Goldman Sachs' latest trilogy of research reports shows that China is brewing its own "Seven Sisters".
According to the message from the ChasewiththeWind trading desk, the Goldman Sachs strategy team recently released a重磅research report, proposing for the first time the concept of "Chinese Prominent 10" (Chinese Prominent 10), directly comparing Tencent, Alibaba, Xiaomi and other ten private sector giants with the US "Seven Sisters of US Equities" (Magnificent 7), aiming to uncover core assets in the Chinese stock market with long-term dominance potential.
The report shows that these ten companies span high-growth areas such as technology, consumption, and automobiles, representing the "new driving force" of China's economy - artificial intelligence, self-innovation, global expansion, and service consumption upgrade. Their total market capitalization amounts to $1.6 trillion, accounting for 42% of the weight in the MSCI China Index, with an expected compound annual growth rate of earnings over the next two years reaching 13%.
Goldman Sachs believes that China's "Prominent 10" have similar market-dominating potential to the "Seven Sisters of US Equities", and may further increase the concentration of the Chinese stock market in the future, changing investors' perceptions of China's assets.
"Prominent 10" covers multiple industries, with coexisting growth potential and reasonable pricing
Goldman Sachs selected "Prominent 10" include: Tencent (market value $601 billion), Alibaba ($289 billion), Xiaomi ($146 billion), BYD ($121 billion), Meituan ($102 billion), NetEase ($86 billion), Midea ($78 billion), Hengrui Pharmaceutical ($51 billion), Ctrip ($43 billion), and Anta ($35 billion).
These companies cover multiple sub-industries including interactive media, retail, technology hardware, automobiles, catering, entertainment, home durable consumer goods, pharmaceuticals, hotels, and textile apparel. They collectively account for 42% of the weight in the MSCI China Index, with daily trading volume reaching $11 billion, demonstrating extremely high market influence and investment attractiveness.
In terms of themes, "Prominent 10" represent five major investment trends: artificial intelligence/technology development, self-sufficiency, globalization, service consumption, and improvement of shareholder returns in China.
From a financial perspective, "Prominent 10" demonstrate strong growth expectations and relatively reasonable valuation levels.
Goldman Sachs analysts estimate that these companies' compound annual growth rate (CAGR) of earnings over the next two years will reach 13%, with a median of 12%. Currently, the average price-to-earnings ratio (P/E) of these stocks is 16 times, and the forward price-to-earnings growth ratio (fPEG) is 1.1 times, which is more attractive compared to the "Seven Sisters of US Equities" with a P/E of 28.5 times and an fPEG of 1.8 times.
In addition, since the low point in late 2022, these ten stocks have risen by an average of 54%, with a year-to-date gain of 24%, outperforming the MSCI China Index by 33 and 8 percentage points respectively, showing their excellent relative performance.
Strong recovery driven by policies and technology
In the report, Goldman Sachs stated that after experiencing a loss of nearly $4 trillion in market value and underperforming the state-owned enterprise sector by 56 percentage points since the end of 2020, China's private enterprises are showing strong signs of recovery.
Data from the report shows that private enterprise profits and ROE have rebounded by 22% and 1.2 percentage points respectively since the low point in 2022, while valuations remain at historical lows, and cash return rates have hit new highs.
On the policy level, the importance placed on private enterprises by the higher authorities has significantly increased.
The private enterprise symposium held on February 17 this year and the introduction of the first Law for the Promotion of Private Economy on April 30 have both boosted the confidence of private entrepreneurs. Goldman Sachs' compiled indicators also show that the intensity of supervision on private enterprises is currently at its loosest level in the past five years.
The rapid breakthroughs in AI technology, especially the advent of Chinese AI models like DeepSeek-R1, have significantly enhanced market optimism towards tech private enterprises.
Since the low point in mid-January 2025, the Hang Seng Technology Index and the MSCI China Index have rebounded by 25% and 21% respectively.
