Morgan Stanley picks this stock to play China’s emerging tourism trend

Morgan Stanley projects China's inbound tourism could generate $2 trillion over the next decade, driven by successful visa-free policies and enhanced payment infrastructure that have surprised analysts with a robust rebound since early 2023. This trend, despite current revenue remaining below pre-pandemic levels, is expected to significantly benefit Chinese airlines, with Morgan Stanley constructive on the sector and favoring Air China, while also boosting broader economic activity and potentially expanding China's global tourism market share to 6% by 2034.

Analysis

Morgan Stanley projects China's inbound tourism industry could generate at least $2 trillion in revenue over the next decade, driven by surprisingly strong momentum since the country's full reopening. This optimism is founded on specific policy catalysts, including the expansion of visa-free travel programs to over 30 countries and significant enhancements to payment infrastructure, which now allow foreign visitors to use international credit cards on dominant mobile payment apps like Alipay and WeChat Pay. Evidence of this trend includes a record number of inbound tourists in Q1 2024 and the resumption of regional conferences in mainland China. Despite this positive trajectory, tourism's contribution to GDP, at 0.5%, is still only half of its pre-pandemic level of 1%, indicating substantial room for recovery and growth. Morgan Stanley is particularly constructive on Chinese airlines as direct beneficiaries, noting that total passenger volumes as of June have already surpassed pre-COVID levels, which could drive margin expansion as international demand strengthens. However, the sector faces a near-term headwind from softening domestic demand, suggesting the inflection point is still approaching. The long-term forecast anticipates China's share of the global tourism market expanding from 2.4% in 2019 to 6% by 2034.

Key Decisions for Investors

• Consider long positions in Chinese airlines, specifically the Hong Kong-traded shares of Air China as highlighted by Morgan Stanley, to capitalize on the expected rise in international passenger traffic and potential for profit margin improvement.
• Investors should monitor the dynamic between recovering international demand and softening domestic demand for Chinese airlines, as the timing of the profitability inflection point is a key variable for the sector.
• Evaluate second-order beneficiaries within China's consumer retail and payments ecosystem, as increased tourism supported by friendlier payment systems and expanded tax refund programs is poised to boost consumption.
• Adopt a long-term investment horizon for this theme, recognizing that while leading indicators are positive, inbound tourism revenue has a significant gap to close before reaching pre-pandemic levels, making this a gradual recovery play.