Morgan Stanley has raised the price targets of Alibaba Group Holding, Baidu, Pinduoduo and Meituan Dianping as the US investment bank upgraded China’s internet sector to “attractive” level in a research note published on Monday. The sector is expected to show “accelerated diversification” to expand their reach from consumers to businesses and government, Hong Kong-based analyst Grace Chen wrote in the report. The bank also expects that momentum to carry into lower-tier cities and into overseas markets, with cost discipline to support sales growth, according to the report. The size of China’s e-commerce is expected to grow by 18 per cent to 12.7 trillion yuan in 2020, mainly driven by a penetrating in less-developed areas, the bank said. The 26 companies under Morgan Stanley’s sector coverage, including leading players Alibaba, Baidu and Tencent Holdings, are seen generating 24 per cent more profits to 376 billion yuan on the back of 24 per cent jump in sales to 2.6 trillion yuan. Baidu, Alibaba and Tencent will help China ‘aggressively’ narrow AI gap with US “We see diminishing risks of further cuts to sales and earnings estimates against moderated market expectations in view of easing regulatory and competitive concerns,” the bank said. Morgan Stanley increased the 12-month price target for Alibaba shares to US$245 from US$215, saying its positive stance is based on its sustained strength in e-commerce and attractive valuation. Lower-tier cities are becoming a new growth driver, adding to its leading position in business-to-consumer and business-to-business platforms. True dominance of China’s Baidu, Alibaba and Tencent revealed – and how their influence extends worldwide Alibaba closed at US$200 in New York on Friday, while its shares in Hong Kong last traded at about HK$194.80. The Hangzhou-based e-commerce group is the owner of the South China Morning Post . The price targets search-engine giant Baidu was raised to US$150 from US$132, while the bank expects e-commerce upstart Pinduoduo to fetch US$40 versus US$35. The target for food delivery group Meituan Dianping was increased to HK$120 from HK$105, the report showed. Meituan, Xiaomi shares jump as they become available on Stock Connect Not all of the 26 companies are getting the thumbs-up though. Morgan Stanley downgraded smartphone maker Xiaomi Corp to equal weight and slashed its price target by about 5 per cent to HK$10, due to its struggles for impact from fifth-generation phones. “Slower 5G smartphone shipment ramp-up would lead to slower internet service revenue growth,” Morgan Stanley said. “Elevated operating expenses to promote new smartphone models will more than offset continuous gross margin improvements on hardware business.” The investment bank also warned increasing pressure on the country’s booming live streaming industry in the coming years when downgrading key players like Huya and Douyu to equal-weight from overweight. “Sequential growth of individual companies could slow down, pressuring valuation for companies without a secondary profit driver,” it noted in the report.