Our focus on green aligns with the Chinese government's aim to reach net zero by 2060. Achieving this goal will require significant investment. The China Council for the Promotion of International Trade states that China's decarbonization efforts will require around $21.3 trillion in investment by 2060. Reaching the goal will also need ingenuity, coordination, and drive across industries. There are strong indications that China is up to the task.
The country dominates global manufacturing capacity for renewable energy and storage, including 90% of solar production.1 China also produces a whopping 75% of the world's batteries. Furthermore, it has numerous leaders in areas like solar wafers, battery and other electric vehicle componentry, automation, and those upgrading electricity grids for a renewable future. For investors, the green theme therefore offers significant long-term opportunities.
China's decarbonization efforts will require around $21.3 trillion in investment by 2060.
How does this look in practice?
When we imagine the green world of tomorrow, we picture sleek electric vehicles (EVs) and fields of glistening solar panels. What we don't often consider is the less glamorous – but no less important – technology that makes these innovations possible. Within this supporting ecosystem, there are a number of attractive mid-cap stocks that dominate their respective niches. We believe they should grow in stature as the green industry leaders that rely on their products become household names.
One company to highlight is a leading power module company that is China's main manufacturer of insulated-gate bipolar transistors. These are semiconductor-switching devices used for fast switching with high efficiency in numerous electronic devices. Applications include EVs, solar inverters, wind farms, household appliances and more. The leading power module company is therefore well-placed to take market share as demand for these products surges. The company also makes its own input microchips, rather than relying on global suppliers. This self-sufficiency chimes with the government's ambition to localize the manufacture of important technology, such as semiconductors.
Another specialist firm in the green-tech space is a company considered a leading lithium iron phosphate (LFP) manufacturer, a core material for EV batteries. The LFP manufacturer has made a name for itself with its revolutionary nano-grade LFP. Spanning seven years to develop, the product contains a longer battery life and better stability than rival alternatives. It also boasts above average cold-weather performance, a sound safety profile, and all-important consistency. On top of all that, it's cheaper to make than many alternatives. Importantly, the LFP manufacturer holds the patent on this production method, meaning no other players can develop nano LFP in this way. Among its clients is a Chinese battery-manufacturer that specializes in the manufacturing of lithium-ion batteries (and supplier to an American automotive and clean energy company), and a publicly-listed Chinese conglomerate manufacturing company.
Offshore wind farms are an excellent source of clean energy. However, these farmers still need a reliable and secure way to transfer the energy back to shore. Enter of China's leading power cable manufacturers, notably underwater cable (it has 30% market share). This sector looks set to flourish as China grows its offshore wind capabilities. By our numbers, the underwater cable market could grow 30% a year until 2025 and in the high teens thereafter. More broadly, wind power is less globalized than solar, meaning China could play a meaningful leadership role in this space. Again, companies exposed to this dynamic should do well.
Given the technical requirements for underwater cables, the industry has high barriers to entry and attractive profitability. Within the sector, this leading power cable manufacturer has a strong brand, efficient production methods, and marine engineering expertise. The company is also expanding its production capacity in areas that should see meaningful offshore development, such as Zhejiang and Guangdong.
What's the long-term outlook?
China is the world's largest greenhouse gas emitter. Achieving carbon neutrality by 2060 will not be easy. However, the country is investing heavily in areas like solar, wind, and batteries. As a result, many Chinese companies are leading the way in the technologies of tomorrow. For investors with access to the necessary on-the-ground resources and local know-how, we believe China's green drive represents a significant opportunity.
1 abrdn December 2022
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