25 September 2018

An exotic China theory: The bigger the trouble the better

This year, we have seen the strong comeback of a couple of sectors that were once in deep trouble. If there is any takeaway, it is probably that instead of running away from sectors with big problems, embracing them could be a better investment approach. In China, experience shows that bigger the problem, the more likely Beijing will lend its mighty helping hand.

Few sectors can compare with solar power’s woes. Overcapacity, trade frictions, crumbling product prices and headline-making bankruptcies banded together to produce a perfect storm for the entire value chain from polysilicon to panels.

When the media was busy debating as to how prolonged the downtrend will be and what will be the financial impact on the sector and banks who lent heavily to solar players, Beijing came up with the answer — if foreigners are not buying, China can use those products itself. Boosting solar power consumption actually kills two birds with one stone; solar factories can keep humming and the country can expand its clean energy portfolio.

In July, the government announced its eye-popping 35 Gigawatt solar power installed capacity target for 2015, followed by a series of subsidy details. Additional measures to help secure financing for the sector are underway, according to the China Securities Journal.

Companies, big and small are rushing in to tap the upcoming opportunities. This month, Kunlun Trust, the investment arm of energy giant China National Petroleum Corp., teamed up with small-cap firm Goldpoly New Energy Holdings Ltd. (00686.HK)

Another small player Shunfeng Photovoltaic International Ltd. (01165.HK) recently won permission to acquire Wuxi Suntech, formerly the biggest solar panel maker. Solar cell material maker GCL Poly is also wasting no time to beef up its solar farm investments.

There is no doubt more will come. On-site solar projects, the major focus of government’s support plan, are set for a blowout in the coming years.

Last week, Jiangsu TV — in the eastern province that bet heavily on solar industry — ran a two-day report on the warming up of the sector. Encouraged by the government push, companies are doing their bit to upgrade the industry. Some intend to spend more on research and development while others have installed automation devices to cut costs and raise output.

On the big winners chart, solar plays can certainly occupy quite a few high spots. GCL chalked up a gain of 70 percent in its share price in year to date, while Shunfeng doubled since reports of its takeover bid surfaced.

Talking about blunders, milk is another outstanding industry. The tainted milk scandal of 2008 brought the shady practices of dairy players under global spotlight. Confidence plummeted but problems didn’t stop there. Quality issues cropped up from time to time in following years. Finally Beijing issued a stringent set of baby formula requirements in August, along with plans to groom a few heavy-weight domestic milk product makers to rectify the situation, triggering a series of acquisitions.

Again, milk counters were some of the best performers this year. Inner Mongolia Yili (600887.CN) surged about 80 percent in year to date, China Mengniu (02319.HK) lagged but still posted a decent 57 percent rally. Yashili (01230.HK), which was acquired by Mengniu, jumped 150 percent to become one of the best in the sector.

A more distant example is railway. The 2011 Wenzhou high-speed rail disaster exposed the deep-rooted corruption problem in the railway authority, sparked national outrage, froze new project approvals completely and threatened to end the country’s dream to become a top bullet train maker. Major railway related plays kept sinking for about two months and there seemed to be no light at the end of the tunnel.

Two years from the deadly crash, a shakeup was done with the establishment of China Railway Corp. to replace the defunct Ministry of Railways. Massive ordering of train equipment was restarted and Premier Li Keqiang even helped pitch China’s high-speed train technology to Thailand’s Prime Minister Yingluck Shinawatra during the 16th ASEAN-China Summit last month.

Rolling stock makers are again boasting bulging orders and success in winning overseas contracts.

Most of the sector’s share price recovery was already seen last year. Currently, they trade at levels close to the highs since the crash.

CSR Corp. (01766.HK), which produced the two trains involved in the 2011 accident, has comfortably recouped all losses after the fiasco and is 150 percent above the trough hit two months after the crash. Rail construction firm China Railway Group (00390.HK) has tripled from the post-crash low.

– Contact the writer at [email protected]


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