China's government is leading the push to boost auto sales and Morgan Stanle y thinks three stocks are set to benefit. "While China braces for its slowest quarterly economic growth in two years, the car industry is benefiting from multifaceted stimulus offered by central and local governments," Morgan Stanley's analysts, led by Tim Hsiao, said in a note this month. Hsiao noted that China's "tried and true" playbook of boosting vehicle sales growth has led to a sharp recovery of the auto sector in the second quarter. The measures implemented include purchase tax cuts and a loosening of the country's tight quota on the number of license plates issued. This auto sector recovery is expected to continue into the second half of the year, driven by replacement demand for both electric vehicles and traditional internal combustion engine (ICE) vehicles, he added. The bank has forecast personal vehicle sales growth of 4% in 2022 as its base case. "Growth in the auto sector should compare well sector-wise, as other key sectors scramble to remain afloat amid cyclical downturns," Hsiao said. 'Kodak moment' Morgan Stanley believes EV names could be the first to benefit from China's stimulus packages. "We still believe EVs will remain a strategic focus for China into 2023 and we hold a constructive view on near-term performance of EVs as the strong order books, thin channel inventories, aggressive stimulus, and favorable model pipelines will underpin EV momentum into 2H22," Hsiao said. Read more Warren Buffett loves this stock. Morningstar is more bearish and thinks it should be trading lower Strategist reveals why this FAANG stock is a safe bet heading into September Analyst names the stocks 'at risk of going to $0' and 3 top picks, giving one over 80% upside In a separate note on Aug. 29, Hsiao suggested that the traditional ICE vehicle could soon be facing its own "Kodak moment." The former photography behemoth commanded a significant share of the market in the 1970s but had to file for bankruptcy in 2012 after it failed to keep pace with the industry's rapid digitalization. Hsiao added that there was "zero discussion" about new petrol-based models during the earnings calls of Chinese automakers, with all questions and management comments focused on hybrid and EV strategies. Stock picks Which stocks then, will benefit from this new auto landscape? "Stocks with cheap valuation and greater estimate revisions for their stronger product pipelines or project breakthroughs could stay more resilient in valuation terms," Hsiao said. Within this space, Morgan Stanley likes Shanghai-based Nio for the potential upside to its stock price. "We think the market expects Nio's operations to remain suppressed – but with [second half] volume recovery kicking in, backed by improving supply and a favorable model cycle, we believe risks to Nio's volumes and stock price are now skewed to the upside," Hsiao said. The bank also likes Beijing-based Li Auto . While it acknowledged that the stock has underperformed the market over the past two weeks, it believes strong orders for the company's latest L9 Smart SUV and higher sales of the L8 SUV will lay "a more favorable platform" for 2023. Rounding off the bank's list is Guangzhou-based Xpeng . The stock has underperformed its peers this year on concerns over slowing orders for its P5 and P7 models, and the absence of new models until the fourth quarter of the year, according to the bank. However, it expects sales of Xpeng's vehicles to pick up from September, backed by an increasing number of orders and the launch of the new G9 luxury SUV. Morgan Stanley is buy rated on all three stocks.