Goldman picks China chip stocks to buy as tech rivalry with the U.S. grows

Published Sun, Oct 3 20218:01 PM EDTUpdated Sun, Oct 3 20218:33 PM EDT

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

Goldman Sachs analysts picked some Chinese semiconductor stocks set to benefit as companies look to localize their supply chains. Among mainland China-traded stocks, especially in technology, the analysts said they like semiconductor and software companies because they are still in an early stage of development relative to global peers. One driver of future growth is localization, they said in a Sept. 22 report. The other is "rising investments in R & D and product expansion to enlarge addressable markets, with supportive government policies facilitating these efforts." Geopolitical tensions between the U.S. and China has spurred Beijing to invest more in homegrown technology . Disruptions from the coronavirus pandemic has also prompted companies to find multiple sources of production, particularly near large end-markets like China. Here are some of the Goldman analysts' top picks: GigaDevice Goldman rates Shanghai-traded GigaDevice a "buy" based on expectations that semiconductor technologies MCU and DRAM will drive growth through 2025. The Goldman analysts are particularly optimistic about an automotive MCU that GigaDevice expects to sell in volume next year. The semiconductor industry faces a shortage of chips, particularly for autos. "Once customers have adopted GigaDevice's products, it is unlikely they will swap out of GigaDevice's MCUs or DRAM when foreign supply becomes abundant," the report said, "because it is costly for customers to do so and customers also recognize the need for urgent localization to avoid trade tension risks." StarPower Shanghai-traded StarPower is rated "buy" and on the Goldman analysts' conviction list. The company is "a key local beneficiary" of growth in electric vehicles, the report said. Growth in the Chinese electric vehicle market will drive demand for a kind of semiconductor known as IGBT — a sector in which StarPower and China peer Silan will have about 46% of market share by 2025, the analysts predict. They have a price target for StarPower of 505 yuan per share, or more than 20% above Thursday's levels. Naura Shenzhen-listed Naura is less sensitive to trade tensions between the U.S. and China because of the company's focus on the matured node segment of the chip industry, the Goldman analysts said. However, they have a neutral rating on the company due to its recent share price rally, and are looking for positive developments such as improvements in U.S.-China relations and a meaningful increase in orders from global customers, the report said. It's important to note that this is not the first time China is trying to build up its own chipmakers. Back in 2014, McKinsey analysts wrote that multiple state-led efforts to build up the local semiconductor industry have struggled to take off . — CNBC's Michael Bloom contributed to this report.

Employees work on the production line of silicon wafer at a factory of GalaxyCore Inc. on May 25, 2021, in Jiashan County, Jiaxing City, Zhejiang Province of China.

Wang Gang | China News Service | Getty Images

Goldman Sachs analysts picked some Chinese semiconductor stocks set to benefit as companies look to localize their supply chains.

Among mainland China-traded stocks, especially in technology, the analysts said they like semiconductor and software companies because they are still in an early stage of development relative to global peers.