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Morgan Stanley has named a slew of Chinese stocks it says are set to outperform, despite current market conditions. The investment bank said a number of company-specific initiatives were being overlooked by investors, but were set to give the firms a competitive advantage. “We understand investor concerns amid the current uncertain market conditions, while believing there are company-specific initiatives that could lead to stock performance divergence and alpha generating opportunities,” the bank wrote in a June 28 note. Alpha is a measure of an investment’s performance compared to the market more broadly. These initiatives include measures to improve return on equity, a focus on gaining market share gain through expansion, and efforts to “premiumize” product offerings. “The initiatives go beyond standard avenues like share buybacks and cost cutting and include significant capex and/or R & D investments in pursuit of higher market share, technological leadership, etc,” Morgan Stanley said. The analysts selected 39 Chinese stocks based on the degree of their improvement initiatives. The bank said that on a 12-month trailing basis, these stocks have returned 20.2%, compared to the overall MSCI China index, which has lost 13.4%. Here are six of their picks, five of which are also listed in the U.S: Alibaba Morgan Stanley says that Alibaba ‘s restructuring efforts to break up into six clusters should bring “significant” capital returns. The bank projects cash available for distribution to reach $200 billion in three years. It gave Alibaba a price target of $150, or potential upside of nearly 78%. Baidu The bank says the internet services giant is the “best AI play in China.” ” Baidu is the pure-AI focused player as compared to peers, and has been continuously investing in AI since 2010, the earliest starter in China. Baidu has the highest R & D mix compared to peers in tech innovation over the years,” said Morgan Stanley. It gave Baidu a price target of $190, or potential upside of 33.8%. Tencent Music Entertainment Group The bank said Tencent Music Entertainment Group is expected to benefit from subscription growth and extra streams of revenue, among other factors. It gave the group a price target of 450 Hong Kong dollars (57.50), or potential upside of 34.4%. NetEase Morgan Stanley pointed to NetEase ‘s strong game pipeline, and expects margins to improve as a result of non-game segments cutting losses, among other factors. It said AI will also help lift its research and development capabilities. It gave NetEase a price target of $120, or potential upside of around 22%. Trip.com The bank expects market share gain due to higher online penetration and expansion of new revenue streams, among others. It gave Trip.com a price target of $55, or potential upside of 56.6%. Star Power Semiconductor Morgan Stanley also named one semiconductor stock: China-listed Star Power Semiconductor. It said the company is set to move from its mass-market base, to more “premiumization.” It gave Star Power a price target of 420 Chinese yuan ($57.8), or potential upside of around 80%. While the stock isn’t listed in the U.S., global investors can access this stock and others through ETFs such as the KraneShares CICC China 5G & Semiconductor Index ETF . Star Power Semiconductor has a 1.2% weighting in the ETF. — CNBC’s Michael Bloom contributed to this report.
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