Goldman picks 5 Chinese tech stocks — and one has an upside of 91%

Published Thu, Mar 4 20215:53 AM EST

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Goldman Sachs has named five buy-rated Chinese tech stocks with potential upsides of between 37% and 91% over the next five years. It describes all of them as leaders in their main businesses and says their new products and expansion into larger markets makes them especially attractive. All of Goldman's China technology picks are in software, its preferred sector because of its potential for stronger earnings growth, the analysts led by Allen Chang said in a research note on Tuesday. Here are Goldman's top five tech stock picks in the Chinese market: ThunderSoft , a provider of smartphone operating systems, is set to do well in automotive OS too, as the next generation of cars is developed. "We see ThunderSoft as an early beneficiary of the automotive digitalization trend, which is turning automobiles into electronic devices," Goldman's analysts wrote. The company is also a chip supplier to firms like Qualcomm , Intel and ARM, which the bank says will expand into the auto market. ThunderSoft's auto revenue segment was up 60% year-over-year in 2020, and Goldman estimated a net income compound annual growth rate (CAGR) of 45% for 2021 to 2026 for the company overall. The bank said the stock has an upside potential of 91%. Goldman also likes Desay SV, which specializes in infotainment and air conditioning software for cars. The company is moving toward advanced driver assistance systems like automated parking and remote-control software, and the bank said its earnings drivers include its range of products. The bank estimated a net income CAGR of 43% between 2021 and 2026 and said the stock has an upside potential of 75%. Artificial intelligence company ArcSoft produces algorithms for the Android OS, as well as facial recognition technology for cameras. Goldman likes it for its expansion into auto markets, producing software to help prevent drivers' fatigue or erratic driving, for example. The bank estimated a net income CAGR of 34% between 2021 and 2026 and said its upside potential is 69%. Design software firm YJK is a "leader" in building information modelling, vital for structural safety, the bank said. Clients' digital budgets are rising in China, Goldman added, and YJK is set to expand its customers as well as products. It also has the opportunity to move from one-off sales to a subscription model and is the only company of its kind to be picked by the bank. It estimated a net income of 29% CAGR between 2021 and 2026 and said its upside potential is 51%. Thunisoft is the "dominant vendor in China's legal tech market," and is expanding into education and government software that will bring in additional revenue, according to Goldman. The Chinese government is keen on digitalization, the bank said, and the public sector is "willing to spend" on software. It estimated net income CAGR at 24% between 2021 and 2026, and said its upside potential is 37%. Goldman's preferred Chinese tech stocks more broadly are in the software and semiconductor sectors — and it listed several upsides for the industry. Companies are expanding their product lines, hiring more staff, and increasing revenues, and the analysts said this would help firms be more efficient. Compared to U.S. companies such as Microsoft , Oracle and Adobe , Chinese software firms' net margins are "still low," according to the bank, but increased investments in research and development by Chinese firms means profitability is likely to increase. China's software-as-a-service market is expected to grow at a compound annual growth rate of 34% between 2021 and 2023, compared to 15% for the global market over the same period, the bank estimated.

The Goldman Sachs logo on a smartphone screen.

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Goldman Sachs has named five buy-rated Chinese tech stocks with potential upsides of between 37% and 91% over the next five years.

It describes all of them as leaders in their main businesses and says their new products and expansion into larger markets makes them especially attractive.

All of Goldman's China technology picks are in software, its preferred sector because of its potential for stronger earnings growth, the analysts led by Allen Chang said in a research note on Tuesday.

Here are Goldman's top five tech stock picks in the Chinese market: