"Growth stock genius" Chen Jinwei's latest view: The advantages of China's chemical industry cannot be overturned for a decade; most optimistic about midstream cyclical sectors and consumer pharmaceuticals.

Each round of fund quarterly reports contains some unique and highly valuable insights, hidden among tens of thousands of reports waiting to be discovered.

This year is no exception.

After reading a number of reports from well-known fund managers in the industry, Zishitang unexpectedly found that the Penghua Industry Select Fund's Q4 report managed by Chen Jinwei was exceptionally valuable.

On one hand, as an expert in stock and sector selection, Chen Jinwei’s moves have always drawn much attention. In the past year, 2025, his fund’s performance also surpassed the benchmark by 28 percentage points.

On the other hand, Chen Jinwei’s year-end portfolio showed many new ideas; more importantly—his quarterly commentary was especially complete and systematic. From a third-party perspective, it’s akin to listening to one of his live lectures.

It’s especially worth presenting to readers.

Reiterated: Most Optimistic About Two Directions

In the Q4 report, when looking ahead at this year’s market, Chen Jinwei explicitly stated: In 2026, the two most promising directions are the midstream cycle and domestic demand-driven consumer and pharmaceutical sectors.

He is optimistic about the midstream cycle because he believes the midstream cyclical industries will benefit from “anti-involution” policy orientation. Meanwhile, although this investment direction saw some performance in the second half of 2025, there remains a huge expectation gap (meaning actual results exceeding market expectations).

As for consumer and pharmaceutical, Chen Jinwei notes that these have been the worst-performing sectors over the past five years. He predicts that consumer and pharma could be the ones with the greatest upside and expectation gap in the next five years. Thus, after basically reducing innovative pharma holdings, the pharma stocks he now holds mostly have domestic demand-driven healthcare consumption attributes.

Chemicals Actually Possess Resource-Goods Attributes

In his quarterly report, Chen Jinwei used chemicals as an example to elaborate his complete logic for favoring midstream cyclical industries.

He first put forth his strongest argument: Chemicals actually possess resource-goods attributes.

He said that, unlike upstream resource products such as nonferrous metals, chemicals are often perceived in the market as easily expandable, but in reality, the notion that midstream is easily expanded may be a misconception unique to China.

“If we break down global capex in the chemicals industry over the past five years, we see that outside China, there is almost no new capital expenditure. If China can effectively control the growth in capacity via anti-involution policies, then chemicals will possess resource-like attributes,” he said.

Chen Jinwei also believes that building a chemical plant in other countries is very difficult. Beyond China’s usual manufacturing advantages—infrastructure, skilled labor, efficient government—chemicals have a unique “network effect” (i.e., upstream and downstream clusters), which is a distinctive domestic advantage.

This also explains why, in discussions of “manufacturing going global,” Chinese chemical firms building factories abroad or in developing countries isn’t actually that common. Even when they do, it’s often in tires, urea, or modified plastics, sectors that tend to have “relatively short supply chains and single downstream applications.”

But for most chemical firms, their products form a “net,” not a “line.” For example, chemical product A produces byproduct B; in China, you can easily find downstream demand for B, but in other countries you might not find any downstream demand for B at all.

China’s current chemical network is unrivaled globally, and replication elsewhere will not be possible for a long time. Some overseas country once imposed high tariffs on Chinese chemicals but recently canceled them, because they found that most of the capacity is in China and stable suppliers could not be found elsewhere. These chemicals are the most basic and indispensable.

Chen Jinwei concludes: The advantage of China’s chemical industry will be hard to overturn for the next ten years or even longer. This is the basis for revaluing the sector.”

The Feasibility of “Anti-Involution” is Underestimated

Chen Jinwei also believes some investors misjudge the analysis of “anti-involution.”

First, they define anti-involution as a supply-side policy, then emphasize “it needs demand-side policies to work,” also highlighting that the supply-side reforms of ten years ago only succeeded due to demand stimulation, and thus are divided on anti-involution policies’ effects.

But Chen Jinwei believes anti-involution itself can stimulate demand-side changes. He says, two key facts must be recognized: the growing weight of external demand in many industries, and the near-monopoly pricing power in some sectors.

He notes that some Chinese industries account for over 80% of global capacity yet still incur overall losses. Anti-involution policy can help monetize such pricing power, transferring overseas consumer dividends, through anti-involution, to shareholder returns (capital income), employee wages (wage income), and supplier profits (business income)—which is direct demand stimulation, and is more sustainable than many current expectations.

He also mentions that while some argue anti-involution violates game theory, he counters: “In the past, if price coordination failed, there would not be further negotiation, but this time, if anti-involution consensus is not reached, it’s likely to continue in a different way.”

The reason is industry structure has changed—“In the past five years, almost all capex has gone into top firms,” reducing the industry from “fifty companies” to “five big firms.” “The current top companies have a ‘cannot squeeze out others through price competition’ mindset,” making the game a ‘repeated unknown rounds’ instead of ‘single round,’ so coordination is easier. “Most importantly, if industry profitability returns to reasonable levels, every participant benefits—this is actually incremental.”

