Goldman Sachs Says the ‘Prominent 10’ Could Be China’s ‘Magnificent Seven’

Move over, Magnificent Seven. There’s a new elite equities club in town, though the name is a bit less catchy.

The “Prominent 10” are China’s large, public-owned enterprises (POEs) that Goldman Sachs in a Sunday note said it expects to benefit the most in the coming years from a lighter regulatory approach and investments in artificial intelligence.

The companies: internet and gaming behemoth Tencent, e-commerce giant Alibaba, smartphone maker Xiaomi, electric car company BYD, digital shopping platform Meituan, video game maker NetEase, appliance maker Midea, pharmaceutical company Hengrui, digital travel agency Trip.com, and sportswear maker ANTA. 

They “embody the theme of AI/Tech development, self-sufficiency, ‘Going Global’, services and new forms of consumption, and China’s improving shareholder returns,” said Goldman. Their advantages, Goldman’s analysts said, should help the group to grow earnings by 13% annually over the next two years.

Chinese Market Is Fragmented, Inexpensive, and Gaining Beijing’s Support

The Chinese equity market’s relative fragmentation and modest valuations underpin Goldman’s hopes for the Prominent 10.

China’s 10 largest public companies account for 17% of the total market based on their market capitalization, compared with 33% in the U.S. and more than 50% in Korea, France, and Germany. Its largest POEs also trade at a 22% premium to the overall market based on forward earnings, according to Goldman, down significantly from 74% in 2021 and well below the 43% premium investors pay for the Magnificent Seven. If China’s largest POEs traded at the same valuation as the Mag Seven, they’d be worth an additional $313 billion. 

Another reason Goldman expects these companies to thrive is the Chinese government’s recent pivot toward supporting the private economy after cracking down in 2021. Chinese President Xi Jinping in February spoke at a private-sector symposium attended by many of China’s preeminent entrepreneurs, and the company this year also enacted the Private Economy Promotion Law, reportedly China’s first-ever law promoting private business, and updated its regulatory framework for mergers and acquisitions. 

“All these should help revitalize POEs’ investment appetite (animal spirits), thereby supporting their organic and acquisitive growth down the road,” the analysts wrote. 

Size Matters in AI, International Expansion

Artificial intelligence is expected to be foundational to the success of these companies. The companies with the capital to invest in AI research and infrastructure are best positioned to remain competitive in the long run, Goldman says. And the Prominent 10 are concentrated in industries—interactive media, IT services, software, health care technology—that are fervently embracing AI.

Their size could also help the Prominent 10 to expand their international businesses. Due to intense domestic competition that has strained profit margins, Chinese companies have increased their presence abroad over the last decade; international sales accounted for 17% of total revenue last year, up from 10% in 2017. The largest companies with the healthiest balance sheets and cash flows, says Goldman, should have more success expanding abroad than their smaller competitors.