As mentioned previously by Wall Street Insight, Goldman Sachs had predicted that the widespread adoption of AI could increase the earnings per share (EPS) of Chinese companies by 2.5% annually over the next decade and push up the fair value of the Chinese stock market by 15-20%, or attract more than $200 billion in incremental funds.
Notably, private enterprises account for 72% of the market share in Goldman Sachs' defined AI-Tech sector (semiconductors, power infrastructure, data cloud, software applications, etc.), and are expected to outperform non-tech sectors by 15 percentage points this year and next.
Low market concentration, large room for capital returns
Specifically, the report shows that the concentration of China's stock market is low, with significant dispersion of returns over the years. The top ten companies in China account for only 17% of the total market capitalization, far below the 33% in the US and 30% in emerging markets (excluding China).
Goldman Sachs believes that as existing leading enterprises in industries gradually expand their dominant positions, market concentration is likely to rise from 17% to a higher level in the coming years.
Secondly, the investment interest in private enterprises will support their organic growth and acquisition growth in the future. Therefore, a more transparent and relaxed merger and acquisition framework should be beneficial for the acquisition growth of enterprises, thus promoting higher industry consolidation.
Over the past decade, the annual replacement rate of the top 10 largest market capitalization enterprises in China has been only 12%, showing the "stickiness" and competitive advantages of leading enterprises.
A panel regression analysis of over 7,000 listed companies in China and the US indicates that capital expenditure, R&D investment, and concentration are all significantly positively correlated with subsequent stock returns and market share representation—meaning that private enterprises already occupying profit pools, capital expenditure, and R&D leadership within their industries are more likely to maintain or even expand their lead in the future.
AI-driven new impetus, overseas expansion enhances profitability potential
Goldman Sachs also specifically noted that AI technology is reshaping the competitive landscape, with large private enterprises performing more prominently in AI investment, development, and commercialization due to their customer base, data accumulation, and investment capabilities.
According to the report estimates, the widespread application of AI technology can drive a 2.5% annual increase in corporate profits in China over the next decade, with private enterprises accounting for 72% of Goldman Sachs' defined AI-tech universe.
An analysis of text from over 1,300 earnings conference calls shows that private enterprises dominate the tech industry (such as media, software, IT services, and healthcare), with significantly higher attention to AI than peers. It is expected that enterprises with large customer bases and data, embracing new AI technologies and committed to reshaping business models, are more likely to become long-term winners.
In addition, Chinese private enterprises are leading the "go-global" strategy.
Data from the report shows that the proportion of overseas sales by private enterprises has increased from 10% in 2017 to 17% in 2024. Due to the need for substantial upfront investments in overseas expansion (such as labor, production facilities, and marketing), enterprises with strong balance sheets and cash flows have an advantage.
Goldman Sachs pointed out that some enterprises have significantly higher gross margins in overseas markets than domestically (for example, BYD's overseas gross margin reaches 30%). Investors should focus on leading private enterprises with global capabilities to share the benefits of economies of scale and improved profitability.
Double利好from valuation troughs and capital inflows
Goldman Sachs noted that despite continuous improvement in fundamentals, the valuation of China's "Prominent 10" remains at historical lows.
The report shows that the average trading valuation of "Prominent 10" is 13.9 times the expected 12-month forward price-to-earnings ratio, with a valuation premium of only 22% over the MSCI China Index, far below the historical average, and significantly lower than the 43% valuation premium level of US tech giants.
Further, if Chinese private enterprises can achieve similar valuation premiums to those in the US, their market concentration would rise from 11% to 13%, adding $313 billion in market capitalization to these enterprises.
The recent policy shift and demand for diversification from the US market have reignited global investors' interest in Chinese assets.
Goldman Sachs estimates that among 496 global mutual funds, 86% are underweight on Chinese stocks, managing total assets worth $0.9 trillion. If global active funds adopt equal-weighted allocation to Chinese stocks, it could bring in potential inflows of up to $44 billion, with large private enterprises benefiting most due to their size, liquidity, and index weights.
At the same time, the assets of China's stock ETFs have grown rapidly over the past five years, and index heavyweights will continue to receive favor from passive funds.
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