In the wake of COP26, the momentum behind energy transition is unstoppable: Asian countries, and especially China, will be among the main protagonists. As the world shifts to greener technologies, the ability to look along supply chains to find the best opportunities is vital, according to Pruksa Iamthongthong and Adrian Lim, co-managers of Asia Dragon Trust.

‘We think about energy transition in three layers: renewables, electrification and energy efficiency,’ said Iamthongthong.

The first layer covers the changing energy mix and the rapidly increasing proportion of renewables. ‘For us, it’s important to know what part of the value chain gives the best opportunity in risk/reward terms: our preference here is for upstream companies within the solar supply chain,’ she said.

Given China’s 90% global market share in solar panel manufacturing, this is a particularly rich area. ‘In this rapid phase of industry growth, playing the component manufacturers is an effective way to capture the growth across the whole of the industry,’ she said.

Within this area, the Trust holds Longi Green Energy, the global leader in solar wafer manufacturing, as well as Sungrow which focuses on inverters and energy storage, and Nari Technology, which is a play on the fact that grids will need to be upgraded as the renewables mix increases.

Lim points out that the strength of the renewables theme is reflected in the fundamentals of these three companies. ‘Purely in terms of financial performance, they all have strong margins, very good market share, good technology, and a stable trend of revenue growth as well as Ebitda,’ he noted.

The second layer of the energy transition story, electrification, focuses on electric vehicle (EV) penetration. ‘This is moving very fast in China and we are seeing opportunities not just among Chinese companies but also Korean companies that are supplying components for the global shift to EV usage,’ Iamthongthong said.

Here again, investing in upstream companies gives Asia Dragon’s managers the ability to capture broad-based industry growth, Lim said. ‘We’ve gone beyond headline names and invested in the component suppliers whose products are vital if the EV case is to be successful. We’ve focused on those that we think have the best chance of explosive growth in the future: their fortunes are not pegged to just one or two brands but to the success of the whole EV story.’

Charged up

Asia Dragon’s managers particularly like battery companies, such as Korea’s LG Chem, and a recent addition to the portfolio has been China’s CATL, a battery maker that has rapidly caught up both in terms of technology and market share. They also hold Delta Electronics, a Taiwanese company that develops charging infrastructure and supplies to both developed and emerging markets.

Perhaps the least obvious of the three layers within the energy transition story is energy efficiency. ‘For this reason, we think it’s also the least crowded and it’s where, in spite of the growth opportunities, valuations are still relatively attractive,’ Iamthongthong said.

Energy efficiency can be broken down into three main parts: the semi-conductor supply chain, data centres, and machinery and automation, Lim and Iamthongthong said.

‘Advanced semiconductors are more energy efficient. So a company like Taiwan’s TSMC, which has very advanced manufacturing capability, is an obvious play on this,’ Iamthongthong said.

As the data economy grows, the ability to process data in an energy-efficient manner will also be vital. ‘In China especially, regulations are tightening on data centres. So those that have a superior design or better technology will benefit and will be able to outgrow the industry. We hold China’s GDS, which is a leader in terms of energy efficiency,’ Iamthongthong said.

Machinery and automation is a play on the greater Capex spending that will be required to produce the equipment needed to service the shift to greener technologies. ‘Here we have a presence in companies like Shenzhen Inovance, one of the leading automation companies in China,’ Iamthongthong said.

But investing in emerging economies also presents a specific set of challenges, Asia Dragon’s managers note. ‘We have to understand the social challenges. As these economies strive to become greener, it’s essential to ensure ongoing economic growth and development,’ Iamthongthong said.

India is a particularly good example. ‘There’s a well-known shortage of housing in India, and this requires the use of cement, which is a highly carbon-intensive industry. Because housing and infrastructure are necessary for society, we stick with this relatively high-polluting industry, but our strategy here is to invest in the companies that have the best profile available. We invest in UltraTech, which is one of the two or three most energy-efficient Indian cement companies,’ she said.

UltraTech is also an example of Asia Dragon’s managers using their leverage as a shareholder to engage. ‘We’ve been asking them to improve the composition and independence of their board because historically the company was family-owned and run. In the last few decades, it has introduced more and more professional management and independent board members. This is something that we continue to watch and to engage with,’ Lim said.

Companies selected for illustrative purposes only to demonstrate abrdn’s investment management style and not as an indication of performance.

This article was written and originally published by Citywire Investment Trust Insider.

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