Goldman Sachs: A-Share Hard-Tech Leads, AI Profit Concentrates on Hardware

Overview

This report analyzes about 7,000 Chinese listed companies' Q1 2026 financial statements and over 4,500 conference call summaries, revealing current structural diversification trends in the Chinese stock market. The key conclusion is that A-shares have shown strong recovery driven by 'hard technology,' significantly outperforming offshore markets (H-shares/MSCI China) constrained by internet subsidies and increased AI capital spending. Meanwhile, there is a significant shift in profit concentration within the AI industrial chain towards upstream hardware manufacturing. Enterprises are accelerating outbound expansion with higher overseas profit margins, coupled with record-breaking dividends pushed by regulatory incentives, forming the main investment logic.

Core views

Enormous gap between A-share and H-share performance. In Q1 2026, CSI 300 index profit grew 9%, with CSI Growth and ChiNext recording remarkable growth rates of 22% and 198% respectively, primarily due to explosive gains in AI hardware and related sectors. Conversely, MSCI China index profit declined 8% year-on-year, mainly suppressed by increasing commercial subsidies and rising AI capital expenditures at large tech firms. Institutions maintain an overweight preference for A-shares over H-shares, forecasting 20% growth for CSI 300 and 8% for MSCI China. Significant redistribution of profit within the AI value chain. Globally and in China, the AI profit pool has tilted markedly towards hardware ends. Within China's AI supply chain, hardware's profit share rebounded sharply from 41% in 2024 to 54% in Q1 2026, benefiting semiconductor (memory, IC design), data center infrastructure, power supplies, PCB/CCL segments most. On the contrary, downstream software application's share dropped from 59% to 46%, facing margin compression pressures. This trend stems from aggressive capital expenditure plans by global and Chinese cloud service providers (CSPs), providing visible demand support for upstream hardware manufacturers. Macroeconomic landscape shows 'revenue recovery with profit divergence'. Although overall revenue growth accelerated to 4%, differences among ownership structures and industries were evident. State-owned enterprise (SOE) profit growth rebounded to 7%, with margin improvements; private enterprise (POE) growth slowed to 4%, especially consumer-facing new economy segments, banks affected by narrowing net interest margin, and real estate-related areas underperformed. In highly competitive 'cutthroat' industries, semiconductors, industrial metals, and aviation (benefiting from lower fuel costs) achieved margin improvements, whereas automobiles, agriculture, e-commerce, and PV equipment sectors suffered severe margin erosion. Enterprise globalization strategy continues advancing despite tariff uncertainties, with overseas revenue ratio for Chinese-listed firms reaching 18% in 2025 (up from 16%). Automotive leads outbound expansion with its overseas revenue ratio soaring to 29%, followed by semiconductors, transportation, capital goods, and biopharmaceuticals rapidly expanding. Notably, most industries achieve higher profit margins overseas than domestically, providing strong structural impetus for sustained outward movement. Additionally, exchange rate fluctuations caused a net foreign exchange loss of 5.8 billion yuan in 2025, exerting some squeeze on export-oriented segments. Regarding shareholder returns, Chinese enterprises are entering uncharted territory of record-high cash repayments. Expected total shareholder returns reach 3.8 trillion yuan in 2026, driving the overall shareholder yield up to 2.9%. This increase is predominantly led by traditional industries and state-owned enterprises, aligning with policy guidance promoting higher dividend payout ratios. Meanwhile, share repurchase volumes declined 11% to 400 billion yuan, concentrated in the internet sector where funds are prioritized for AI investments and business subsidies. Corporate cash allocation also shows shifts toward R&D (increasing 3% to 2.1 trillion yuan) and M&A (growing 46% to 700 billion yuan), reflecting strategic intent to control capital expenditures amidst oversupply conditions while seeking breakthroughs through organic growth and technological localization.

Analysis framework

Institutions adopted a combined top-down and bottom-up analytical framework. First, they aggregated financial data from approximately 7,000 listed companies for macro-level analysis of profit and revenue trends, differentiating performances across A-shares and offshore markets, SOEs versus private enterprises, and new versus old economic sectors. Second, using text analytics on over 4,500 earnings conference call summaries, they captured management focus changes on strategic priorities like AI and outbound expansion, thereby verifying logical consistency with quantitative findings. At the industry level, detailed AI value chain maps were constructed to track profit flow trajectories across hardware, software, and infrastructure tiers. Finally, integrating cash flow analyses, institutions evaluated resource allocation efficiencies among dividends, share buybacks, capex, R&D, and M&A activities to identify high-quality growth candidates meeting specific criteria.

