China's Top Ten Companies Could Be Referred to as the New 'Magnificent Seven' by Goldman Sachs
The New Elite: China's Prominent 10
Get ready to meet the newest A-listers in the global equities scene! The Prominent 10, not as catchy as the Magnificent Seven, but just as impressive.
Goldman Sachs, in a recent report, predicts that these large, public-owned enterprises (POEs) will see significant growth in the near future thanks to a more lenient regulatory approach and investments in AI technologies.
The contenders: internet and gaming leviathan Tencent, e-commerce juggernaut Alibaba, smartphone heavyweight Xiaomi, electric vehicle powerhouse BYD, digital shopping platform Meituan, video game developer NetEase, appliance giant Midea, pharmaceutical powerhouse Hengrui, digital travel agency Trip.com, and sportswear manufacturer ANTA.
These companies, according to Goldman, are all about AI/Tech development, self-sufficiency, international expansion, services, and new forms of consumption, with the potential to enhance earnings by 13% annually over the next two years.
Chinese Market: Fragmented, Inexpensive, and Supportive
The fragmented nature and reasonable valuations of the Chinese equity market are key reasons for Goldman's optimism regarding the Prominent 10.
China's top 10 public companies account for only 17% of the stock market, compared to 33% in the US and over 50% in Korea, France, and Germany. Chinese POEs also trade at a 22% premium on forward earnings, a significant drop from 74% in 2021 and a far cry from the 43% premium investors pay for the Magnificent Seven. If China's largest POEs were valued identically, they'd be worth an extra $313 billion.
Another factor in play is the Chinese government's recent shift towards supporting the private economy. After cracking down in 2021, Chinese President Xi Jinping has shown support for private businesses, attending a symposium with many leading entrepreneurs and even passing the Private Economy Promotion Law. These moves, according to Goldman, will help revitalize POEs' investment appetite and further their growth.
Size Matters: AI and Global Expansion
Artificial intelligence is predicted to play a pivotal role in the success of these companies. Companies with the means to invest in AI research and infrastructure are likely to stay competitive in the long run, and the Prominent 10 are based in industries that are increasingly adopting AI.
Moreover, their size provides an advantage for international expansion. Chinese companies have been increasing their presence overseas over the past decade, with international sales accounting for 17% of total revenue in 2020, up from 10% in 2017. With healthy balance sheets and cash flows, the largest companies should find it easier to succeed internationally than their smaller counterparts.
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Sources: [1] Forbes, [2] Bloomberg, [3] Reuters, [4] CNBC
- As the Chinese equity market continues to grow, investors might want to consider investing in the Prominent 10, as these companies are expected to increase their earnings by 13% annually over the next two years, thanks to their focus on AI/Tech development, self-sufficiency, international expansion, services, and new forms of consumption.
- These Chinese companies, including Tencent, Alibaba, Xiaomi, and others, are trading at a lower premium on forward earnings compared to other global stock markets, providing a potential opportunity for investors looking to diversify their portfolios.
- The success of the Prominent 10 may not only be tied to their domestic growth but also their ability to expand globally, as they possess the size and resources to make significant investments in artificial intelligence research and infrastructure, a critical factor in staying competitive in today's technology-driven business environment.
