Tap into China’s clean energy dominance when this ETF lists in London tomorrow
11th October 2023 |
In the last issue of Small Cap Investigator, we promised we’d send you a new investment opportunity imminently in the China/clean energy nexus, a market we’ve long wanted exposure to.
Well, we’re finally in a position to give you the requisite details.
Remember, when it comes to green energy, China is utterly incomparable.
Consider that, each year from 2020 to 2022, China installed more renewable electricity capacity than the US, the EU and India put together.
In the solar industry alone, China already generates more power than every other country in the world combined, with the rate of progress so astonishing that even industry specialists can’t quite keep up with what’s happening on the ground.
Last November, for instance, the International Energy Agency estimated China would add 80 GW of new solar capacity in 2023. In February, the China Photovoltaic Industry Association said China would install 95-120 MW this year.
Ten months into 2023, both estimates are already looking seriously under-clubbed.
According to BloombergNEF, China is now set to install over 150 GW of solar capacity this year – more capacity than had been installed ever in the US by the start of 2022.
What’s more, in May, the chairman of Tongwei Solar predicted that new installations might fall between 200 and 300 GW in 2024 alone.
But that’s just in China.
In 2021, over 80% of all stages of solar photovoltaic manufacturing occurred in China. But only a minority of these supplies are actually installed in China, with the majority exported overseas.
However, it’s not just in solar energy that China reigns supreme. As of January 2022, China operated half of all the world’s offshore wind turbines.
In the electric vehicle (EV) market, China produces more EVs than the rest of the world put together.
Here, the Chinese government has set a goal of EVs hitting 20% of all new car sales by 2025.
From 2016-2018, EV sales in China jumped from 1% to 5% of all car sales. They reached 20% in 2022 – three years ahead of schedule. By comparison, the US only reached 5% in 2022.
What’s more, as of 2022, 98% of all electric buses in the world were deployed in Chinese cities.
China’s shift to a green economy isn’t just happening fast – it’s still accelerating.
In fact, a pattern has emerged over the past several years where the government sets an ambitious environmental goal, then reaches it much earlier than expected.
According a report by Global Energy Monitor in June, China is currently on track to double its entire renewable energy capacity by 2025 – five years earlier than the government’s original target date of 2030.
China’s goal was peak emissions before 2030 and carbon-neutrality by 2060, but this peak may even already be passed. If not, it will likely arrive within the next two years.
What this means, of course, is that China has spent more on the energy transition than any other country since 2012.
In 2022 alone, China invested $546 billion or nearly half of the global total in energy transition investment, according to Bloomberg NEF. For context, the US was a distant second at only $141 billion.
No wonder, then, that the percentage of Shanghai-listed companies generating revenue from renewable energy pursuits is significantly higher than that found among S&P 500 member firms.
Companies that make up the S&P 500 produce just 3.4% of their revenue from clean-energy sources, roughly half what companies on the Shanghai Composite Index earn.
In dollar terms, Shanghai-listed firms generated $707 billion in renewable energy-related revenue last year. That’s slightly more than the US, Germany and France combined.
So with China expected to remain the global leader in renewable energy over the next five years, accounting for 43% of renewable capacity growth worldwide, it’s clear the country is home to the largest number of clean energy equity investment opportunities anywhere in the world.
This makes the country’s clean tech space the perfect place to look for a Small Cap Investigator recommendation.
However, up until now, investing in the Chinese clean tech space has been nigh on impossible for most UK investors.
Most brokers just don’t offer a market in all but a few Chinese stocks.
But, starting tomorrow, that’s about to change with the London listing of the Kraneshares MSCI China Clean Technology Index UCITS ETF (LON: KGRN), our latest Small Cap Investigator recommendation that is set to take advantage of China’s continued clean tech dominance.
Our latest Small Cap Investigator recommendation: Kraneshares MSCI China Clean Technology Index UCITS ETF (LON: KGRN)
KGRN is a fund that has been listed on the NYSE since December 2017 but it will now finally be available as an undertakings for collective investment in transferable securities (UCITS)-compliant exchange-traded fund (ETF), meaning it will be fully available to UK and European retail investors.
