WHEB Commentary

Ty Lee

Market background still positive for energy efficiency


I recently attended the UBS Global Clean Energy and Utilities Conference and met with some analysts in the clean tech field. It is clear that the market backdrop is still more favourable to energy efficiency, whereas the renewable energy sector continues to be challenging. In the current cost-conscious economies, companies want to stay competitive while reducing costs at the same time. Energy efficiency themes clearly play out well in this environment. For instance, one would expect the rise of gasoline prices in the US would hold back consumers from buying cars, but the demand for fuel-efficient cars actually spurred demand for automobiles in March. Another piece of anecdotal evidence is the recent growth of Kingspan, a leading supplier of energy saving solutions to the construction industry. The company reported an impressive 14% organic revenue growth in 2011 despite facing a challenging construction market.

By contrast, renewable energy is still facing various headwinds. In the solar sector, prices are collapsing throughout the whole value chain from polysilicon to solar modules. We recently met with the management of Centrotherm, a leading solar equipment manufacturer. With the lackluster demand for solar equipment, the company’s near-term strategy was to take up large-scale turnkey solar plant projects in Algeria and Qatar to offset its revenue decline in equipment sales, highlighting the gloominess of the current solar market. The situation is similar in the wind sector. Due to excess capacity and dropping turbine prices, Vestas, the world’s largest wind turbine maker, reported a €166 million loss for the first time in 6 years in 2011. Even Chinese low cost manufacturers have been struggling. Sinovel, the largest Chinese wind turbine maker, announced a 73% profit decline and Xinjiang Goldwind, the second largest Chinese wind turbine maker, predicted that its net income might drop to between zero and 20.6 million yuan.

The over-capacity issue has already driven some industry consolidation. However, the process may take longer than most expect for a number of reasons. The solar and wind sectors are largely dominated by Chinese manufacturers. Some of them are supported by their local governments, which are very reluctant to let the struggling manufacturers go bankrupt as it might damage their local economies. The resultant effect is a long-drawn-out industry consolidation process in the sectors, hammered in the meantime by continued over-capacity. Nonetheless, the valuation of the renewable energy sector has dropped to such a low level that might trigger more mergers and acquisitions. There was a rumour on 16 April that Sinovel and Xinjiang were considering taking over Vestas, although Goldwind has already dismissed the rumour on the basis that their technologies are not compatible.

In view of this dichotomy, we see more investment opportunities within energy efficiency themes that span across a wide range of sectors from transportation to buildings, industrials, IT, lighting and energy storage. Nevertheless, despite the bleakness of the renewable energy sector today, it will, in our view, represent a major part of the global economy in the future. More investments will be made in renewable energy and while we’re currently on the sidelines, we will continue to look for value opportunities in this rapidly changing and dynamic space.

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