Getting Green in China Means Investing in Black Gold
Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Prior to joining Global X Funds, Alex Ashby lived and traveled extensively throughout Asia. He currently manages a group of six ETFs covering the consumer, energy, financial, industrial, material, and technology sectors of the Chinese economy. The Global X China Energy ETF (NYSEMKT: CHIE) provides investors with exposure to energy companies in China and is designed to be a transparent, cost-efficient way to get access to the growing demand for energy within the country.
Slepko: Everyone knows about (and often is confused which is which) CNOOC (NYSE: CEO), Sinopec (NYSE: SNP), and PetroChina (NYSE: PTR) – and those are your top three holdings, but I’m curious about coal, like Yanzhou Coal Mining (NYSE: YZC) and China Coal Energy. After all the oil and gas companies, coal concerns represent the largest grouping in the Global X China Energy ETF (NYSEMKT: CHIE).
Ashby: Those big three are definitely important suppliers to China, but they are also becoming more multinational through mergers and acquisitions abroad. The state ownership of these companies is an important distinction, but these expansions are creating a stronger link to the global trends in the supply and demand of oil. With those top three holdings you are getting more of an oil play, but with the [other ~70% of the ETF] you are getting an even more China specific play. Currently, coal is a huge part of the country’s energy mix, more so than in other countries – China is the largest consumer of coal in the world. This is mostly because China has a good amount of coal supply, and it’s currently cheaper than many other energy sources – and there are less restrictions on its use (though that is changing with an increased focus on environmental issues in China). One recent announcement that may impact companies like Yanzhou is the potential canceling of government-set coal contracts. This development would actually help liberalize the market and allow the coal miners to earn more by selling on a spot basis. We view these types of reforms as beneficial and demonstrate a move in the right direction regarding government involvement in the industry.
Among the three major oil and gas companies, there are many similarities – significant state ownership being a primary one – but some key differences as well. PetroChina is by far the largest, and in 2011 the company passed ExxonMobil as the largest producer of oil in the world. However, PetroChina is less involved in natural gas than its US counterpart.
Natural gas and offshore exploration are areas where CNOOC is more active and has been the leader among the three major Chinese producers. However, competition may be heating up there as well: recent contracts awarded to PetroChina and Sinopec suggest that offshore exploration is an area of increased interest for those companies. It will also be interesting to see how each company begins to incorporate “unconventional” energy assets into its production mix, both via acquisitions – the recent approval of CNOOC’s purchase of Canadian oil sands operator Nexen, for example – and through organic development.
Slepko: It is also interesting to see a cluster of five green energy companies [JA Solar, LDK Solar, Suntech Power, Trina Solar, Yingli Green Energy] at the bottom of your list of energy holdings [which together account for about ~1.5% of the ETF – though with a combined market cap of USD 1.8 billion are still going concerns]. I’m assuming they decided listing [their stock on an American exchange] was the only way they would get any investors, as Chinese investors seem more practical in what they are willing to risk their money on.
Ashby: Chinese companies list on US exchanges for a variety of reasons, but I don’t think it has a lot to do with the characteristics of local investors – many foreign companies view the US listing process as more transparent, and in cases where companies have already raised money from foreign investors through certain investment structures they may be required to list abroad due to local regulations.
The solar industry had a tough year in 2012, and is still working through supply/demand issues. It will be interesting to see how the fund reflects China’s own mix of domestic energy as the usage changes over time. Those big three oil companies are gigantic and there’s no reason to think they will stop expanding and acquiring throughout international markets, so most likely those companies will stay consistently near the top for the foreseeable future. However, I think you may start to see changes in the middle and lower holdings depending on how effective the green companies will be and which new companies will enter the middle ranks of the already established energy players. If China looks to transition away from coal and toward green energy or nuclear power, we could see more of those types of companies represented in the fund.
There could still be some consolidation taking place in certain sectors, particularly in solar which has already contracted in part due to the supply/demand imbalance. Panel makers around the world have begun to cut panel production amid oversupply, so it will be interesting to see how that process plays out. Recent earnings from LDK Solar disappointed, with sales falling and the company reporting a loss during the quarter. China is definitely making a push for cleaner energy, but these solar companies ultimately need the demand side to pick up again in order for the economics of the segment to improve.
While certain areas in China’s energy industry may outperform or underperform, the ETF gives exposure to all these major energy sources – oil and gas, coal, green energy, etc. – and helps to diversify an investment within the sector. The energy demand is only increasing, so the question investors should ask when looking at them individually will be how effectively these companies can supply the growing demand for energy in China.
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!