By Chong Koh Ping
Chinese renewable-energy stocks have soared recently as investors believe the country's drive to become carbon neutral will fuel heavy investment in wind farms and solar parks.
Big moves in Chinese shares are often tied to government plans and this is the latest example, as investors try to anticipate winners from whatever policies are included in the nation's next five-year plan.
In the one month to Oct. 22, New York-listed Daqo New Energy Corp. jumped 59.9%, while Hong Kong-listed Xinyi Solar Holdings Ltd. and Xinjiang Goldwind Science & Technology Co., have advanced 17% and 31.5%, respectively. Daqo New Energy makes polysilicon, a key raw ingredient for solar panels, while Xinyi Solar makes solar glass. Xinjiang Goldwind is China's biggest wind-turbine maker.
A Wind index of 40 renewable and clean-energy companies whose shares trade in Shanghai or Shenzhen has gained nearly 5% over the past month, compared with a 2.2% increase in the broader CSI 300 index.
Last month, President Xi Jinping told the United Nations that China's carbon emissions will peak in 10 years and it will strive for carbon neutrality by 2060. Going carbon neutral means China's emissions of this key greenhouse gas will be equal to zero, once offsetting measures like planting trees are taken into account. Achieving that will require slashing emissions by using cleaner energy sources and carbon-capture technologies.
That pledge has fueled hopes that green energy will be favored in the next five-year plan. Leaders of the ruling Communist Party are meeting later this month to flesh out the details of this medium-term economic blueprint, which will cover 2021 to 2025.
"The speech sent a very strong message and renewable energy companies are the major beneficiaries," said DBS Group research analyst Patricia Yeung. "But we have no clue how they're going to do it. This is a major uncertainty."
In addition, Ms. Yeung said solar stocks were already trading at very rich levels, with share prices for companies such as Xinyi Solar already at more than 20 times forecast earnings.
The long-term goals are audacious for a country that is the world's biggest emitter of carbon dioxide. Citigroup analysts estimate China would need to use more than 12 times more solar power--and more than seven times more wind energy--by 2060 to go carbon-neutral, requiring $6.2 trillion of investment over 40 years.
The analysts dub this a golden opportunity for clean energy and say electricity generated from coal--China's dominant fuel source--will need to shrink by nearly three-quarters.
Still, Evan Li, HSBC's head of Asia utilities and conglomerates research, said the market might have gotten ahead of itself in pricing in the likely financial benefits.
Mr. Li said investors had been cheered by reports of aggressive government targets, which could potentially require increasing national wind and solar capacity by 100 gigawatts annually for the next five years. But he said the market could get a reality check as soon as November, when details are likely to emerge.
"The 2030 and 2060 goals will support growth in wind and solar energy," said Mr. Li, referring to the target dates for peak emissions and carbon-neutrality. "But the significant and immediate change in the next two to three years remains in question and will depend on the development of grid infrastructure."
While China has the resources to aggressively expand alternative power-generation capacity, he said, it faces a series of near-term challenges. These include connecting wind and solar firms to the grid and minimizing waste, storing power and transmitting it from distant regions where most alternative energy is generated to China's power-hungry industrial and urban hubs.
Adding 100 gigawatts a year of new green energy would represent a step up. Last year China added 26 gigawatts of wind and 30 gigawatts of solar, taking respective generation capacity to 210 gigawatts and 204 gigawatts, according to National Energy Administration data.
Hundreds of wind-energy companies recently proposed at a Beijing conference that China should add more than 50 gigawatts annually in wind power through 2025.
Dennis Ip, an analyst with Daiwa Capital Markets in Hong Kong, said the solar sector had a comparative edge, since its costs had fallen faster than those in wind--and wind farms took longer to build.
He said there was also likely to be another round of mergers between makers of solar components and only the leaders in each subsegment are expected to survive. That would benefit investors by reducing competition and making those market niches less volatile, he said.
Write to Chong Koh Ping at firstname.lastname@example.org
(END) Dow Jones Newswires