Zheshang Strategy: The US-Iran Conflict Is Complex and Changing, Chinese Safe Assets Are Expected to Be Reassessed

Key Takeaways

The Iran-Iraq conflict since March has caused significant disruptions to global capital markets, increasing volatility in risk assets. Combined with the April earnings season, there are more factors of uncertainty. We believe that, in an uncertain market environment, Chinese safe assets—those with a high degree of matching between performance and valuation (safe assets), directions with incremental catalysts, or those favored by capital—are likely to see a valuation re-rating. Based on this, this article introduces the PEG and PB-ROE framework. It selects, as much as possible, directions where performance and valuation are well matched, and then—combined with judgments about industry fundamentals—appropriately increases tolerance for the valuations of certain industries. We recommend focusing on three major directions: beneficiaries (coal, power, oil & petroleum refining, and new energy), de-sensitized exposure (innovative drugs with independent cyclical characteristics, and agriculture, baijiu, and home appliances with consumption-dividend characteristics), and hedging (state-owned “China’s major-stocks” infrastructure).

Executive Summary

**1.**Finding China’s safe assets along the PEG and PB-ROE framework

The Iran-Iraq conflict is complex and changeable, driving up volatility in risk assets, and combined with the April earnings season, uncertainty has increased. We try to find certainty within uncertainty. At this stage, the impact of risk appetite on valuation and the impact of earnings reports on performance are both key considerations for industry selection. We believe that Chinese safe assets—those with a high degree of matching between performance and valuation (safe assets), directions with incremental catalysts, or those favored by capital—are likely to see a valuation re-rating. Based on this, this article introduces the PEG and PB-ROE framework. It selects, as much as possible, directions where performance and valuation are well matched, and then—together with judgments about industry fundamentals—appropriately increases tolerance for the valuations of certain industries. For example, although industries such as coal and power are valued somewhat higher, they can also be considered industries worth watching in the context of energy security. Overall, it is recommended to focus on the three major directions of beneficiaries, de-sensitized exposure, and hedging.

2. Beneficiary Direction: Against the backdrop of disruptions from external supply shocks, the necessity of ensuring energy security is increasing

Coal: China’s “stabilizing keel” for energy security, with a potential rise in its strategic safety position. Coal is an absolute leader in China’s energy consumption mix, with a consumption share far higher than that of Japan, South Korea, and the U.S. China’s external dependency for coal is significantly lower than for crude oil and natural gas. The features of coal being self-sufficient demonstrate that China’s energy supply system has stronger resilience. At the same time, China’s coal-to-chemicals capacity can partially backfill Middle East crude oil imports, enhancing the independence of energy security.

Power: Energy security and the AI industry revolution are resonating, and power assets may face re-rating opportunities. From the perspective of energy security, disruptions to the Strait of Hormuz expose the fragility of traditional energy supply chains. Under the trend of the new energy industry, power—being the hub of secondary energy—has clearly improved its strategic safety position. From the perspective of the AI industry revolution, the surge in computing power has reshaped the electricity consumption structure, and power assets are entering re-rating opportunities under the HALO logic.

Oil & Petroleum Refining: Higher oil prices boost profits, while also benefiting from strong price-following ability and inflation expectations. High oil prices directly thicken refinery and petrochemical industry profits, expand earnings elasticity, and the petrochemical industry has strong cost pass-through capabilities.

New Energy: New incremental demand appears on the demand side, industry clearing improves conditions on the supply side, and industry fundamentals are expected to improve. On the demand side, oil and natural gas prices are sharply volatile, and the fragility of the global energy supply chain has been fully exposed. On the supply side, capital expenditures are bottoming and moving upward, and industry concentration continues to rise; with supply-clearing conditions, industry earnings are expected to improve.

**3.**De-Sensitized Direction: Independent Cyclicality (Innovative Drugs) and the Consumption Dividend (Agriculture, Baijiu, and Home Appliances)

In the pharmaceutical sector, innovative drugs will enter the profit cycle in 2026; overseas expansion will accelerate, and global competitiveness will continue to be validated. In 2026Q1, the total value of BD transactions for innovative drugs in China exceeded $60 billion, approaching about half of the full-year 2025 figure. In agriculture, the direction benefiting from geopolitical strategy, the sector is at a long-cycle turning point. In baijiu, pricing stabilizes, and Maotai’s price increases release signals of an industry recovery, while a valuation trough improves the sector’s safety margin. In home appliances, in 2026, the “trade-in for upgrades” policy continues + sustained high dividend returns + global expansion overseas can serve as a safe core holding.

4. Hedging Direction: “China’s major-stocks” infrastructure for steady progress and long-term success

With improved cyclical conditions in the construction industry, and against the backdrop of high oil prices, maintaining growth may be an important hedging approach. The construction industry is expected to benefit. With the Ya Xia Hydropower Station starting smoothly, it can provide solid performance support for the construction industry. In an environment of uncertainty around the perimeter, safe assets represented by “China’s major-stocks” infrastructure participating in construction are expected to see a valuation re-rating.

5. Risk Warning

The Iran-Iraq conflict exceeding expectations, the failure of the PEG and PB-ROE framework, and potential deviations in the understanding of safe assets.

（Source: Founder Securities (Zhejiang)）