China shares have enjoyed a three-month-long rally and now it's time for investors to turn selective, analysts said.
Since the beginning of July, the has tacked on more than 11 percent, while Hong Kong's has gained around 12 percent, even as many regional markets suffered a bout of extreme volatility amid concerns the U.S. Federal Reserve would begin to taper its asset purchases. Indonesian shares, for example, have fallen around 6.5 percent over the same period.
"Market return is more likely to be muted or show slight downside near term unless we see positive surprises from reforms and very robust external demand. We expect looming profit-taking pressure ahead of some major events like the third plenary session, local government debt audit results, and a potential slowdown of October macro data," Goldman Sachs said in a note.
China's Communist Party leaders will hold the third plenary session in November to set the country's economic agenda.
(Read more: China's home price rises don't tell the whole story)
But Goldman added, "We still see some favorable factors that may support China equities."
It advises playing sectors where earnings and sentiment could be boosted by further policy progress, such as healthcare, brokerages, the railroad-related value chain and possibly banks, if there are signs of gradual interest rate deregulation and significant fiscal reform targets. Many of the stocks in these sectors are trading at reasonable valuations compared with historical levels, it noted.
Among possible plenary beneficiaries, Goldman has "buy" calls on Daqin Railway and Guangshen Railway, China Medical System, Mindray Medical, Citic Securities and Ping An Insurance.
(Read more: Emerging markets poised for further rally: BofA-ML)
Others also point to the potential for selective gains in China shares.
"Earnings season is going to be good – the best so far this year," said Erwin Sanft, head of China equity research at Standard Chartered. "It's just matching the fact that we've had a set of third quarter macro numbers that are the best this year."
He is focusing on cyclical stocks, including the property, commodity and industrial sectors, which were "badly smashed" in the first half. "It is time for investors to look at the laggard sectors," he told CNBC.
"We're moving away from the pure blue chip names," he said, with the advantage of "tier two" names coming from lower valuations. He estimates returns at 30 to 50 percent.
He likes metals names, including steel stocks and aluminum play Chalco. "In the property sector, it's time to move out of the tier-one names," he said, adding Standard Chartered recently upgraded Agile Property.
Rally or not, Credit Suisse still recommends playing the theme of China consumer spending growth, citing a survey of the country's "grey income," showing estimated personal income is significantly higher than official figures.
(Read more: Asia stocks go one way, China sure to go the other)
"This study suggests that the Chinese official household income data substantially understates the income of top earners and hence the spending power of the target clientele of luxury goods brands in China," it said.
"Chinese consumption is still rising at a healthy pace, and after correcting on the back of underestimation of income, the penetration of luxury consumer goods in China is still not very high," it said. It estimates per-capita average nationwide consumption is rising at 10.3 percent compound annual growth rate.
It tips beneficiaries as Belle, Burberry, China Resources Land, Chow Tai Fook, Franshion, Intime, Mengniu, Prada, Swatch and Tiffany.
— By CNBC's Leslie Shaffer. Follow her on Twitter: @LeslieShaffer1