When it lists in London on Thursday 12 October, KGRN will be the only UK-listed ETF to specifically tap into China’s clean tech industries. It will provide investors with an avenue for accessing Chinese equities with significant long-term growth potential and ample government support.
Listen to what KraneShares’ Dr Xiaolin Chen says about KGRN in this exclusive interview
Late last month, I recorded an interview with Dr Xiaolin Chen, head of international at KraneShares, to find out more about KGRN.
I asked Xiaolin to provide an overview of KGRN, including its key investment objectives and what sets it apart from other offerings on the market.
Please click the image below to hear directly from KraneShares on what makes KGRN such a compelling investment opportunity. A transcript of this interview is also available here.
As its name implies, KGRN is a play on clean technology expansion in China. The ETF tracks the MSCI China IMI Environment 10/40 Index, which contains China-based companies that generate at least half their revenue from environmentally beneficial products and services.
Put another way, 50% of a company’s group revenues should come from at least one of renewable energy, energy efficiency, green buildings, sustainable water or pollution prevention. This diversification allows investors to tap into Beijing’s well-funded, broad-based approach to clean energy technologies.
That mandate is relevant on multiple fronts, including China’s status as a leading exporter of renewable energy products and the parts necessary to make those products.
Home to 56 stocks, KGRN certainly stands to benefit from China’s increased focus and spending on clean energy technologies.
Aside from companies involved in renewable energy generation and its components, KGRN’s holdings include companies running data centres powered by renewable energy, EV manufacturers, waste management and clean water solutions providers, and real estate companies implementing sustainable practices and technologies.
Certainly, companies associated with EVs and lithium-ion batteries dominate the fund’s top holdings. The largest three are BYD Company, the world’s largest EV maker (which commands a weight of 9.25%), Li Auto (8.40%), a Chinese luxury EV maker, and Contemperary Amperex Technology (8.08%, a manufacturer of lithium-ion batteries and other energy storage solutions.
Solar company Xinyi Solar Holdings is the eighth largest holding (4.09%), while LONGi Green Energy Technology is the ETF’s tenth-largest holding (3.35%).
Of course, favourable geography is common to all KGRN’s holdings.
After all, the Asia-Pacific region is home to the largest concentration of companies generating significant portions of sales from green energy, meaning there is huge growth opportunity on the doorstep of all KGRN holding companies.
Certainly, China’s ties to surging renewable energy expenditures around the world make KGRN a good long-term bet for investors.
Please be aware of some key risks
This is an investment not without risk.
Firstly, although China’s current dominance in the clean energy space is undeniable, it’s also true that countries in the West are looking to weaken China’s stranglehold over the forthcoming years. State-led industrial policies such as the Inflation Reduction Act in the US are looking to promote domestic supply chains, which could see portfolio flows ebb away from China and pivot to other big regions in the clean energy battle.
Secondly, it’s also fair to say that China’s economy is far from firing on all cylinders at present. The country is contending with a protracted crisis in the property market, deflation, weak exports and a falling yuan.
Although China’s explosive spending on clean energy offers one salve, any underperformance in the Chinese economy will certainly weigh on holdings in KGRN’s underlying index.
Thirdly, please be aware that KGRN’s holdings can be volatile. The annualised standard deviation of KGRN’s monthly returns is appreciably higher than the popular emerging market and Chinese alternatives on the market.
What’s more, and lastly, it is not particularly cheap to own. According to YCharts, on a weighted average basis, the holdings of KGRN trade at 13.3x forward P/E. KGRN also charge 78 basis points (bps) to investors.
However, if you’re comfortable with the risks, then KGRN is certainly worth considering by patient, tactical investors.
Certainly, Chinese companies such as those held by KGRN will continue to benefit from the nation’s dominant position in the clean energy supply chain.
As such, we recommend you buy Kraneshares MSCI China Clean Technology Index UCITS ETF (LON: KGRN) when it lists in London on Thursday 12 October. The ETF will enter the model portfolio at its opening price.
Action to take: buy Kraneshares MSCI China Clean Technology Index UCITS ETF
Ticker: LON: KGRN
ISIN: US5007678502
Buy up to: $2 above its opening price on Thursday 12 October
Until next time,
James Allen
Co-editor, Small Cap Investigator
