APAC Conviction List - Directors’ Cut Report Interpretation

Overview

This monthly APAC Conviction List update refreshes Goldman Sachs’ selected fundamental Buy ideas. It explains the addition of Kotak Mahindra Bank and NEC, records four removals, provides a catalyst calendar, and summarizes related regional strategy and sector research.

Core views

Goldman Sachs adds Kotak Mahindra Bank and NEC to its APAC Conviction List, while removing Jardine Matheson, Foshan Haitian Flavouring & Food (H), Wuxi AppTec and Shenzhen Inovance. The firm stresses that list membership is selected from Buy-rated Asia-Pacific coverage but is not itself a stock-rating change; removals can reflect reduced conviction, price realization, elapsed catalysts, or better opportunities elsewhere. For Kotak Mahindra Bank, Goldman Sachs expects a material re-rating as core pre-provision operating profit compounds at 15% and EPS at 16% over 2026E-29E. The thesis rests on recovery in unsecured lending, continued share gains in secured retail, SME and commercial banking, and a 205bp reduction in the core cost-to-income ratio. The analyst expects loan growth to accelerate into the high teens despite moderating system growth, noting 2% quarter-on-quarter unsecured-lending growth in 1QFY27 and improving disbursement spreads. Kotak’s ownership of major capital-markets and insurance subsidiaries is presented as a differentiated platform supporting deeper customer wallet share and industry-leading risk-adjusted NIMs of 4.5%. The report addresses concerns around Kotak’s savings-deposit market-share losses, attributing them to prior savings-rate cuts and slower branch additions. It sees offsets from faster branch expansion, senior hires in mass retail, and the expectation that the savings-rate-cut cycle has ended. Excess CET1 may weigh on reported RoE, but Goldman Sachs estimates normalized FY27/FY28 RoE adjusted for free funds at about 15%, assuming a 15% optimal CET1 ratio and valuing excess capital at 1x. It calls the core-franchise valuation of 1.7x P/BV and 11x P/E attractive. The 12-month Rs509 target is based on a SOTP, including a 2.2x forward P/B multiple for the standalone bank using a three-stage Gordon Growth Model; the stated price was Rs424.70 on September 1, implying 19.8% upside. For NEC, Goldman Sachs forecasts operating profit to compound at 18% in FY3/26-FY3/29E, versus roughly 8% for the sector. It forecasts FY3/27 operating profit of ¥452 billion, up 26% year on year and above the company’s revised ¥430 billion guidance; its non-GAAP forecast is ¥500 billion. Domestic IT services are expected to remain the principal driver, with FY3/27 non-GAAP operating profit of ¥353 billion, 11% year on year and ¥24 billion above guidance, supported by enterprise and financial-sector modernization demand and a 1.5 percentage-point margin improvement from exiting low-margin projects. Aerospace and defense is forecast to generate ¥90 billion of non-GAAP operating profit, up 20% year on year and ¥9 billion above guidance. Goldman Sachs believes NEC’s valuation does not fully reflect earnings from the US-based CSG consolidation, estimated to add about ¥22 billion to overseas IT profits, and the submarine-cable turnaround, estimated to improve profits by ¥26.5 billion year on year. It expects higher memory prices to reduce profit by about ¥8 billion, less than the company’s ¥20 billion assumption, because of pass-throughs, procurement lead times and a roughly 5% server-sales ratio. The analyst also argues that generative AI should be a net positive for Japanese system integrators through AI-enabled pricing and development productivity. NEC’s ¥6,000 12-month target uses a weighted 22x FY3/28E P/E on EPS of ¥272, compared with a September 1 price of ¥5,011 and stated 19.7% upside. Beyond the additions, the report’s strategy summary remains constructive on Asian equities. Goldman Sachs raises its 12-month MXAPJ Index target to 1,120 from 1,080, supported by technology-hardware supply-chain profit growth, with 2026 earnings-growth forecasts raised to 350% for Korea, 60% for Taiwan and 19% for Japan. It nevertheless lowers the three- and six-month targets to 960 and 1,040 amid risks from US midterm elections, higher bond yields and Middle East tensions. The preferred regional and sector exposures are North Asia, technology hardware, capital goods, banks and healthcare; China A shares remain Overweight with a structural preference for AI hard-tech. Related sector work reinforces the AI-infrastructure theme. Goldman Sachs expects China semiconductor capital expenditure to reach US$82 billion by 2030E, up 79%, while identifying lithography and remaining R&D and capex gaps versus global leaders as constraints. In Korea memory, it expects 2027 HBM pricing to rise about 100% year on year as AI-server demand exceeds supply. For wafer-fab equipment, it raises global market forecasts to US$150.3 billion in 2026E and US$217.5 billion in 2027E, citing stronger AI-related DRAM and logic/foundry investment and China capex. In China industrial technology, it identifies data-center power infrastructure and robotics as part of a technology-led export phase, but notes market-access and international regulatory barriers for areas such as energy storage and humanoid robots.

