APAC Focus: Where are the investment opportunities in China's energy transition?

A comprehensive top-down investment guide for energy transition In our 2021 Q-Series, we mapped out the impact and trajectory of China’s zero-carbon goals. In this report, we dig deeper into the five key subsectors—solar manufacturers, wind equipment, renewable operators, power grid, and hydrogen—to plot market sizes and growth, and analyse the key investment opportunities and risks. Our analysis indicates the entire electricity value chain will be the key beneficiary of China’s energy transition, with earnings CAGRs as high as 30% in 2022-25E across subsectors. We have also run scenarios for the impact of key macro variables—interest rates, energy prices, basic material prices, and geopolitical tensions—and conclude the overall earnings impact should be neutral to positive. We expect fundamentals to improve in 2023 versus 2022: we are more bullish on market sizing, which puts our 2023 EPS forecasts c8% above consensus for our three most-preferred subsectors. Potential re- rating catalysts include: 1) green electricity demand-side reform policies; 2) accelerating wind and solar installation data; and 3) recovering grid capex and IoTE investment growth.

We expect secular growth based on our proprietary market sizing analysis... Our top-down analysis indicates 6-46% growth in the five subsectors' market sizes in 2022-25E (6% for overall power grid capex and 46% for hydrogen). Key areas where we differ from the market: 1) for renewable operators, we think the green electricity tariff might increase in 2022-25, while the market has been concerned about tariff pressure; 2) for power grid, we think the market has underestimated the strong recovery in IoTE investment from 2023 onwards as bidding and delivery normalise; 3) for wind equipment, we think the market has yet to reflect the potential growth in subsea cable demand due to increased project distance from shore.

...with limited downside risks to the key macro economic trends We have run earnings impact scenarios for rising interest rates, higher energy prices, lower basic material prices, and geopolitical tensions. Our analysis indicates the overall impact should be neutral to positive, as: 1) most subsectors (excl. renewable operators) are net-cash or have low net gearing below 15%; 2) most companies either have limited cost exposure to energy, or can pass through price hikes; 3) lower basic material prices can stimulate downstream demand with neutral-to-positive impact on margins, except for polysilicon companies; 4) there is likely minimal impact from geopolitical tensions given most subsectors (excl. solar manufacturers) have <2% overseas revenue exposure. Also, the sector has secured an independent supply chain.