China's listed companies' profit growth hits a five-year high; opportunities remain in the market.

Goldman Sachs reports that China's listed companies posted a robust 24% year-on-year profit growth in Q2—its highest quarterly growth in five years. Profits on the STAR Market doubled, and AI-related benefits are spreading from chips to broader sectors. However, consumption remains weak and internet stocks under pressure; Goldman Sachs maintains its overweight recommendation on A-shares. The strongest-performing sectors in Q2 included: IT (+142%), insurance (+140%), materials (+78%), energy (+52%), securities firms (+58%), and pharmaceuticals (+20%). Data show that aggregate net profits of all Chinese listed companies rose 14% year-on-year in the first half of 2026 (RMB basis). Growth accelerated markedly in Q2—net profits surged 24% year-on-year, the highest single-quarter growth rate in nearly five years and a sharp jump from 6% in Q1. STAR Market and ChiNext profits rose 102% and 44% year-on-year respectively; the CSI 500 and CSI 1000 rose 27% and 22% respectively. Consumption-related sectors continued to face pressure: food & beverage (-50%, dragged by agriculture), retail (-20%), and autos (-14%) all recorded profit declines. Q2 corporate profits surged even beyond Goldman Sachs’ prior full-year forecast (~20%), as the Q1 figure stood at just 6%. This validates Goldman Sachs’ view of an A-share market trajectory for 2026—“weak first, strong later.” Semiconductor sector profits jumped ~150% quarter-on-quarter to USD 23 billion, accounting for 42% of China’s total AI-related profits (up from 25% in Q1). This signals that, following the post-5G semiconductor cycle—characterized by overcapacity and losses—a new boom cycle has begun, driven by surging AI demand. This year, widespread market skepticism toward tech has not stemmed from deteriorating earnings, but rather from falling stock prices. Sentiment acts as a filter: during rallies, investors instinctively screen out risks; during downturns, they overlook positive fundamentals. In reality, industries remain industries, companies remain companies, and profits remain profits—it is merely perception that has shifted. At present, “hard tech” remains the most clearly defined profit-growth driver across the entire A-share market. This also raises another question: amid tech corrections, many voices have emerged calling for “sector rotation”—some say into software, others into commercial aerospace, still others into consumer staples or healthcare. It is as if these sectors can only rise if tech falls. While individual stocks in tech and these other sectors do indeed exhibit a “seesaw effect” on the charts, their weakness stems from fundamental factors—for example, commercial aerospace suffers from excessively high expectations and overheated speculation; the consumer sector is undergoing a valuation re-rating from “growth stocks” to “value stocks.”

Goldman Sachs reviews China’s Q2 earnings: profit growth hits a five-year high, with expansion of growth from 'hard tech' into broader sectors.

On net profit margin: aggregate net profit margin for all Chinese listed companies improved from 7.6% in H1 2025 to 8.2% in H1 2026. IT sector margins rose from 3.6% to 6.7%; materials from 4.1% to 6.1%; and securities firms from 31% to 40%. Real estate remained the largest drag, with revenue down 21% year-on-year and margins persistently negative. Semiconductors dominate the AI profit pool—memory chips emerge as the biggest winner. Analysis indicates China’s AI profit pool is rapidly concentrating in hardware—especially semiconductors. In Q2 2026, China’s semiconductor sector’s profits surged ~150% quarter-on-quarter to USD 23 billion, accounting for 42% of China’s total AI-related profits—up from just 25% in Q1 and a mere 9% for the full year 2025. Memory chips were the core driver. Following their listing, domestic memory leaders are rapidly capturing global memory-cycle profit share, now commanding 13% of global memory profits. China’s overall semiconductor sector margin reached 20% in Q2 (still in single digits for the full year 2025), with memory chip margins soaring to 71%, foundry margins at 15%—though still trailing U.S. peers (35%) and other regions (43%). Beyond semiconductors, China’s global profit shares in power, AI infrastructure, and physical AI also rose quarter-on-quarter in Q2. Power is China’s most stable advantage sector, commanding 42% of global profits (approx. USD 12 billion), with power generation alone accounting for 48% of global power-sector profits. AI infrastructure profits rebounded to USD 8 billion (19% global share), led by PCB/CCL, servers, and optical modules. Notably, China’s AI model layer remains unprofitable—the country’s value creation remains heavily concentrated on the hardware-enabling side, rather than foundational models or software. Internet earnings hit bottom—turnaround expected in H2. Offshore soft-tech/internet firms posted slightly weaker-than-expected Q2 results. Goldman Sachs’ coverage of nine major internet companies—including Alibaba, Tencent, Xiaomi, NetEase, Baidu, Meituan, JD.com, Pinduoduo, and Ctrip—showed a 13% year-on-year decline in Q2 profits, below the consensus expectation of -8%. Yet the firm believes earnings growth has bottomed. Consensus forecasts project Q3 profit growth turning positive at +17%, accelerating further to +25% in Q4, and reaching +43% in Q1 2027. Key drivers supporting this recovery include: easing subsidy-driven competition in food delivery, monetization of AI and cloud services generating new revenue streams, and e-commerce’s sustained cash-generating capacity. However, the firm’s economists forecast only a 1.7% year-on-year growth in China’s social retail sales in H2 2026—persistent consumption weakness remains a constraint. A-share shareholder returns continue strengthening; HK-listed buybacks contract. Goldman Sachs notes a clear divergence in shareholder returns between A-shares and H-shares. On the A-share side, over 870 listed companies announced interim dividend plans, totaling RMB 740 billion in cash payouts, with an interim payout ratio of 29%; 57 companies declared dividends for the first time since listing. SOEs contributed approximately 80% of total dividends, with 15 companies each distributing over RMB 10 billion in a single payout.

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