI-themed ETFs. Investors seized the dip, resulting in a net subscription increase of 66 million fund units.
Amid the market's deep correction, Hong Kong-listed innovative pharmaceutical stocks continued to decline. The Huabao Hong Kong Stock Connect Innovative Drug ETF (520880), which invests 100% in innovative drug R&D companies, saw its price drop nearly 3% at one point, marking its fourth consecutive day of losses and approaching its historical low. However, this price action appears disconnected from fundamentals, attracting buyers. The ETF has seen a net inflow of 535 million yuan over the past 10 days, with its outstanding shares climbing to a record high of 5.342 billion units. Analysts note that the core investment thesis for innovative drugs remains intact, with valuations becoming attractive after the deep correction. Upcoming industry conferences later this month could serve as a catalyst for a potential rebound.
UBS Securities noted that the Shanghai Composite Index's recent breakthrough of a key resistance level provided strong positive momentum for the market. The subsequent recovery in corporate earnings and the inflow of incremental funds are expected to be the primary drivers for the market's upward movement this year. Corporate profit recovery has been a key factor cited by foreign institutions in their bullish outlook on Chinese equities.
Morgan Stanley forecasts a moderate improvement in the earnings prospects of Chinese companies, supported by factors including stronger export growth driven by AI and energy capital expenditure cycles, a stronger Renminbi against the US dollar, and the peaking of price competition among major internet platform companies. The firm expects the Chinese market to see moderate gains by the second quarter of 2027.
**Focus on Sector ETFs**
**1. Chemical Sector Shows Resilience** The chemical sector outperformed in a weak market. The Huabao Chemical ETF (516020), tracking the sector's performance, traded in positive territory for most of the day, with its intraday gain peaking at 1.78% before closing up 0.1%. Constituent stocks in fluorochemicals and lithium battery materials led the gains, with Do-Fluoride reaching the daily limit-up and others like Juhua Group and Tinci Materials rising over 3%.
Year-to-date, the chemical sector has significantly outperformed the broader market. The underlying index for the Huabao Chemical ETF has gained 8.88%, surpassing the performance of major indices like the Shanghai Composite (4.2%) and the CSI 300 (4.96%). From a capital flow perspective, the basic chemicals sector saw substantial net inflows of 9.663 billion yuan from main funds, ranking second among all primary industries.
Looking ahead, analysts from CICC point out that the current round of industry capacity expansion is nearing its end. Policies like "Dual Carbon" and anti-internal competition measures are expected to catalyze a recovery in industry profits from their cyclical lows. Meanwhile, new materials are poised for a new phase of high growth, benefiting from rapid downstream demand. The global market share and competitiveness of China's chemical industry chain are expected to continue improving in the long term.
**2. AI Sector Sees Divergence; Funds Flow into ETF on Dip** Within the AI sector, performance was mixed. While CPO optical module stocks like TaiChenGuang and LianTe Technology fell over 5%, other areas like AI applications and computing power leasing were active. The Huabao GEM AI ETF (159363), with its 50% exposure to CPO, closed down 1.14% with heavy turnover of 1.7 billion yuan. Investors used the decline to accumulate, adding 66 million fund units in a single day.
The rationale for buying the dip in AI, particularly in computing hardware like optical modules, is supported by several factors. First, NVIDIA's record-breaking rally reinforces optimism for the computing power supply chain. Second, cloud service providers are ramping up capital expenditures, with overseas providers accelerating AI monetization and raising spending guidance, which is expected to boost data center construction and benefit optical modules. Third, the commercialization of CPO technology is progressing faster than expected, with companies like Foxconn reporting tight supply for CPO switches, signaling the start of mass production. 2026 could be a pivotal year for CPO development.
From a valuation perspective, fund managers note that the optical module sector does not show signs of excessive froth. They recommend holding leading companies within the segment to capture potential upside while preparing for market consolidation.
**3. Innovative Drug Sector Nears Bottom, Attracting Bargain Hunters** The Hong Kong-listed innovative drug sector continued its descent amid the broad market sell-off, with leading constituents like Akeso, Innovent Biologics, and BeiGene declining. The Huabao Hong Kong Stock Connect Innovative Drug ETF (520880) fell 2.14%, extending its losing streak and approaching its historical low. For the week, the ETF lost 6.91%.
Analysts attribute the recent weakness more to capital flow dynamics and sentiment rather than fundamentals. Liquidity has been diverted to the hot AI theme, and disappointing clinical trial data from some companies has heightened market sensitivity to R&D risks.
However, the significant inflows of 535 million yuan over the past 10 days indicate that value-oriented investors are stepping in. The fundamental case for innovative drugs remains strong, supported by robust out-licensing deals (exceeding $60 billion in Q1 2026), clear policy support including data protection regulations, and a shift towards profitability for leading companies.
Looking forward, the sector is entering a period of intensive data catalysts. The upcoming ASCO annual meeting from May 29th to June 3rd is expected to feature important clinical data releases from several Chinese biotech firms, which could act as a positive catalyst. After an eight-month correction, the sector's investment value is becoming increasingly prominent.
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