Morgan Stanley picks 'alpha' opportunities in China tech — giving one 52% upside

Published Wed, Dec 6 20236:52 PM ESTUpdated Wed, Dec 6 20237:48 PM EST

Amala Balakrishner @in/amala-balakrishner @_amalabk

The Chinese economy may have been in a funk this year, but Morgan Stanley sees promise in tech — naming stocks to play the sector into the new year. In a Dec. 4 note, the investment bank's analysts pointed out that the Hang Seng Tech Index – which includes China internet players — is down 7% so far this year, slightly outperforming the MSCI China Index, which is down 12%. They expect 2024 to be "another year of an alpha-driven market as subpar macro improvements weigh on industry growth." "[We] expect alpha-driven performance for select stocks," they added. Alpha stocks are those with the ability to beat the market. Morgan Stanley is bullish on content leaders in games and music, which they say will "continue to show resilient performance." It also sees "unique growth opportunities" for domestic and overseas "market share gainers and education plays" as well as artificial intelligence enablers. 'Top pick' and overweight-rated stocks It named online retailer Pinduoduo its "top pick in China's e-commerce segment." The bank has an overweight rating on the stock, as it has the "most solid low-price user mind share" of the major e-commerce players. Mind share refers to consumers' awareness of a brand. Reasons for that include a low-price yet high-quality supply chain, high operational efficiency and "a traffic allocation algorithm and underlying business logic that place a high weighting on high-quality/low-price products." Morgan Stanley has a price target of $181 on Pinduoduo, implying around 26% potential upside from its Dec. 5 close. Other companies that the investment bank gave an overweight rating include online travel portal Trip.com and e-commerce giants Tencent and Baidu . Morgan Stanley has a price target of $50 on Trip.com — giving it nearly 52% potential upside from its Dec. 5 close — and 430 Hong Kong dollars ($55.06) on Tencent, or around 39.2% upside. It has a price target of $150 on Baidu, giving it upside of 32%. Calling it the "best AI enabler play in [its] coverage," the investment bank likes the company for its "full stack of AI capabilities including cloud infrastructure, deep-learning framework, large language model, and applications." Equal-weighted stocks The investment bank is cautious on giant Alibaba , downgrading its rating from overweight to equal weight. It attributed the downgrade to slower turnaround in customer management revenue and cloud, given the drag in China's economy. Morgan Stanley also said uncertainty from reorganization after the withdrawal of the cloud spin-off and the lack of a capital management catalyst could weigh on the company. The investment bank now has a target price of $90 on Alibaba, giving it upside potential of 24.3%. It is also equal-weighted on Meituan following a "slower-than-expected recovery in consumption sentiment." The bank now has a target price of HK$120 on Meituan, giving it upside potential of around 42%. — CNBC's Michael Bloom contributed to this report.