Goldman says investors want profitable Chinese companies’ overseas growth

Goldman Sachs says Chinese companies’ overseas growth could expand their global footprint, but stock investors are looking beyond sales growth. Trina Chen, co-head of Greater China equity research at Goldman Sachs Research, said investors want evidence that expansion abroad can produce profits rather than set off another damaging price war.

That distinction is central for investors assessing Chinese companies that are seeking customers outside their home market. Goldman forecasts their overseas market share could rise to 31% by 2035 from about 18%, based on research across more than 10 industries, including express delivery, industrial robots and household appliances.

Goldman’s forecast is an outlook, not a guarantee. Chen said equity investors remain skeptical of the international opportunity and that little of it is reflected in Chinese companies’ stock prices.

What do investors want from Chinese companies’ overseas growth?

Chen’s test is whether a company can expand abroad while maintaining healthy returns. Goldman says Chinese businesses can often earn higher profit margins overseas than at home, while still charging less than local rivals. A profit margin is the share of revenue left after costs, so higher margins can give a company more room to compete on price without eroding earnings.

Investors, Chen said, need confidence that overseas growth will not reproduce China’s “involution,” a term used for intense competition that drives prices down and hurts profitability. China has been trying to address that type of race-to-the-bottom competition, according to Goldman.

Chen also said geopolitical risks and restrictions on access to markets weigh on share performance. Those concerns are part of why Goldman says the potential from global expansion has not been fully valued by the stock market.

Why are Chinese companies expanding overseas?

CNBC reported that sluggish consumer demand in China has encouraged companies, including electric-vehicle brands, to accelerate plans to enter other markets. Geely, for example, said it planned to enter Canada the following year.

Goldman’s argument is not limited to the U.S. and Europe. The firm identified emerging markets and places underserved by existing competitors as areas where Chinese businesses are seeing some of their fastest growth.

For shareholders, the debate turns on whether foreign revenue becomes durable earnings. Chen noted that markets can react sharply when established companies lose share: a 10% to 15% decline in market share can cut a company’s market capitalization, the market value of its listed shares, by 50% to 80%, according to her estimate. Goldman’s broader view is that Chinese companies may keep taking global share, while investors wait for proof that the gains can be profitable and sustainable.

This story draws on original reporting from CNBC.