By Martin SumichrastPresident Obama said in his speech to Congress on Feb. 24, "we know that the country that harnesses the power of clean, renewable energy will lead the 21st century. And yet it is China that has launched the largest effort in history to make their economy energy efficient." If you have any doubt of the direction of China's future energy demands, here is an enlightening tidbit of information: China's auto industry is now the second largest in the world, having just surpassed Japan, and is on track to surpass the U.S. to become the single largest global auto consumer. The number of passenger vehicles sold in China during January was higher than that of the U.S. for the first time, according to the Associated Press. China's status as a global player has historical precedent. According to an economist from the IMF, China has had the greatest GDP for nine out of the last 10 centuries. This growth is backed-up by a recent UBS ( UBS) Wealth Management estimate that U.S. GDP is expected to grow 22% from $14.3 trillion in 2008 to $17.4 trillion in 2014. At the same time, China is expected to grow 119% from $4.2 trillion in 2008 to $9.2 trillion in 2014. Additionally, China's stimulus plan is loaded with infrastructure expansion which will push their energy demand higher. China hasn't waited for the recent global meltdown to understand that it needs to focus on expanding domestic energy production, specifically in the sector of alternative energy. A good example of this is in the area of wind power. While U.S. energy companies are expanding into wind power, they are finding it hard to build them out as U.S. equipment manufacturers' near term supply has already been bought-up by the Chinese. The takeaway message is clear. With an expected doubling of GDP in the next 5-7 years, China needs energy, and lots of it.
So how can the US individual investor participate in China's growing alternative energy business? Here are three Chinese alternative energy plays that trade in the US markets: 1. Yingli Green Energy ( YGE) is one of the world's leading vertically integrated PV product manufacturers (solar cell maker). Despite a slowing fourth quarter brought about by the overall economic slowdown and an increase in debt levels that have worried the market, they continue to generate strong cash flow and beat fourth quarter estimates, earning 12 cents per ADS share for the quarter. In an effort to help, the Chinese government has given a preferential enterprise income tax rate of 15% for three years under the PRC Enterprise Income Tax Law. The stock is down from its high of over $40 to under $4.00. I would expect them to outperform the overall market after markets stabilize. 2. Huneng Power ( HNP) is taking the lead on forays into new clean-coal and nuclear power technologies. Huaneng is already the largest utility in China. It owns or controls 29 operating power plants. As a state-owned enterprise, it has the contract to produce the power for the entire eastern region of China, including Shanghai and Beijing. Although it will generate a loss for 2008, mainly due to high coal prices, expect HMP to increase production, which will generate profits as the economy expands. The stock is down from its November 2007 high of over $57 and trades in the $25 range. 3. China Bio Energy Holdings ( CBEH) is China's only vertically integrated bio-diesel producer. CBEH is also getting lots of help from China's government in two areas: tax-free earnings through 2010 and access to their government's military rail lines, which has allowed for access to new markets. The company currently trades at $4.00 with PE of under 5. It has no debt and has plans to increase bio-diesel production capacity by another 50% in 2009. Relatively unknown, CBEH should get on investors' radar screens this year. (For full disclosure, the author owns shares in CBEH).
Another reason to take interest in alternative energy plays is that China's government continues to actively provide assistance in those areas that it deems important. Efficient energy producers are obviously one of those sectors. With government backing, global attention and unprecedented growth, efficient energies are a great investment prospect.