China’s Hot EV and Solar Stocks Have More Room to Run, Funds Say

(Bloomberg) -- Some of the world's biggest money managers say the strong rally in China's renewable energy stocks has more legs, citing the sector's rosy earnings prospects and policy support.

BlackRock Inc., Aberdeen Standard Investments Ltd. and UBS Global Wealth Management are among those backing investments in Chinese electric vehicle-related companies and solar firms. Their endorsement comes as the world's largest battery maker Contemporary Amperex Technology Co. and major solar producer LONGi Green Energy Technology Co. hit record highs this week after surging more than 40% each in the last quarter.

Global funds are upbeat because of China's continued dominance in global EV battery and solar panel production, and the nation's supportive industry policies serving its ambitious goal of reaching carbon neutrality in 2060. International expansion by key players is among other reasons for their optimism.

Chinese companies are increasingly threatening the EV market share of Tesla Inc., which has captivated much of the investment world's imagination until recently. Tesla slid nearly 4% during the first half of the year even as other automakers surged ahead.

“It's a structural, long-term growth story that investors are prepared to pay up for today,” said James Thom, an investment director at Aberdeen Standard. “The anticipated uplift in renewable energy capacity over the next five years under the latest ‘five-year plan' is sufficient to justify current valuations,” he added, referring to Beijing's blueprint for economic and social development through 2025.

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Top Bets

EV makers are entering a “golden age,” with global sales expected to surge 76% this year amid supportive policies in Europe and the U.S., as well as increased “high-quality” supply from China, Essence Securities Co. analysts wrote in a note Monday. The Chinese brokerage recommends investors stay overweight the sector.

Shares of U.S.-listed Chinese EV manufacturers have climbed more than 60% since their lows in mid May, supported by signs of robust demand growth. Among them is Xpeng Inc., which is slated to start trading in Hong Kong on July 7 after raising $1.8 billion in a so-called homecoming share sale.

As prices of materials from lithium to polysilicon have risen, the rally has extended to suppliers. Solar polysilicon maker Tongwei Co., which has estimated a sharp jump in first-half earnings, has gained nearly 39% since a low in March. Equally upbeat about its profit growth, battery materials supplier Yunnan Energy New Material Co. has seen its shares more than doubled since February.

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For Hartmut Issel, head of Asia Pacific equities at UBS Global Wealth Management, there's also scope for solar glass manufacturers to outperform as a potential rise in demand can help improve margins. That's after increased supply reduced prices earlier in the year, dragging down names such as Xinyi Solar Holdings Ltd.

Valuation Concerns

To be sure, the rich valuations of some new energy stocks are starting to elicit caution among other investors: CATL is trading at 102 times 12-month forward earnings estimates -- about eight times that of rival Panasonic Corp.; Yunnan Energy boasts a valuation of 82 times, near an all-time high multiple of 89.

“While these themes have a long way to run, the underlying stocks can be very volatile, especially when they are already pricing a lot into the future,” said Dhananjay Phadnis, portfolio manager at Fidelity International Ltd.

Policy Tailwinds

Despite such concerns, strong domestic policy support will likely prove a powerful tailwind for the sector's long-term growth.

For example, many provincial governments are setting “an even tighter target” than 2060 to reduce carbon emissions, BlackRock portfolio manager Lucy Liu said at a briefing last month.

Other recent developments include an “old-for-new” car subsidy scheme launched by Guangdong authorities, one that Citigroup Inc. says could boost sales for EV makers from BYD Co. to Nio Inc., Li Auto Inc. and Xpeng due to their exposure to the province.