Goldman Sachs backs A-shares as hard tech beats H-shares by 68pp

Goldman Sachs sees China's A-share hard tech extending its lead over H-share internet, but flags a potential rotation as valuations adjust.

Goldman Sachs reaffirmed its preference for A-share hard tech over H-share internet, with STAR50 outperforming HSTECH by 68 percentage points year to date, as the bank flagged conditions for a narrowing gap ahead.

"The gap between A-share hard tech and H-share internet is at an extreme by historical standards, but we see conditions for a narrowing ahead," Kinger Lau, Asia portfolio strategist at Goldman Sachs, said in a July 13 note.

STAR50, the onshore AI-hardware benchmark, has surged while HSTECH, tracking offshore internet platforms, remains down 14 percent for the year despite an 11 percent rebound over the past two weeks. The ChiNext index has outperformed the Shanghai Composite by 19 percentage points and the CSI 300 by 17 points. MSCI China first-quarter profit fell 8 percent from a year earlier, dragged by internet companies that account for about 35 percent of the index's earnings weight. The sector has accumulated more than 180 billion yuan in subsidy losses since the second quarter of 2025, while shouldering AI capital expenditure estimated at over $100 billion in 2026 and $120 billion in 2027.

The divergence means H-share internet stocks could shift from a "valuation trap" to a "profit recovery trade" if second- or third-quarter results show an operating profit inflection, Lau said. For now, Goldman maintains its tactical overweight on A-shares, with materials, capital goods and insurance as preferred sectors, while advising investors to watch for earnings catalysts in H-share platforms.

Profit Recovery Is the Missing Piece for H-Shares

The path to a sustained H-share recovery runs through three factors: whether subsidy losses in fast-commerce and other segments narrow, whether AI-related revenue from cloud services and agentic AI begins to contribute, and whether traditional e-commerce cash flows remain stable enough to fund AI spending without being viewed as a profit drain. If second-quarter or third-quarter earnings show an operating profit inflection, valuation methodology could shift from blended discount to sum-of-the-parts, separating core business from AI investment and new ventures.

MSCI China's earnings have grown just 7 percent in 2025, marking the sixth consecutive year of below-consensus delivery, and the pressure has intensified in early 2026 as internet subsidy costs and AI capex compound. The index's rating was cut from overweight to market weight six weeks ago, with weak earnings delivery cited as a key input.

AI Concentration Risk Emerges Beneath the Surface

Goldman's analysis suggests China's AI-related stocks are not in bubble territory overall. The economic benefits from AI — through efficiency gains, new profit pools and expanded addressable markets — could exceed current market pricing by 50 percent to 100 percent, the bank estimated.

The risk is concentrated in specific segments. Semiconductor stocks and some A-share hard tech names trade at elevated valuations relative to both their own history and global peers, with rising concentration and leverage adding to the risk. "Pure thematic trading still has room, but the risk-reward is no longer as clean as it was at the start of the year," Lau said.

China now accounts for about 11 percent of global AI-related market capitalization and 18 percent of AI revenue, yet international investor positioning remains underweight, particularly in power, infrastructure and physical AI. On OpenRouter, Chinese AI models account for nearly half of global token usage, suggesting the country's AI story has moved beyond supply chain into consumption.

IPO Pipeline and Foreign Flows

Hong Kong has seen 100 companies list year to date, raising $35 billion, with median returns of 32 percent after one month and 30 percent after three months. Foreign cornerstone investor participation is near 2021 highs. The remaining IPO pipeline for 2026 is estimated at about $25 billion, or $45 billion including follow-on offerings — a figure dwarfed by the roughly $500 billion to $560 billion in annual dividends and buybacks from listed companies.

On the mainland, ChangXin Memory Technologies, a DRAM manufacturer, is planning to list on the STAR Market in what could be the largest A-share IPO since May 2022, targeting about $4.3 billion.

Goldman also initiated coverage on Zhipu, also known as Knowledge Atlas, with a neutral rating and a price target of HK$1,880, implying about 15 percent upside. The stock has surged 70 percent over the past 60 trading days. The bank's preferred Chinese AI models are DeepSeek and ByteDance, both privately held, alongside Zhipu as the only publicly traded pick.

This article is for informational purposes only and does not constitute investment advice.