Morgan Stanley picks the winners of a Chinese spending boom

Published Mon, Feb 1 202110:04 PM EST

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Key Points

Morgan Stanley analysts predict consumption in China will double in the next decade to $12.7 trillion.
Analysts said in a report released Wednesday they expect "robust growth" in categories such as education and health care, smart appliances and electric vehicles.
Experience-related sectors such as pets and toys, service robots and social media will also likely see significant growth, the report said.

Chinese consumption is expected to double in the next decade — and Morgan Stanley has some investing ideas for the trend. Government policy and an aging population will likely help boost consumption to $12.7 trillion by 2030, more than two times the $5.6 trillion spent in 2019, Morgan Stanley analysts said in a report released Wednesday. On a per capita basis, disposable incomes are set to double from $6,000 a year to $12,000 in 2030, the report said. The rapid rise of e-commerce and one-hour delivery have already spurred the growth of Chinese corporate giants such as Alibaba and JD.com . As the Chinese population ages and new technology emerges, other companies will likely get a boost. The analysts predict "robust growth" in categories such as education and health care, smart appliances and electric vehicles. Sectors such as pets and toys, service robots and social media will also likely see significant growth, the report said. "Material shifts in consumption patterns are likely to take place, from young consumer focused to household demand driven, which will incrementally require a higher proportion of services in consumption," the roughly 200-page Morgan Stanley report said. While some of these categories are so new that there aren't many publicly traded companies yet, here are some of Morgan Stanley's top stock picks for listed companies: Top picks for China e-commerce, entertainment Alibaba JD.com Pinduoduo Bilibili , video streaming site Why Morgan Stanley likes those stocks Online shopping will remain a major area of expansion, with sales growing 12% a year, Morgan Stanley said. Penetration is expected to reach 45% in 2030 versus about 30% in 2020, the report said. The analysts expect leading e-commerce companies — like Alibaba, JD.com and Pinduoduo — to benefit from this growth by investing in new infrastructure and trends, such as fresh produce delivery. Notably for Chinese consumption overall, the analysts are betting more on retirees and their children who are establishing families of their own, rather than China's youngest consumers. While "Generation Z" — those born between 1997 and 2012 — is spending more at their age than prior generations and is more eager to try new products, the report said the group's size of 250 million is significantly smaller than older segments. In the next 10 years, the category of those who are 55 years and above will likely increase by 123.9 million people, the report said. In addition to the top e-commerce firms listed, Morgan Stanley also has a "buy" rating on video streaming site Bilibili . The company was focused on younger users, but is now expanding its content to appeal to a broader audience, which makes analysts optimistic for greater returns ahead. Top picks for China insurers PingAn Insurance PICC ZhongAn Why Morgan Stanley likes those stocks Morgan Stanley predicts China's spending on health care will likely more than double to 16 trillion yuan ($2.46 trillion) by 2030, up from 6.5 trillion yuan in 2019. China's health-care system faces many problems such as unequal distribution of hospital facilities and dated systems that slow access to prescription medicine. Online consultations and e-commerce platforms from Ping An Good Doctor and Alibaba-backed Ali Health can meet those needs if government policy is supportive, Morgan Stanley said. They said that once guidelines for implementing online prescription drug sales are released, Ali Health could sell the medicines at a much larger scale through Tmall, Alibaba's e-commerce site. The potential for sales of chronic disease drugs and others to participate in government-backed reimbursement programs will be "a game-changing catalyst for online drug sellers," the report said. Top picks for Chinese education Tal Education , offers after-school education New Oriental , after-school tutoring China East Education, operates vocational education institutions in the catering and auto industry Why Morgan Stanley likes those stocks Morgan Stanley expects that by 2030, the overall education market will have doubled to $2 trillion, with K-12 after-school tutoring growing the fastest at about 11% a year. Vocational education will grow about 10% annually for a market worth $390 billion, the report said. Top picks for China home appliances Haier Smart Home , which is leading the market in China Midea Gree , manufacturer of air conditioners Why Morgan Stanley likes those stocks Morgan Stanley expects China's home appliance market to grow 5% a year through 2030. In a slowing Chinese market for home appliances, companies will be able to drive sales by finding new sources of growth, primarily through integration with the internet, the report said. These "smart" appliances can then be controlled remotely via smartphone apps.

Visitors wearing masks walk past Shanghai Disney Resort, that will be closed following the outbreak of a new coronavirus, in China.

Aly Song | Reuters

Chinese consumption is expected to double in the next decade — and Morgan Stanley has some investing ideas for the trend.

Government policy and an aging population will likely help boost consumption to $12.7 trillion by 2030, more than two times the $5.6 trillion spent in 2019, Morgan Stanley analysts said in a report released Wednesday. On a per capita basis, disposable incomes are set to double from $6,000 a year to $12,000 in 2030, the report said.

The rapid rise of e-commerce and one-hour delivery have already spurred the growth of Chinese corporate giants such as Alibaba and JD.com.

As the Chinese population ages and new technology emerges, other companies will likely get a boost.