This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Jan 4 - 10, 2016.
The world is changing and with it, the types of investments that will yield returns? What are the investments of the future?
2. Solar
The most obvious beneficiary of a progressive low-carbon economy is the solar power sector, which is already growing by leaps and bounds with a number of governments worldwide looking to slash their carbon footprint.
Affin Hwang Asset Management Bhd’s (AHAM) head of equity strategies and advisory Gan Eng Peng says the global solar sector is expected to do well in the light of the expected rush ahead of on-grid tariff cuts in China and Investor Tax Credit cuts from 30% to 10% in the US. The increasingly low cost of equipment is making solar energy a viable source of electricity supply without the need for government subsidies, he adds.
Solar or photovoltaic cells were among the low-carbon technologies singled out in a Goldman Sachs International report titled “The Low Carbon Economy”, released on Nov 30.
Goldman Sachs says the entire low-carbon technology sector is growing at US$600 billion per annum and a wide range of industries are expected to be disrupted with the development of low-carbon technologies.
Gan says this sector is a mega trend corollary to the Paris accord as it has far-reaching consequences on the price of crude oil in the coming months. “It has broad implications for oil prices; the geopolitics of oil; the attraction of investment dollar; how electricity is priced during the day (when solar energy is created); and how there is a very big need for industrial batteries to be able to store the energy created economically during the day to be used during the off-peak production. Solar energy is a disruptive frontier business.
“Focusing on the long-term picture, preference is for downstream players, given the declining cost trend. As costs become lower in China, retail parity — projects become economical for end-users without government subsidies — could eventually occur in 2017 or 2018, triggering a new scenario in which solar distributed generation replaces utility-scale solar projects as the major capacity growth driver.”
If a dash to fit solar panels occurs in China, Gan says companies in the midstream segment that manufacture modules and solar glass, such as Jinko Solar, which is listed in the US, and Xinyi Solar, on the Hong Kong Stock Exchange, should be monitored. Other listed companies in Hong Kong include GCL New Energy and China Singyes. Malaysian investors are able to tap into these companies through foreign investment houses like UBS and JP Morgan.
On the local front, Tek Seng Holdings Bhd (TS) is involved in the business of manufacturing and developing photovoltaic products, including solar cells and panels. As at Dec 22, its price-earnings ratio was 25.3 times. In its 2014 annual report, the company stated that its strategic alliance with Taiwanese solar PV manufacturer, Solartech Energy Corp, has provided a platform for greater expansion plans and technology know-how transfer.
“With the current capacity at 220mw, we are optimistic that we will see better contribution from TS Solartech for the financial year ending 2015. Barring any unforeseen changes to the economic and business environment, we are optimistic that our group will achieve an encouraging level of profitability in the coming year,” it says.
3. Batteries
Companies involved in the manufacture of large-scale lithium-ion batteries, particularly electrical vehicle (EV) batteries and home batteries for solar panels, have grown in tandem with the growth in solar energy. This sector is shaping up to be a strategic linchpin for the low-carbon economy.
Goldman Sachs says in its low-carbon economy report that it expects cost to go down by 60% and the performance of EV batteries to improve by 70% by 2020 as a direct result of research and development as well as rapid volume growth, delivery cost reductions and performance improvements.
“Delivering on this potential is not only critical to support a market breakthrough of grid-connected vehicles. It could also become a game-changer for the economics of wind and, in particular, solar power, and could create material upside to current growth projections,” it says.
Jason Lee, ECM Libra’s chief investment officer for equities, says lithium is the lightest, most versatile and probably the most preferred of all metals used in the battery market. It is also widely used in our daily lives.
“Battery manufacturers are generally moving towards lithium because it has shown to have the highest electric output per unit of weight. And this demand should soar with the expected increase in hybrid, plug-in hybrid and electric vehicles currently used and the potential increase in such production by automobile majors and of course, Tesla Motors,” he says.
Not neglecting the role of batteries in smart appliances, which saw the application of lithium batteries reportedly double in the last decade or so, new applications will continue to multiply in terms of their usage in smartphones, tablets, laptops and other IoT electronics that demand lithium, says Lee.
“US-based Tesla’s gigafactory could create a demand spike. It is widely reported that Tesla is developing a more affordable line of electric cars due to be released by 2020. Also widely known is Tesla’s plans to construct a US$5 bilion gigafactory to build 500,000 electric cars with the objective of lowering the cost of batteries by at least 30%. One-fourth of the plant’s capacity is reportedly used for Tesla’s stationary storage business, which sells backup batteries for homes and businesses, all of which will be fuelled by lithium,” he adds.
Some of the companies to look out for in this sector are Hong King-listed Tianneng Power International and BYD Co Ltd and Japan’s GS Yuasa. Smartphone lithium manufacturers such as LG Chem and Samsung SDI are top battery makers.
“From what we know, lithium is not traded as a commodity. A few major suppliers globally, akin to an oligopoly, have managed to supply lithium over the past decade. Since lithium is not traded, it is priced on a contract basis. As such, lithium and other battery-related raw materials could be a scarce resource and companies operating in this segment could benefit as well,” says Lee.
“While it is still early days with inherent risks, the potential demand pull from Tesla’s ventures make this space an exciting one to watch going forward,” he adds.
While AHAM’s Gan agrees that the potential for batteries is tremendous, he says it is hard to quantify at the moment as the technology is still evolving and adoption is in the early stages as it is still too costly for mass consumption. “Once batteries become affordable, the volume growth can be exponential. However, the growth in terms of value will be lower than volume growth after factoring in the price decline,” he says.
China is currently the largest electrical vehicle market as sales volume rose by 240% year on year in the first half of 2015, as a direct response to the Chinese government’s efforts to stave off carbon pollution.
Gan recommends keeping an eye on battery companies involved in R&D as well as production in the US, Europe, Japan, South Korea and China. “But note that these are not pure plays. The main risk is the evolving technology. For example, the batteries produced by Panasonic may be replaced by newer battery technology developed by LG Chem. It is hard to be certain which company will be the eventual winner,” he cautions.
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