U.S. cleantech struggles, China thrives. Will stocks mirror the trend soon?
03 August 2023
As the Q2-2023 earnings season unfolds, the U.S. cleantech industry grapples with high interest rates and declining power prices, undermining the competitiveness of renewables. Meanwhile, in China, the narrative is distinctly different.
In the U.S., rising interest rates and lower electricity prices are undermining the residential solar market, reflected in the Q2 earnings reports of companies like Sunpower, Enphase, and SolarEdge. Further compounding the issue is the introduction of NEM 3.0 in Califonia, which has curtailed compensation for net energy metering, making solar-only systems less attractive and driving a shift towards home solar + battery systems vs. solar systems alone.
The wind sector, too, is bearing the brunt of rapid technological advancement and intense competition. As firms rushed to introduce new technologies at ever-decreasing prices, quality control took a hit, a problem brought to the fore by profit warnings from Siemens Energy. The high failure rates resulting from these hasty roll-outs and issues at production facilities raise concerns about the long-term viability and trust in Western wind products.
Contrasting with the challenging U.S. scenario, China's renewable energy sector is thriving. H1-2023 figures report significant growth in wind and solar installations. Wind capacity additions increased by 77.7% YoY to 22.99GW, while solar capacity saw a 154% YoY jump, reaching 78.42GW. Aligning with these developments, the China Photovoltaic Industry Association (CPIA) has revised its global PV demand estimates upward by 5-10% this year.
Impact on our Investment Case
The waning demand for residential solar in the U.S. is not new news for us. The U.S. Solar Energy Industries Association (SEIA) reported that Q1 2023 residential installations had risen by 30% YoY but gave disappointing guidance of 8% growth for 2023. Anticipating this trend, our allocation in the Sustainable Future strategy was revised earlier in the year by reducing exposure to U.S.-centric firms and increasing weighting towards European and Chinese-focused end-markets.
The wind industry's quality control issues and other challenges are concerning but not insurmountable. We believe wind energy, especially offshore wind, will continue to be crucial to the decarbonized power mix. Projects in the pipeline will likely consider higher failure rates, raw material price volatility, and supply chain hurdles in their pricing, ensuring viability. However, China's smoother permitting process and government-driven growth make it a more predictable and attractive market.
Our investment case on China should begin to bear fruit, underpinned by last week's politburo meeting where leaders pledged to increase stimulus measures and investor confidence.
China's electric vehicle (EV) sector adds another feather in its cap, with local manufacturers like BYD, Li Auto, and Xpeng reporting record-breaking sales in July 2023. After a period of reduced demand leading to EV price cuts and slowed production, the battery industry appears to be back on its feet. Aided by the extension of purchase tax exemptions till the end of 2025, consumer demand has bounced back, stimulating the entire supply chain from car manufacturers to battery and battery component makers.
Despite the short-term headwinds, our Sustainable Future theme remains a very interesting theme with strong growth potential.
As indicated in our mid-year review, many key input costs have begun to stabilize, and the implications of large-scale, multi-billion-dollar climate plans are yet to be fully priced in by the market. After a period of strong growth, Western B2C cleantech players may experience a short-term price correction. This is influenced by a confluence of factors such as rising interest rates, macroeconomic uncertainty, and declining power prices, all of which contribute to potential near-term headwinds.
China, on the other hand, presents a contrasting narrative. Much of the negativity is already factored into the market, creating a springboard for a vigorous resurgence in the industry, particularly in sectors like solar, wind, and electric vehicles. Stock prices should follow once investors realize the growth in China's renewables is stronger than that in Europe and the U.S.
Our objective remains unchanged: strategically pinpointing and seizing the best risk-adjusted return opportunities within the broad scope of the cleantech industry.
Companies mentioned in this article
BYD (002594); Enphase (ENPH); Li Auto (LI); SolarEdge (SEDG); Sunpower (SPWR); Xpeng (XPEV)
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