Analysis framework

The report refreshes a committee-selected list of fundamental Buy ideas, then explains the new additions through operating forecasts, investor debates, catalysts and target-price valuation. It supplements those company cases with regional strategy, sector supply-demand views, earnings revisions and a rolling calendar of earnings and non-earnings catalysts.

Methodology notes

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Kotak Mahindra Bank sum-of-the-parts valuation

  Goldman Sachs values Kotak’s standalone bank and separately captures the value of its financial-services subsidiaries, including insurance, asset management and broking businesses.

• Valuation methodsPB valuation

  Forward price-to-book valuation using a three-stage Gordon Growth Model for Kotak

  The target applies a 2.2x 12-month forward P/B multiple to the standalone bank, with the multiple supported by a Gordon Growth Model.

• Valuation methodsP/E and PEG Valuation

  Weighted target P/E valuation for NEC

  Goldman Sachs applies a weighted 22x P/E to FY3/28E EPS, using separate IT-services and hardware multiples weighted by sales mix.

Asset mapping & comparison

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

• Kotak Mahindra Bank (KTKM.BO)

  New APAC Conviction List addition; Goldman Sachs expects earnings acceleration and a re-rating.

  Strengths

  Diversified financial-services platform, expected unsecured-lending recovery, market-share gains and 4.5% risk-adjusted NIMs.

  Weaknesses

  Reported RoE is affected by excess CET1 capital.

  Comparison

  The report describes Kotak as the only large Indian bank with 100% ownership of all major capital-markets and insurance subsidiaries.

  Risks

  Slower loan growth, weaker margin progression, muted low-cost deposit growth, or delays in the executive leadership transition.

• NEC (6701.T)

  New APAC Conviction List addition; Goldman Sachs expects high profit growth from domestic IT, defense and submarine-cable systems.

  Strengths

  Modernization demand, improving IT-services margins, defense order momentum, CSG consolidation and cable-system turnaround.

  Weaknesses

  Exposure to public-sector project runoff and rising component costs.

  Comparison

  Forecast operating-profit CAGR of 18% exceeds the approximately 8% sector average.

  Risks

  Lower corporate IT investment, higher component costs, delayed price pass-through, procurement delays or unprofitable projects.

• Jardine Matheson

  Removed from the APAC Conviction List.

• Foshan Haitian Flavouring & Food (H) (3288.HK)

  Removed from the APAC Conviction List.

• WuXi AppTec (2359.HK)

  Removed from the APAC Conviction List.

• Shenzhen Inovance Technology (300124.SZ)

  Removed from the APAC Conviction List.

Key data

• Kotak core PPoP CAGR15% over 2026E-29EGoldman Sachs forecast supporting the addition to the list.
• Kotak EPS CAGR16% over 2026E-29EGoldman Sachs forecast.
• Kotak 12-month target priceRs509Versus Rs424.70 on September 1, 2026; stated upside of 19.8%.
• NEC operating-profit CAGR18% in FY3/26-FY3/29ECompared with approximately 8% sector average.
• NEC FY3/27 operating profit¥452 billionUp 26% year on year and above revised company guidance of ¥430 billion.
• NEC 12-month target price¥6,000Versus ¥5,011 on September 1, 2026; stated upside of 19.7%.
• MXAPJ 12-month target1,120Raised from 1,080; the report states 26% price return and 28% total return in US-dollar terms.
• Global wafer-fab-equipment forecastUS$150.3 billion for 2026E and US$217.5 billion for 2027ERaised on AI-related DRAM and logic/foundry demand and stronger China capex.

Impact & implications

The update concentrates the list’s new additions in Indian financials and Japanese IT/defense exposure, while the accompanying strategy work favors North Asian technology hardware and AI infrastructure. Goldman Sachs frames near-term index risk as an argument for caution in the path to its higher 12-month Asian-equity target, rather than a change in its constructive baseline.

Risks

• Kotak Mahindra Bank faces risks from slower-than-expected loan growth, weaker margins, muted low-cost deposit growth and leadership-transition delays.
• NEC faces risks from weaker corporate IT spending, higher component costs, delayed pass-through, procurement delays and unprofitable projects.
• Goldman Sachs cites near-term Asian-equity risks from US midterm elections, higher US and global bond yields, and continued Middle East tensions.
• China semiconductor self-sufficiency remains constrained by lithography challenges and R&D and capital-expenditure gaps versus global leaders.
• China industrial exporters in energy storage and humanoid robotics face near-term market-access barriers and complex international regulation.

What to watch

• Kotak’s new CEO announcement, accelerated branch rollout, unsecured-retail loan growth, commercial-banking and vehicle-finance share gains, credit-cost moderation and cost-to-income progress.
• NEC’s July-September quarter results, potential guidance revisions from CSG consolidation, reduction of unprofitable projects, defense-budget developments, AI-service deployment and Southeast Asian submarine-cable orders.
• Earnings releases over the next three months, including NEC on October 29, 2026 and Kotak Mahindra Bank on November 5, 2026.
• Whether technology-hardware supply-chain earnings growth supports the path toward the MXAPJ 1,120 target despite near-term macro and geopolitical risks.