China's A-share market delivered a notable earnings rebound in the second quarter of 2026, with net profit growth climbing to 20% while revenue expanded by only 6.8%, according to a research report from Shenwan Hongyuan Group Co., Ltd.. The profit surge was largely driven by non-recurring items, particularly investment gains, rather than core operational strength. Although currency fluctuations pushed up financial expenses, gross margins and return on equity continued to improve, indicating that pricing power is recovering faster than volume growth. The ChiNext and STAR Market boards posted stronger profit and ROE improvements compared to the Main Board, while early signs of inventory restocking emerged against a backdrop of subdued capital expenditure and improved cash flow structures. Dividend payouts and share buybacks have also intensified, though risks from global trade tensions and geopolitical uncertainties warrant caution.

Key observations from Shenwan Hongyuan include the following:

Earnings stability amid currency headwinds and strong investment income

At the aggregate level, price improvement is outpacing volume growth across the A-share market. Cumulative net profit excluding non-recurring items rose to 20.0%, while net profit attributable to shareholders increased 4.7 percentage points from Q1 to 22.0%. Revenue growth inched up just 0.1 percentage points to 6.8% quarter-on-quarter. The higher elasticity in profit growth relative to revenue stems largely from non-recurring gains, explaining why the attributable profit figure exceeds the ex-items measure. Investment income and fair value changes together accounted for 1.1% of revenue and 19.0% of attributable net profit in Q2 2026, both reaching the highest mid-year levels since 2022. When excluding turnaround tech listings and non-recurring items from the sample, A-share ex-items net profit and revenue growth stood at 13.1% and 6.3% respectively, broadly flat compared to Q1.

On costs, widening exchange losses drove a sharp increase in financial expenses, lifting the three-expense ratio to 10.64% for Q2 2026, marking the third consecutive quarter of increases. Financial expense growth exceeded 60% in the first half of the year, reflecting higher currency conversion losses. Domestic-demand companies posted relatively weaker absolute growth but returned to positive territory.

Profitability metrics validate sustained improvement

Gross margin on a trailing twelve-month basis improved for the third straight quarter to 18.0%. Even after excluding newly listed companies like CXMT and delisted names, the trend remains intact. Export-oriented businesses continue to enjoy higher gross margins with simultaneous improvements. The Main Board and ChiNext saw modest margin gains, while the STAR Market recorded a 3.4 percentage point jump in gross margin to 35.0% during Q2. A DuPont decomposition of ROE shows that improvements in net profit margin and asset turnover contributed most, with price recovery again proving more significant than volume.

Growth boards take the lead in profitability gains

Large-cap growth stocks represented by the ChiNext and STAR boards demonstrated significantly enhanced profitability in Q2 2026. All major segments posted sequential improvements in profit, revenue growth, and ROE, with ChiNext and STAR showing the most pronounced advances. The Main Board (excluding financials and the 'Big Three Oil Companies') saw ex-items net profit growth of 9.5%, flat versus Q1, while revenue growth eased 0.1 percentage points to 4.5%. ChiNext profit and revenue growth accelerated by 5.7 and 0.5 percentage points respectively to 31.5% and 22.3%. The STAR Market (ex-solar companies) surged 524.5% in profit and 47.4% in revenue on a low comparison base. ROE across major boards continued to climb, with ChiNext at 7.4% and STAR at 9.0% (ex-solar), both surpassing the Main Board's 6.5% (non-financial, ex-oil).

From an index perspective, most broad-based benchmarks saw continued upward momentum in profit and revenue growth. The small-cap Guozheng 2000 index was the exception, posting a low single-digit profit decline, though revenue growth picked up. Gross margins and ROE generally improved, with CSI 1000 margins bottoming out and rebounding, while Guozheng 2000 margins fell to historic lows. ROE improvements were weaker for small-cap and dividend indices, but stronger for the ChiNext, STAR, and large-cap broad benchmarks.

Mild inflation spurs restocking while capital expenditure stays subdued

Inventory cycles are turning: PPI and corporate inventory growth are rebounding in tandem. Historically, companies enter restocking phases when prices recover. After three years of negative nominal inventory growth, restocking demand is emerging, with A-share inventories rising 2.4% year-on-year in Q2 2026, the first positive reading since 2023. While PPI may moderate in the third quarter as upstream resource price increases slow, both PPI and corporate inventories are expected to maintain modest, single-digit recovery through 2026 and into 2027, supported by limited supply pressure as capacity is absorbed.

Capital expenditure and construction-in-progress continue to grow modestly, while workforce expansion and spending intentions remain at historically low levels. Fixed asset growth is still being digested, keeping all three metrics at low absolute rates.

Against this backdrop of restrained capex and spending, listed companies have strengthened their shareholder return commitments. As of August 31, 2026, over 1,000 companies had announced interim dividend plans totaling more than RMB 700 billion, surpassing the same period in the prior two years in both number and amount. Share buyback announcements from January to August 2026 cumulatively exceeded RMB 240 billion, also outpacing the previous two years, reflecting regulatory emphasis on market stability.

Cash flow metrics show sustained improvement

Operating cash flow saw a slight year-on-year decline in the first half of 2026, mainly due to higher procurement costs from upstream price increases and increased expansion spending by tech-growth sectors. Contract liabilities and advance receipts fell 5.1% year-on-year in Q2, a 0.1 percentage point widening from Q1, though improving order books could provide additional support. Investment net cash flow has now grown for five consecutive quarters, as companies curtail expansionary investments and build cash reserves. Financing net cash flow has been positive for three straight quarters, indicating restored market financing functions as firms raise equity capital and attract long-term patient capital.

The cash collection ratio and cash payment ratio are reverting toward historical norms, reaching 102.0% and 93.5% respectively in Q2, with cash and equivalents continuing to improve year-on-year. Receivables turnover on a TTM basis has declined for nearly five years since its peak in Q3 2021. However, private enterprises have seen their receivables turnover rise for three consecutive quarters to 555.7%, narrowing the gap with state-owned enterprises.

Risk warnings

Uncertain global trade dynamics could lead to weaker-than-expected world economic growth. Global political cycles and geopolitical risks may disrupt industry fundamentals, particularly for export-oriented companies. Financial report data carries inherent lag and may not reflect future trends.