Goldman Sachs is optimistic about A shares, but has downgraded H shares to benchmark: when the Japanese and Korean markets are stronger, the cost of waiting for H shares to recover increases.

This year, the Chinese stock market still has activity, but the indices and themes have diverged. On June 3, according to Wind Trading Platform news, Goldman Sachs strategy team led by Kinger Lau and other analysts released the latest China stock market strategy report, summarizing it in one sentence: bullish on the story of Chinese AI, but bearish on the indices that carry this story - especially H shares. A shares and H shares have taken different paths. This year, the Chinese stock market has experienced extreme differentiation. The MSCI China index (dominated by H shares) has fallen by 8% since the beginning of the year, while the CSI300 index (A shares, Shanghai and Shenzhen 300) has risen by 5%, a difference of 13 percentage points; the ChiNext board has outperformed the Hang Seng Technology Index by 40 percentage points. There are four reasons behind this differentiation: index composition, the divide between hard and soft technology, policy direction bias, and profit realization ability. 35% of the MSCI China index's weight is concentrated in 9 internet giants such as Tencent, Alibaba, and Meituan, and these 9 companies have seen an average decline of 22% this year. In contrast, "hard technology" sectors such as AI hardware, semiconductors, and infrastructure have shown strong growth, contributing to 85% of China's AI market value since DeepSeek. The analysts wrote: "Like the story of Chinese stocks, but dislike the indices; continue overweight on A shares and downgrade H shares to benchmark." H shares still have room for recovery, but other North Asian markets (Japan, South Korea, mainland China, and Taiwan) offer stronger cyclical profit growth CKH holdings higher visibility. If funds continue to be overweight on H shares, they will have to bear the opportunity cost of delayed profits. The core issue with H shares: Profit delays repeatedly. The analysts pointed out the root of the issue with H shares: Losses from food delivery and instant retail subsidies reached 34 billion yuan in the first quarter of 2026, accumulating to 180 billion yuan since the second quarter of 2025, far exceeding our and the market's previous expectations in terms of scale and duration. This directly leads to a delay in the profit recovery timetable for the internet sector compared to early assessments by 3 to 6 months. The overall profits of offshore market companies in 1Q26 fell by 7% year-on-year, and 30% of index market value companies performed below market expectations. Based on this, the analysts have lowered the MSCI China's 2026 EPS growth forecast from 12% to 8% and 2027 from 14% to 12%, targeting a P/E ratio compression from 13 times to 12 times, a 12-month target price from 95 to 85, representing approximately 11% upside potential - but this 11% is likely to be realized only after the year-end profit improvement. A shares: The logic remains intact. In contrast, the investment logic for A shares is clearer. The analysts increased their target price for the CSI300 (Shanghai and Shenzhen 300) from 5300 to 5500 and maintained an overweight position. This is the second upward adjustment this year, mainly due to profit accumulation and time rolling. Profit growth expectations for A shares have also been raised: EPS growth expectations for 2026 have been increased from 16% to 20%. The reasons include: higher commodity prices, continued resilience in Chinese export demand, profit growth improvement (2026 EPS growth revised to 20%), loose liquidity environment, diversification value for international investors, and direct exposure to AI hard technology. A shares not only have better price increases this year but also better return/volatility performance. It is relatively less sensitive to external shocks and has a different correlation with major global markets. This diversification value has not been fully priced in by international funds. More importantly, A shares have higher exposure to hard technology AI. Sectors such as power equipment, infrastructure, semiconductors, high-end manufacturing, physical AI, etc., are more concentrated in A shares or related industries. This explains why A shares have shown independent trends while MSCI China was weak. However, this does not mean that all sectors within the index are equally benefiting. The advantage of A shares lies more in profit improvement and hard technology themes, rather than a comprehensive reappraisal. AI: China is part of the global landscape but is underweighted. Calculations show that China accounts for 10% of the global AI market value and 16% of revenue, but the actual allocation of global funds to Chinese AI stocks is only about 1.2%, far below its weight in the global AI landscape. In terms of AI sub-fields, directions such as power, infrastructure, semiconductors, and physical AI (Siasun Robot & Automation, autonomous driving) are seen as more certain directions with stronger policy support and China's manufacturing advantages. H shares still have room for recovery, but the opportunity cost of holding is increasing. H shares' valuation is not expensive and has been downgraded to benchmark, mainly due to slow profit realization. The internet/application layer has rebounded recently, but whether it can sustain depends on whether the financial reporting season from mid to late August can bring a turning point in profits. As a result, the target P/E ratio for the MSCI China index has been reduced from 13 times to 12 times. The target level for the next 12 months has been reduced to 85 points, still implying approximately 11% upside potential, but lower than the previous target of 95 points. This means that offshore Chinese assets still have opportunities. The A-H rotation model still suggests that H shares have room for recovery relative to A shares, with the relative outperformance shown in the figure being 6%. However, this recovery depends more on a turning point in profits rather than just undervaluation. The issue now is that the opportunity cost of waiting has increased. North Asian markets provide stronger cyclical profit growth, and CKH Holdings has higher visibility. If funds continue to be overweight on H shares, they will have to bear the opportunity cost of delayed profits. North Asian markets typically refer to mainland China, Hong Kong, Taiwan, Japan, and South Korea. The more likely scenario is: wait for a clearer profit path for the internet sector later this year, especially close to the third quarter of 2026, and then reassess the beta opportunities in offshore markets. This article is a reprint from Wall Street SeeSaw, edited by GMTEight: Chen Wenfang.