Goldman says Chinese stocks are too big to ignore — and names some top picks with serious upside

Published Thu, Feb 17 20226:31 PM EST

Goldman Sachs has named its favorite China stocks to navigate what it says is a "sizable, under-owned" and "underappreciated" market. Goldman's picks are all Chinese A-shares — mainland companies that are listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. These stocks are denominated in Chinese yuan. China — the world's second-largest economy and stock market — has a "deep market" valued at $14 trillion, Goldman's analysts, led by Kinger Lau, said on Feb. 13. Despite its vast size, the ability to invest in the A-share market has been plagued by limited foreign accessibility, with Goldman estimating foreign ownership at just 4.5% of the overall market. However, the U.S. bank thinks that is about to change. "We believe Chinese A-shares have become more investable for international investors considering the ongoing capital market opening up and reform momentum, accessibility enhancements and product proliferation," Lau said. "This reinforces our strategic view that China equity is an asset class that is too big, too growthy, and too vibrant to ignore, and will bring profound allocation benefits, thematic appeal, and alpha opportunities to global equity investors," he added. Indeed, foreign investors appear to be waking up to the potential of the Chinese stock market. Mainland Chinese stock funds saw net inflows of $16.6 billion in January, continuing the momentum of nearly $11 billion in net inflows in December. January's data also marked the fourth time that monthly inflows have exceeded $10 billion since the Covid-19 outbreak. Stock Picks On a stock level, the bank noted that Chinese A-shares are likely to deliver high earnings growth and look "attractively valued" relative to other key markets globally, with "plentiful" alpha opportunities. Goldman's Asia-pacific conviction list — a collection of the bank's top buy-rated stock picks in the region — contains several A-shares which the bank says have significant potential upside. Medical diagnostic firm Amoy Diagnostics has the highest upside at 148.1%. Goldman has a price target of 140 Chinese yuan ($22.10) on the stock, which closed at around 56 Chinese yuan on Feb. 17. Shares of hospital group Aier Eye Hospital are also expected to rally significantly over the next 12 months, according to Goldman. The bank has ascribed a price target of 80 Chinese yuan on the stock, representing a 128.6% potential upside to its closing price of 35 Chinese yuan on Feb. 17. Goldman also likes industrial mold manufacturer Riyue Heavy Industry, for which it has set a price target of 54 Chinese yuan. The stock closed at around 26 Chinese yuan on Feb. 17 — an implied upside of 105%. Laser equipment maker Shanghai Friendess Electronic Technology also made Goldman's conviction list, with the company having a potential upside of 87.8%, according to the bank. Solar inverter manufacturer Sungrow Power Supply is another of the bank's top picks, with Goldman giving the company a potential upside of 85.9%.

An investor reacts at a stock exchange hall in Hangzhou, capital of China's Zhejiang province.

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Goldman Sachs has named its favorite China stocks to navigate what it says is a "sizable, under-owned" and "underappreciated" market.