WHEB Commentary

Ted Franks

Monthly Commentary April 2018

When a smaller holding is our top monthly performer, there is often more than one story to tell. In April, China Longyuan achieved this distinction. And sure enough, there are lots of factors to its rise.

China Longyuan is a Hong Kong listed Chinese wind farm developer. In wind power capacity, it is in fact the largest wind farm owner in the world.

From late 2015 until the end of February, the news always seemed to be bad. The electricity grid couldn’t keep up with the pace of renewable energy installations. So regional governments restricted the amount of energy the producers could sell. At China Longyuan, earnings growth slowed and cash flow weakened. The share price had had a torrid time, lagging the Hong Kong market by 50%. The valuation languished at historic lows.

But from the start of March, the story began to change. More of the company’s output was being paid for, and on time. Having completed a vast capacity expansion, it reduced spending on new windfarms. With operating margins above 30%, the potential cash generation could be impressive.

In April, there was a further boost. The National Energy Administration (NEA) announced a package of measures to increase the use of wind energy. Practical and sensible, they seemed likely to come into force.

This is partly just tidying up a fast growing, complex industry. But it also reflects an evolution in Chinese thinking about the environment. Environmental improvement is a key policy platform of Chinese Premier Xi Jinping.

The concept of a ‘Beautiful China’ originally appeared under Xi’s predecessor, Hu Jintao. But the environmental challenge has worsened every year. There is a clear impetus to get something done about it. Xi has recently consolidated power in his own hands, seemingly for life. A better, more sustainable ecology would be a very tangible success for him.

So we can tell a story about company specific improvements for China Longyuan. We can also tell a story about an improving regulatory backdrop. And there is more.

This spring has seen a changing dynamic in global energy markets. The global oil price has risen a little and there are reasons to think it may rise further. Chief amongst these are geopolitical tensions centred on Iran. Some also think that global oil infrastructure has been ‘underinvested’ and that supplies may run short.

There is a positive link between higher oil prices and the attractiveness of renewable energy. This is more complicated than it might seem. But high energy prices do lend further support to the ‘Beautiful China’ idea. They will make it easier to enact the structural changes proposed by the NEA. And they increase the enthusiasm amongst equity investors for stocks like China Longyuan.

So there are three stories that converged to propel China Longyuan in April. For the WHEB team, the key question is how far these narratives might drive the rest of the Cleaner Energy theme.

At the moment this theme is around 7.3% of the strategy. In our broad sustainability framework, this is a fair weight. But as a highly impactful theme, we are always looking to expand it.

In April the urgency was again underlined by the weirdness of the weather. A month which started with record freezes also included the hottest April day in 70 years. The slow train of low-carbon energy cannot come soon enough.