This Midstream Cycle Emphasizes Duration, Not Height

Based on the above, Chen Jinwei firmly believes, “In this round, midstream cyclical investment opportunities may not be in price peaks, but in duration.”

He also points out, although he favors the midstream cycle, there are two issues: First, all players are mainly large enterprises, with flatter cost curves, meaning less price elasticity; second, there is a lack of a powerful sector (supply-demand gap), so price slope is steep.

He specifically reminds: In the short term, most industries don’t have rigid supply-demand gaps, so expectations for price peaks should not be too high for now. Especially, if anti-involution is misunderstood as a cartel for price hikes, that clearly violates its original intention. The aim of anti-involution is to orderly rebalance supply and demand in our advantaged industries, benefiting employees, shareholders, clients, and suppliers.

He believes: Regarding the duration of price sustainability, outlook may be more optimistic; combining the above analysis and referring to the performance of chemical products like fluorochemicals, MSG, vitamins over the past few years, perhaps many industries really don’t need to ‘compete to the end’ anymore.

Three Cognitive Biases in Domestic Consumer Demand

For the second focus area, “domestic demand-driven consumption and pharmaceuticals,” Chen Jinwei admits: “Consumer and pharmaceutical have been the worst-performing sectors over the past five years. But they may be the ones with the greatest upside and expectation gap in the next five.” Current pharma holdings “are mostly domestic-demand consumption healthcare,” with overall strategy anchored on consumption analysis.

He believes there are three major cognitive biases regarding domestic consumption:

First: Consumer Recovery is Structural, Not Synchronous for Everyone

He opposes using “income expectations haven’t improved” as grounds for being bearish on consumption; he stresses income changes are not in sync for 1.4 billion people, but are recovering structurally and gradually.

He divides current major income groups into four: First, high net worth individuals impacted by real estate—“negative impact lessening…drag is bottoming out”; second, “clean personal balance sheets” for post-95s, the elderly, and residents in lower-tier cities, “their sectors suffered less recent impact”; third, high-income tech sector upgrade group, “consumption’s structural highlight, currently small but rapidly growing”; and fourth, manufacturing practitioners, “post anti-involution…may become the backbone of future consumption recovery.”

Second: New Consumption Opportunities Are Not in Last Cycle’s Star Stocks

“Some investors equate consumption to star stocks from five years ago…we beg to differ.” He points out, last round's consumption bull market was fundamentally “investor-driven trickle-down,” but this round should focus on “redistribution-driven consumption.”

In goods consumption, “more optimistic on mass consumption products.” For services, “fundamentals are already on the right side, future room is immense.” Notably, “If goods consumption is linked to disposable income, then services consumption is affected by both disposable income and disposable time.”

As average working hours peak and decline, “services that consume time and are self-gratifying, like games, tourism, sports, film and TV, will become new 'long slope, thick snow’ sectors.” Among them, “productizable” attractions and games are our top picks.”

Third: Consumption Stocks Far From Reaching Ceiling

Responding to the argument “there’s no upside left in consumption,” he refutes: “Past advantages—excellent business models—remain, and stable earnings deserve higher valuations.” Current low valuations are due to deflation expectations, “Once this is reversed (doesn’t need to be dramatic), consumption can return to its ‘long slope, thick snow’ fair value.”

More importantly, “Domestic demand is a mandatory exam, not an elective”—exports may exceed expectations, but “large-scale increase potential is limited.” From real demand’s perspective, “many consumption norms in first-tier cities, if viewed across 1.4 billion people, still have huge room for penetration. Everyone wants a better life—this is perpetual.”

He concludes: “2026 is the inaugural year of ‘real consumption’—it’s no longer consumption for others, but consumption for oneself.”

Portfolio Structure: Focusing on Chemicals, Pharma, and Service Consumption

After reading Chen Jinwei’s Q4 opinions, a detailed look at the top ten holdings disclosed in the Q4 report may be even more intriguing.

The quarterly report shows his Penghua Industry Select’s core positions are concentrated in midstream manufacturing, domestic-demand driven pharma, and service consumption.

Among them, Huafeng Chemical, Luxi Chemical, and Lianenglong are clearly in the chemical sector; Huafeng is a spandex leader whose performance closely tracks spandex prices; Luxi is a SOE subsidiary in basic chemicals with a wide product range; called a “chemical supermarket,” firm’s results strongly tied to the base chemical industry and anti-involution policy; Lianenglong is similar.

In addition, Chen Jinwei arranged allocations to medical services—Cofu Medical, Guobang Pharma, Yixintang, all focusing on big pharma: Cofu Medical makes medical devices and test strips—main products include hearing aids, posture correctors, thermometers, ventilators, etc.; Guobang Pharma mainly produces pharma intermediates; Yixintang is pharmaceutical retail.

The important stakes in these fields match directly with the reasoning in Chen Jinwei’s quarterly views, revealing the fund manager’s allocation style.

Risk Disclosure and DisclaimerThe market carries risks; investments need caution. This article does not constitute individual investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein apply to their circumstances. Investment based on this is at your own risk.