Goldman Sachs Once Again Bullish: Global Capital Returns to China, Bullish on China's "Top 10" Stocks

Recently, Kinger Lau, Chief China Equity Strategist at Goldman Sachs, released a research report titled "The Return of China's Private Enterprises: The Tide Has Turned". Lau pointed out that driven by various macro, policy, and micro factors, the medium-term investment prospects for China's private enterprises are improving.

Goldman Sachs has also followed the example of the "Magnificent Seven" in the US stock market and listed China's "Top Ten," namely the ten Chinese private publicly listed firms that Goldman Sachs is particularly bullish on. Goldman Sachs expects that the concentration of China's private enterprise sector in the stock market will increase, and the "Top Ten" are expected to gain further growth momentum from this.

Market Concentration Expected to Rise

Goldman Sachs is relatively more bullish on large private enterprises that occupy the top positions in their industries and believes that the industry concentration in China's private enterprise sector will further increase.

In the report, Lau wrote: "The market structure changes and structural trends we anticipate lead us to believe that the market (market capitalization) concentration in the private enterprise sector will increase."

Lau listed the following eight reasons:

1. Among major global stock markets, China has the lowest market concentration—the top ten companies (including state-owned enterprises) account for 17% of the total market capitalization, compared to 33% in the US and 30% in emerging markets (excluding China).

2. In recent years, China's antitrust and M&A frameworks have become more transparent, which bodes well for the organic and acquisition-driven growth of private enterprises.

3. Existing industry leaders may further increase their market share and profitability.

4. According to Goldman Sachs' analysis, some leading enterprises have already taken a dominant position in their respective industries in terms of profit pools, capital expenditures, and R&D, all of which are positively correlated with future returns and industry dominance.

5. Many large private enterprises are inventors, drivers, investors, or consumers of AI technology, which will have a game-changing impact in the future.

6. Through global expansion, private enterprises are expected to enhance their revenue growth and profitability.

7. The average price-to-earnings ratio of China's top ten private publicly listed firms is 13.9, with a premium of only 22% over the overall market. In contrast, in 2021, the market capitalization premium level of China's top ten private companies was 74%, while the "Magnificent Seven" in the US had a valuation premium of 43% over the overall market.

8. The return of global capital to China, along with the continuous growth of domestic patient capital and passive capital, should disproportionately benefit index-weighted stocks.

"Prominent 10" in China

Goldman Sachs believes that selectivity is still required to achieve successful investment returns in the vast landscape of listed private enterprises.

Drawing inspiration from the "Magnificent Seven" in the US stock market, Goldman Sachs has proposed the "Prominent 10" for the Chinese stock market.

They are:Tencent, Alibaba, Xiaomi, BYD, Meituan, NetEase, Midea, Hengrui Medicine, Ctrip, and Anta.

The combined market capitalization of these ten companies amounts to $1.6 trillion, accounting for 42% of the weighting in the MSCI China Index, with a daily trading volume of $11 billion.

Goldman Sachs analysts forecast that the earnings of the "Prominent 10" will grow by 13% (compound annual growth rate) over the next two years, with a price-to-earnings ratio of 16 times.

The "Prominent 10" will collectively embody the latest economic themes in China, including AI/technology development, "going global," new consumption trends, and enhancing shareholder returns.

In addition, Kinger Lau specifically pointed out that investing in private enterprises does not mean excluding state-owned enterprises—Goldman Sachs reiterates that it still prefers a combination of "high-quality" Chinese state-owned enterprises and shareholder returns.