The next theme in our Five reasons to invest in China series – and perhaps the most important from a global perspective – is green.

Our focus on green aligns with the Chinese government’s aim to reach net zero by 2060. Achieving this goal will require significant investment. The China Council for the Promotion of International Trade states that China's decarbonisation efforts will require around $21.3 trillion in investment by 2060. Reaching the goal will also need ingenuity, coordination, and drive across industries. There are strong indications that China is up to the task.

The country dominates global manufacturing capacity for renewable energy and storage, including 90% of solar production1. China also produces a whopping 75% of the world’s batteries. Furthermore, it has numerous leaders in areas like solar wafers, battery and other electric vehicle componentry, automation, and those upgrading electricity grids for a renewable future. For investors, the green theme therefore offers significant long-term opportunities.

China's decarbonisation efforts will require around $21.3 trillion in investment by 2060.

How does this look in practice?

When we imagine the green world of tomorrow, we picture sleek electric vehicles (EVs) and fields of glistening solar panels. What we don’t often consider is the less glamorous – but no less important – technology that makes these innovations possible. Within this supporting ecosystem, there are a number of attractive mid-cap stocks that dominate their respective niches. We believe they should grow in stature as the green industry leaders that rely on their products become household names.

One company to highlight is StarPower. It’s China’s main manufacturer of insulated-gate bipolar transistors (IGBTs). These are semiconductor-switching devices used for fast switching with high efficiency in numerous electronic devices. Applications include EVs, solar inverters, wind farms, household appliances and more. StarPower is therefore well-placed to take market share as demand for these products surges. The company also makes its own input microchips, rather than relying on global suppliers. This self-sufficiency chimes with the government’s ambition to localise the manufacture of important technology, such as semiconductors.

Another specialist firm in the green-tech space is Dynanonic. It’s a leading lithium iron phosphate (LFP) manufacturer, which is a core material for EV batteries. Here, Dynanonic has made a name for itself with its revolutionary nano-grade LFP. This took seven years to develop – but the results speak for themselves. The product has longer battery life and better stability than rival alternatives. It also boasts good cold-weather performance, a sound safety profile, and all-important consistency. On top of all that, it’s cheaper to make than many alternatives. Importantly, Dynanonic holds the patent on this production method, meaning no other players can develop nano LFP in this way. Among its clients is battery-maker CATL (which supplies Tesla) and BYD Autos.

Offshore wind farms are an excellent source of clean energy. However, the ‘farmers’ still need a reliable and secure way to transfer the energy back to shore. Enter Ningbo Orient Wires & Cables. It’s one of China’s leading power cable manufacturers, notably underwater cable (it has 30% market share). This sector looks set to flourish as China grows its offshore wind capabilities. By our numbers, the underwater cable market could grow 30% a year until 2025 and in the high teens thereafter. More broadly, wind power is less globalised than solar, meaning China could play a meaningful leadership role in this space. Again, companies exposed to this dynamic should do well.

Given the technical requirements for underwater cables, the industry has high barriers to entry and attractive profitability. Within the sector, Orient Cables has a strong brand, efficient production methods, and marine engineering expertise. The company is also expanding its production capacity in areas that should see meaningful offshore development, such as Zhejiang and Guangdong.

What’s the long-term outlook?

China is the world’s largest greenhouse gas emitter. Achieving carbon neutrality by 2060 will not be easy. However, the country is investing heavily in areas like solar, wind, and batteries. As a result, many Chinese companies are leading the way in the technologies of tomorrow. For investors with access to the necessary on-the-ground resources and local know-how, we believe China’s green drive represents a significant opportunity.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.

1 abrdn December 2022