Chinese companies are looking overseas for growth. Morgan Stanley says this is the stock to play the trend

Published Sun, May 26 20248:42 AM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

A U.S.-listed Chinese company that makes most of its money overseas could soar more than 75%, according to Morgan Stanley's newly updated forecasts. Asia equity analyst Yang Liu and a team not only raised their price target on Tuya by 50 cents to $3.50 last Tuesday, but on Thursday issued a separate note saying they expect the beaten-down shares of the Chinese company to "rise in absolute terms over the next 60 days." "This is because the stock has traded off recently, making short term valuation much more compelling," the Morgan Stanley analysts said, noting Tuya's quarterly results last week. Tuya shares closed Friday at $1.99, down more than 13% for the year so far. The company said its first-quarter revenue grew year over year by 30% to $61.7 million, primarily from selling cloud-based "Internet of Things" software to lighting and appliance businesses. A hotel, for example, can use Tuya's system to remotely set mood lighting in each room. "1Q24 clean beat reaffirmed the upward trend with a much steeper slope," the Morgan Stanley analysts said, noting Tuya raised its revenue guidance for the full year. "Key play on Chinese companies going overseas, with a global leading position," the analysts said. "After the 1Q24 result, we think that our previous OW thesis on Tuya is gradually playing out as reflected in the fundamental improvements." More than 80% of Tuya's revenue comes from outside of China, while the domestic market's growth has slowed, the company said on last week's earnings call, according to a FactSet transcript. Management noted that Europe is Tuya's largest market at just over one-third of total revenue, followed by Asia Pacific. Latin America accounts for nearly 15% of revenue, the company said. "Our market share is expanding as major competitors exited the market during the industry downturn from 2022 to 2023," management said. "More leading brands are transitioning from in-house IoT development to our platform." Tuya is just one of many China-based companies going overseas as their business capabilities improve and growth at home slows. The company claims it became one of Google's authorized solution providers in 2021 and says that last year it integrated Google Cloud. In terms of data security, Tuya announced last week it earned the European Union's GDPR data privacy certificate. The company also claims to have data centers in the U.S., Europe, India and mainland China. Tuya plans at its developers' conference on May 29 to release details on how it is integrating generative artificial intelligence with its products. The company, which is dual-listed in Hong Kong, also has a buy rating from Goldman Sachs. BNY Mellon holds more than 21% of Tuya's outstanding shares, while U.S. venture capital firm New Enterprise Associates holds just under 20%, according to records accessed via the Wind Information database.