Methodology notes

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Analysis of AI Value Chain Profit Pool Distribution

  The report dissects the AI industry into upstream hardware (semiconductors, infrastructure), midstream models, and downstream applications. By tracking changes in each segment's profit share (e.g., hardware share rising from 41% to 54%), it determines internal industry sentiment transmission direction and identifies optimal investment value focal points along the value chain.

• Company Fundamentals & Financial FrameworkFree cash flow analysis

  Decomposition of Enterprise Cash Usage

  Beyond focusing on net income, the report conducts in-depth analysis of free cash flow allocation including dividends, share buybacks, capex, R&D expenses, and M&A payments. This assesses whether companies prioritize returning capital to shareholders, expanding capacity, or investing in innovation, thus evaluating their long-term competitiveness and quality of shareholder returns.

• Event Game & Behavioral FinanceOthers

  Text Sentiment & Thematic Analysis of Earnings Conference Call Summaries

  By leveraging natural language processing techniques, institutions analyzed thousands of earnings conference call summaries to quantify keyword frequencies (e.g., "AI", "outbound", "tariffs") and sentiment tendencies. This provides measurable insights into management strategy shifts and evolving market focus, serving as supplementary validation for quantitative financial data.

• Industry/Industrial Analysis FrameworkQuantity-Price Decomposition

  Attributing Revenue and Margin Divergence

  When analyzing concurrent revenue recovery and profit dispersion, the report deconstructs volume (revenue growth rate) against price/cost factors (net margin changes). This helps identify which industries drive growth through sales volume increases versus those enhancing profitability via cost controls or pricing power, uncovering genuine winners in fiercely competitive 'cutthroat' environments.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• GS China Growth Portfolio

  25 selected A/H share stocks combining high growth with reasonable valuations identified by the report

  Strengths

  Median 25-27E EPS CAGR of 39%, YTD gain of 102%, showing robust earnings revision momentum

  Weaknesses

  None provided

  Comparison

  Compared to purely low-value strategies, this portfolio emphasizes visible profit delivery and recent catalysts (such as price hikes or outbound expansion)

  Risks

  None provided

Key data

• 2026Q1 A-Share Sci-Tech Innovation Board Profit Growth Rate+198%Y-o-Y surge leading major indices
• 2026Q1 MSCI China Profit Growth Rate-8%Decline Y-o-Y hindered by Internet subsidies and AI spendings
• Hardware Share of China’s AI Supply Chain Profits54%Q1 2026 data, significantly rebounding from 41% in 2024
• Overseas Revenue Ratio of Chinese Enterprises in 202518%Continued rise from 16% in 2024
• Projected Total Shareholder Return in 2026E3.8 Trillion YuanHistoric High, Corresponding to a Shareholder Yield of 2.9%
• CSI 300 Profit Growth Forecast for 2026E+20%Institution maintains this forecast, notably surpassing MSCI China's 8%

Impact & implications

The report posits that investment logic under current market conditions has shifted from simple 'low valuation repair' to 'certainty of profit growth.' Hard-tech sectors within A-shares attract more interest due to clear profit realization capabilities, while offshore large-cap tech stocks face temporary headwinds from peak AI capital spending periods. For investors, focusing on firms occupying pivotal positions in the AI hardware supply chain, operating with higher international profit margins, and committed to generous dividends offers a pathway to superior returns. Simultaneously, active corporate merger and acquisition activities foreshadow accelerated industry consolidation, suggesting leading firms can expand market shares further via non-organic growth strategies.

Risks

• Uncertainty surrounding tariff policies may further impact profit margins of export-oriented enterprises
• Intensifying competition in downstream software application fields could lead to continued margin compression
• Approximately 60% of real estate firms remain unprofitable, dragging down overall economic recovery
• RMB exchange rate fluctuations might affect export enterprises and sectors with USD debt through bidirectional impacts

What to watch

• Performance recovery of offshore tech giants during the upcoming 2026 half-year reporting season starting in August
• Sustainability of upstream hardware demand after the peak phase of AI capex
• Subsequent integration outcomes of corporate mergers and acquisitions and their effects on industry concentration
• Further regulatory guidance on dividend policies and the ongoing improvement of state-owned enterprises' dividend payout ratios