Goldman stock pickers zero in on global companies that know how to win in China

Published Tue, May 11 20217:06 PM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Key Points

Goldman Sachs analysts have put together a basket of foreign stocks that generate about a fifth or more of their sales in China.
The country's relatively early struggle with the coronavirus pandemic versus other major countries means hundreds of millions of locals are now ready to spend more.

Just-in quarterly earnings reveal how China strategies can pay off for some companies — an investment idea Goldman Sachs analysts are betting on. In portfolio strategy research published May 6, the analysts laid out stocks that generate about a fifth or more of their sales in China. The country's relatively early struggle with the coronavirus pandemic versus other major countries means hundreds of millions of locals are now ready to spend more. As the five-day Labor Day holiday this month shows, Chinese stuck within national borders didn't hold back on travel as Trip.com says bookings more than tripled from a year ago . Goldman's selection focuses on European brands, which avoid the potential overhang from Beijing's tensions with the U.S. Here are some of the analysts' top picks, broken down by industry category: Consumer products and food Swatch — The Swiss watch manufacturer generated 44% of its net sales last year in China, according to an annual report released in March . The company said profits in the country rose so much last year that tax expenses went up. New products the watch maker expects will drive additional sales this year include a U.S. and China launch of the Tissot T-Touch Connect Solar. Burberry — The luxury brand generates 40% of sales from Chinese either shopping at home or abroad, according to Goldman. The company is set to release preliminary results on May 13. Adidas — The footwear and athletic apparel company generates 38% of its sales from China, according to Goldman. Adidas reported a sales increase of 7% in Greater China in the fourth quarter, and expects net sales to grow 20% to 30% this year on a currency neutral basis. Both figures reflect faster growth than in North America or Europe. In terms of upcoming news, the company's annual general meeting is set for May 12. Automobiles and Parts Volkswagen — Europe's biggest private-sector employer generates about 41% of its sales volumes in China, according to Goldman. On May 6, the German automaker said first-quarter deliveries rose by 21.2% from a year ago to 2.4 million vehicles, primarily due to a 61.4% increase in deliveries to China. The company primarily operates in the Chinese market through joint ventures, which recorded first-quarter operating profit of 661 million euros ($803.39 million), more the double from a year ago, according to Volkswagen. BMW — About a third of BMW's sales volumes come from China, according to Goldman. The automaker's sales in the first quarter grew 36% from the same period in 2019, versus 6% growth during that time for the company overall, BMW disclosed last week. Mainland China is BMW's second-largest regional market by sales volume, after Europe. Daimler — The Mercedes-Benz parent generates about 32% of its sales volumes in China, the Goldman report said. In the three-month period ended in March, the company said sales under the Mercedes-Benz car brand rose by 58% from a year ago to a first-quarter record of 208,100 units . The Mercedes-Benz brand's van sales in China also set a first-quarter record with 8,500 vans, and the company expects demand for mid-sized vans "to increase significantly compared with the previous year." Industrial goods and services Kone — The Finnish elevator and escalator manufacturer says China accounts for about 30% of its sales. The Chinese market already showed the fastest growth for Kone in the first quarter, with growth of more than 10% in new equipment units and the value of modernization upgrades. Kone said in a quarterly report it expects that this year, the new equipment market will "grow slightly" in China , while markets in the rest of the world are expected to "gradually recover." Knorr Bremse — The German manufacturer of braking systems for trains and commercial vehicles makes about 22% of its sales from China, according to Goldman. China is the largest rail vehicle market in the world, and Knorr Bremse said it continues to benefit from the Chinese government's infrastructure spending and urbanization of rural areas. The company said in 2020 it saw year-on-year growth in revenue from metro systems, particularly in China, but that was not enough to offset declines in the high-speed trains and locomotive businesses for all of Asia-Pacific. Schindler — The Swiss escalator and elevator manufacturer generates about 20% of its sales in China, according to Goldman. In July, the company gained control of its local joint venture, Volkslift-Schindler Elevator , which contributed 80 million Swiss francs ($88.76 million) to Schindler's overall revenue last year. If the consolidation had occurred at the beginning of 2020, the subsidiary would have contributed 140 million Swiss francs ($155.32 million). Schindler said there was no material impact on its operating profit. High risk, high reward While these and other foreign companies operating in China have benefitted from the Asian country's rapid recovery from the coronavirus pandemic, China sales exposure can also turn into an investment risk. Earlier this year, Swedish clothing retailer H & M disappeared from major Chinese shopping sites after the resurfacing of the company's concerns over alleged forced labor in China's western Xinjiang region. — CNBC's Michael Bloom contributed to this report.

While much of the world was still dealing with the coronavirus pandemic, Chinese shoppers strolled through stores in the Sanlitun area of Beijing, China, on June 6, 2020.

Costfoto | Barcroft Media | Getty Images

Just-in quarterly earnings reveal how China strategies can pay off for some companies — an investment idea Goldman Sachs analysts are betting on.

In portfolio strategy research published May 6, the analysts laid out stocks that generate about a fifth or more of their sales in China. The country's relatively early struggle with the coronavirus pandemic versus other major countries means hundreds of millions of locals are now ready to spend more.

As the five-day Labor Day holiday this month shows, Chinese stuck within national borders didn't hold back on travel as Trip.com says bookings more than tripled from a year ago.

Goldman's selection focuses on European brands, which avoid the potential overhang from Beijing's tensions with the U.S.

Here are some of the analysts' top picks, broken down by industry category: