China’s wind energy industry

While the Beijing Olympics is attracting a lot of attention to the state of pollution in China, many in the world are ignoring signs that China is taking the problem of environmental degradation very seriously. The Red Cat Journal has previously tackled the question of who really owns China’s pollution. Today, we cover some of the progress China is making in clean energy and highlight one listed wind energy company.

China’s landmark Renewable Energy Law took effect on January 1, 2006. The law provides a legal framework for the development of all forms of renewable energy and establishes a payment system for electricity generated using renewable energy. China has set targets for the proportion of energy generated using renewable sources, including a 10% target for 2010 and 15% by 2020. This is up from 7.5% in 2005.

For the wind industry, in particular, China has set a target of 30GW power generation capacity by 2020. However, some analysts and industry players believe that power generated by wind energy could reach 170GW by 2020. To help spur development of a local wind energy industry, China has mandated that 70% of wind energy manufacturing be sourced locally by 2010. As a result, many foreign wind companies are planning to build factories in China or working with local partners. China now has four wind gearbox makers, over 10 blade makers and over 40 wind turbine makers.

Perhaps the best positioned gearbox maker, with a 90% domestic wind gear share currently, is China High Speed Transmission Equipment (0658.HK). The company has technical co-operation agreements with GE, Alstom and ZF. For 2008, analysts estimate that 30-40% of the company’s revenues could come from sales to GE. Because of lower cost manufacturing in China, the company also enjoys a 40-50% cost advantage against international peers. Because of the bright outlook for clean energy, the company’s shares are not cheap. The company trades at over 70X 2007 earnings although earnings are expected to double in 2008. Given the susceptibility of clean energy to a ‘concept’ premium, any investor in China High Speed Transmission Equipment should be willing to tolerate the potential for high volatility in the shares’ price.