Morgan Stanley picks 6 stocks to play China's driverless car 'revolution,' says one has 50% upside

Published Mon, Jan 24 20228:08 PM EST

China is on the "cusp of an autonomous driving revolution," according to Morgan Stanley and the U.S. investment bank has stock ideas for investors to get in on the act. Morgan Stanley gave several reasons behind their thinking. "Technological innovation, industry transformation, geopolitical competition and future mobility disruption are interacting with one another and leading to breakthroughs in energy efficiency, artificial intelligence, 5G communication and, more importantly, the coming EV disruption," the bank's analysts wrote in a note released earlier this month. Opportunities abound Companies from traditional carmakers to technology giants are getting involved in autonomous driving and Morgan Stanley expects a "funding boom" in the sector to continue through 2022. "We believe that the opportunity in China's autonomous driving is going to be substantial," the note said, with the analysts expecting a total addressable market in China of more than $60 billion for semi-autonomous driving hardware, auto semiconductors, so-called robotaxis and smart transportation in 2025. China is leading the way in our view with vehicle autonomy being developed at a faster pace than in other regions across the world... Morgan Stanley Half of the cars on the road in 2025 will have certain self-driving functions, Morgan Stanley predicted. "China is leading the way in our view with vehicle autonomy being developed at a faster pace than in other regions across the world, as the government is guiding its self-driving supply chain development with a clear goal," the analysts said. So how can investors cash in on opportunities as China pushes for its driverless car ambitions? Electric car makers Morgan Stanley said it likes Nio , Li Auto and Xpeng to play the autonomous driving trend. "The companies' full-stack in-house development of hardware/software enables frequent function iterations to meet user demands and quick responses to regulatory requirements," the investment bank said. By "full-stack in-house development," Morgan Stanley is referring to the electric vehicle makers' self-developed technology such as software. For example, Xpeng has an advanced driver-assistance system, or ADAS, called Xpilot. ADAS allows the car to carry out some limited autonomous features like lane switching. Nio also has its own ADAS which is called Nio Autonomous Driving or NAD. While Morgan Stanley said the companies' rollout strategies for autonomous driving are different, they have the same goal. "Aside from the goal of safely transporting passengers on the road, autonomous driving is essential to releasing more time and focus from both drivers and passengers during the ride, which we believe is a critical premise to releasing more monetization opportunities during the ride," the analysts said. NavInfo: Beneficiary of push for domestic chips NavInfo is a Chinese company which sells high-definition mapping and designing chips for cars. Both of these technologies are central to autonomous driving. The company will benefit from Beijing's push to localize semiconductor manufacturing, according to the investment bank. Morgan Stanley said that NavInfo's autonomous driving solution "integrates group resources from HD [high definition] maps, positioning, algorithms, data to software, which are designed to cover diverse needs for different levels of self-driving functions." The Wall Street bank said it remains "overweight" on the stock, which is listed in Shenzhen, and has a 20 yuan price target for. That implies just over 20 % upside from Monday's closing price. Huayu: Potential to 'bear fruit' Huayu is a car parts supplier but has invested into the autonomous driving and electric vehicle space. These strategic initiatives will "bear fruit," according to Morgan Stanley. That's why the investment bank said it was "overweight" on the Shanghai-listed stock. Morgan Stanley has a 42 yuan price target on the company's shares implying 45% upside from Monday's closing price. Nexteer: 'Back on recovery path' Nexteer is another car parts company focused on the steering of a vehicle. The firm is focused on new technologies to help support ADAS in vehicles. Morgan Stanley said the company is also on the hunt for acquisitions which "could lend extra growth impetus," while the electrification of trucks could "unleash business opportunities." The investment bank said the supply chain disruptions and inflation are near-term headwinds but "demand looks rosy." "While the global chip shortage has disrupted Nexteer's growth trajectory, we expect the market will look beyond the near-term production hiccup in light of an easing auto chip shortage and solid underlying demand, particularly in the US, and put Nexteer back on the recovery path," Morgan Stanley said in its note. The bank has a price target of 15 Hong Kong dollars on the Hong Kong-listed stock, implying 52% upside from Monday's closing price. Desay: Opportunities in autonomous driving Huizhou Desay SV Automotive sells so-called "smart cockpit" technology, which includes features like infotainment systems. It also makes components like sensors that are required for autonomous driving. Morgan Stanley called Desay a "leading local supplier for smart cockpits" and an "early mover in autonomous driving." It supplies some autonomous driving components to Xpeng's P5 and P7 models. This year, the "major earnings driver for Desay is traditional/smart cockpits," Morgan Stanley said, adding that it will be driven by production increases from its customers such as FAW-VW (a joint venture between FAW Group and Volkswagen Group) and new projects with Toyota . "We expect Desay to gradually recover from chip supply shortages, with incremental revenue contribution from VW and Toyota in 2022," the analysts said. "Although the recent rally seems ahead of fundamental improvements, we still like the stock as a leading player in China's smart cockpit space and opportunities emerge in autonomous driving area." Desay is up around 26% in the last six months. Morgan Stanley has a 155 yuan target price on the Shenzhen-listed stock, implying 4.5% upside from Monday's closing price.

Xpeng is pushing aggressively into international markets. The Chinese electric car start-up launched its P7 sedan and G9 SUV in Denmark, Norway, the Netherlands and Sweden.

Zhang Peng | LightRocket | Getty Images

China is on the "cusp of an autonomous driving revolution," according to Morgan Stanley and the U.S. investment bank has stock ideas for investors to get in on the act.