As the Chinese government continues its clampdown on the tech and education sectors, investors are looking towards industries that are aligned with the country’s national development objectives in a bid to minimise regulatory risk.
China has been tightening regulations on various Internet companies, leading to an ongoing rout in tech stock prices. The MSCI China Tech 100 index - which captures large- and mid-cap stocks across A shares, H shares, ADRs and more – slumped 12.99% in the three months until July 31.
In contrast, China’s CSI New Energy index has soared over 50% in the past three months, as investors shifted their China equity focus from tech giants to stocks along the clean energy and carbon-neutral theme.
Last September, Chinese President Xi Jinping made a commitment for China to be carbon neutral by 2060 and hit peak emissions by 2030. The world’s second-largest economy is heavily reliant on coal and emits a quarter of the world’s greenhouse gases.
Even within the new energy theme, experts observe that the outlook differs across subsectors. For instance, views on sectors such as electric vehicle (EV) manufacturers are split, with some experts observing that valuations are too high, but they generally agree there are opportunities to be found deep within the supply chain, such as batteries, solar and wind power, advanced manufacturing, data centres, and selected metals and mining sub-sectors.
AsianInvestor asked fund managers and analysts which new energy subsectors will outperform over the next six to 12 months, as well as other sectors to keep an eye on.
The following contributions have been edited for clarity and brevity.
Mark Mao, Greater China research analyst
J.P. Morgan Asset Management
China is very focused on innovation in cutting edge tech, such as semiconductors and automation, as well as renewable energy innovation to meet its ambitious climate goals. There has been very meaningful investment into renewables, with many Chinese companies having become global leaders. For example, Chinese companies are the world's largest manufacturers of solar glass, solar modules and batteries for electric vehicles.
While China has been promoting the new energy vehicle (NEV) industry for more than a decade, it finally saw the penetration rate exceed 10% in the first half of 2021. Further endorsed by China’s commitment to carbon neutrality, we expect to see a continuous NEV penetration rate growth in the coming decades – at a speed which investors may not fully appreciate yet – due to advances in technology and competition which are making these renewable technologies available and installable at the right prices.
We continue to use fundamental research to be very selective on the companies that have benefitted from the NEV development trend and favour those who are already leaders or have the potential to become leaders in each part of the value chain. Each sub-segment has its unique key winning factors, entry barriers, business models and competitive landscapes, making bottom-up research the key in stock selection. Meanwhile, we also pay attention to the risks and sources of volatility, given the nature of the fast-evolving industry and dynamic changes in the competitive landscape.
Caroline Maurer, head of China and Hong Kong equities
HSBC Asset Management
In terms of carbon neutrality themes, our investment team does not prefer the pure new electric vehicle manufacturers at this stage because their valuation is too high and has priced in a lot of future growth while sales numbers are still at an early stage. There is still not a clear winner in the industry or key differential features for the product, e.g. auto-driving system (similar to IOS in Apple products).
Instead, we like beneficiaries in the supply chain especially EV batteries manufacturers with high technology (R&D) standards. We also believe the Chinese solar energy industry has a great opportunity. Top Chinese players are gaining global market share due to their technological advantages, price reductions and low cost of financing. Solar energy will be the main new source of renewable energy in mainland China.
We continue to overweight the Information Technology sector, especially in semiconductors and technology hardware & equipment. The shortage in semiconductors has broadened downstream, causing tight supply/demand conditions in automotive, consumer electronics and industrials, and the pricing power of manufacturers will likely sustain for a while.
We also believe that autonomous driving chips will be the next area of market focus after smartphone chips in mainland China. The sector also has less regulatory risk and is more resilient during Growth stocks de-rating or increasing risk-premium in Tech stocks.
Victoria Mio, director, Asian equities
We like companies that produce clean energy or provide relevant services in a bid to increase clean energy supply, including energy-storage service providers and firms that focus on wind, nuclear, solar, and hydropower, lithium-ion batteries, and hydrogen energy.
Selected metals and mining sub-sectors might also outperform the market amid carbon reduction. For example, copper demand could rise notably when global clean power stations enter an intensive construction period, as it is widely used in the fields of photovoltaic, wind power and energy storage. Moreover, the accelerating global electric vehicle trend will spur copper demand since it is in the ascendant in the fields of new energy vehicles and charging piles. Other metals including aluminium, lithium, nickel, cobalt and molybdenum also have potential in clean energy and EV application areas.
With intensive introduction of regulatory policies recently, we are also interested in some sectors with high policy certainty and growth visibility such as sporting goods, new energy vehicles and high-end manufacturing. We also like the biotech sector as we think it will enjoy further support for R&D and will have little policy headwind.
In 3-6 months, investment opportunities will continue to come from commercialized sectors such as wind, solar, gas, EV, batteries, battery materials. Solar manufacturers’ earnings and cash flows do not directly rely on government subsidies anymore and they can ride on the structural global installation growth amid worldwide carbon reduction agenda.
David Smith, portfolio manager of Asian Sustainable Development Equity Fund
Aberdeen Standard Investments
In terms of renewables, we see China as a leading supplier of solar and wind components globally, well placed to help China and the world’s transition to a 1.5°C world (limiting global warming to 1.5°C). The solar value chain in particular is dominated by China, with domestic leaders now global leaders.
In terms of batteries, China’s battery technology leaders are globally competitive, and this also presents interesting investment opportunities along the value chain.
Healthcare however is a more complicated proposition – investors need to look closely at those that are moving the needle on addressing key needs domestically. This might include the clinical research organisation (CRO) players, and also telemedicine companies.
Finally, there are sectors that are energy-intensive but also critical to China’s economic development. Data centres, for example, are hugely important for the continued growth of China’s digital economy, but are also very power-hungry operations. Given the focus on energy intensity and decarbonisation, we think that operators that manage very high-quality data centres which have more efficient operations stand to benefit from rising regulatory hurdles, increasingly strict controls on energy usage and efficiency, and a renewed focus on security.
Sean Taylor, APAC chief investment officer
At the margin, international and domestic investors have switched their focus from the platform businesses to clean energy opportunities, in line with government policy changes.
We prefer areas such as electric vehicle and solar power development which receive strong policy support and attention. China has pledged to produce double the capacity of batteries versus the rest of the world combined by 2025, to accelerate green transportation efforts. In addition, these industries are rather matured and have stable and good business performance. China’s solar industry has progressed from a subsidy-driven market to be driven by grid parity projects and is leading the world in solar power production.
Outside of the renewable market, we also favour other policy-friendly sectors such as semiconductor and industrial automation industries which would benefit under China’s accelerated efforts to achieve self-sufficiency. The escalation of tension between the US and China is likely to incentivize the Chinese government to place more support and attention in these sectors. However, these new areas are smaller in the index and have fewer earnings histories and higher valuations. Hence, selectivity remains key.
Chris Liu, senior portfolio manager, China A-share investments
Sectors like electric vehicles will likely benefit as China moves towards carbon neutrality. China is the largest EV user market in the world and maker of lithium-ion batteries. Chinese companies are very competitive and have leading market positions throughout the whole EV value chain.
Solar power is another area that will benefit from carbon neutrality. China has strong technology advantages and economy of scale from upstream solar cells to downstream solar farms.
We also remain positive about China’s healthcare sector. 2021 results are expected to be strong for China healthcare stocks in general given the indication of strong 1H results. There will be more new drugs approved and we are going to see more market share gaining from domestic drug makers in the area of innovative drugs in China. The recent census reveals the acceleration of the population ageing in China, which is positive for healthcare demand in the long run.