Pure Climate Stocks in China: Once in a lifetime opportunity or poisoned pill?

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20Apr

Pure Climate Stocks in China: Once in a lifetime opportunity or poisoned pill?

China’s regulatory crackdowns, when taken together with its ties with Russia and zero-Covid policies, have prompted the worst stock selloffs since the 2008 financial crisis. With a recent announcement, JP Morgan analysts have doomed Chinese companies with an “un-investable” label for the coming 6 to 12 months. So, what does this mean for Chinese Pure Climate Stocks? Let’s take a look at China broadly: the historical performance of its stock market, the reasons behind its current stock undervaluation, and the performance of its Pure Climate Stocks.

How has the Chinese stock market performed?

During the last 30 years, China’s economic development has surpassed almost every economic forecast, achieving the fastest advance in modern history. Given this reality, one might expect investors to believe that the country’s stock market, tracked by an MSCI index since 1993, would be soaring today. However, despite the unprecedented economic boom, Chinese stocks have lagged behind. After a lousy first decade, Chinese equities performed well for almost 20 years before stumbling again over the last year. To make matters worse, President Xi Jinping’s crackdown on entrepreneurs – even as the country’s real estate market faces other problems – have taken a toll on stock development. Over the past 12 months, Chinese stocks have lost a whopping 30 percent of their value.

The graph below showcases Chinese stocks volatility while also highlighting the most relevant results of the market.

Chinese stock market

Source: https://www.msci.com/documents/10199/aa99c3a4-d48b-44ac-8caa-49522caa9021

Are Chinese stocks currently undervalued?

Stock markets abide by the risk and return principle, an idea stipulating that any increased chance of return is strongly correlated with a higher risk level. In simple terms, it means that in order to see bigger returns, an investor must be willing to take bigger risks.

A common measure for valuing a company is the price-to-earnings ratio (PE), which is calculated by dividing the current stock price by the earning per share (EPS). Essentially, the PE ratio indicates how much investors can expect – or would be willing to invest in a company – to receive a single dollar of its earnings. For instance, if a company was currently trading at a P/E multiple of 20x, an investor would be willing to pay $20 for $1 of current earnings. A high P/E could mean that a stock’s price is overvalued, or possibly, that investors expect high growth rates in the future. Conversely, a low P/E might indicate that the current stock price is low relative to earnings, or that the company is undervalued. Companies that have no earnings or are losing money have no P/E ratio.

Undervaluation of Chinese stocks is distinctly noticeable when comparing the P/E ratios for similar types of companies in the U.S. and China. Let’s take some tech giants as an example: China’s Tencent and Alibaba have P/E ratios of 13 and 15, respectively, whereas their American counterparts like Facebook and Amazon have P/E ratios of 22.5 and 46.5, respectively. The difference ranges between 70 and 200 percent.

So, it then begs the question: why is this happening?

It turns out that the disparity is mostly an expression of China’s political risks and geopolitical circumstances.

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Government regulations explained

Last year, strict regulations took effect in Chinese stock markets. One clear example are education stocks. In an abrupt move in July, Chinese authorities banned school-age tutoring businesses from operating on weekends and holidays, while simultaneously ordering them to restructure as non-profits. The move caused the shares of education giants like New Oriental Education & Technology and TAL Education to plunge by a staggering 90 percent. Then there are the tech and real estate sectors, where the government harshly cracked down by regulating its biggest companies and developers, costing investors trillions of dollars. Recently, even Tencent Holdings Ltd. (see above), which had largely escaped unscathed from previous restrictions, faces a possible record high fine for allegedly violating anti-money-laundering regulations.

A high intolerance for criticism of the government has clearly also played a role. Millionaire Jack Ma, the richest man in China and owner of Alibaba, or “the Amazon of China”, was usually to be found in the spotlight. Then, in October 2020, he made a speech where he criticized the Chinese financial industry establishment. Authorities took notice and swift action. Following the statement, his upcoming IPO was canceled outright, and he was then summoned for “regulatory interviews”. Despite some muddled and speculative reports of his reappearances during 2021, the entrepreneur hasn’t been near hasn’t been near the spotlight since then, and his business empire has been dismantled and parceled out to government-run competitors.

More recently, there has been unease among investors about the potential delisting of Chinese stocks in U.S. markets, which are undergoing stricter transparency regulations. Chinese law controls the transmission of some financial information out of the country, complicating companies’ abilities to comply with the U.S. regulations.

China’s role in the war and Covid outbreak

On top of everything else, Russia’s war in Ukraine has certainly worsened matters for the Chinese stock market. Investors’ concerns over China’s ties with Russia – ties that could prompt secondary sanctions being imposed in the country – has led to an unprecedented exodus of investment. Meanwhile, it has also raised questions about whether Chinese companies are becoming incompatible with ESG investing.

Furthermore, the country is experiencing its worst Covid outbreak since the pandemic began. The outbreak, paired with the government’s zero-Covid strategy, has pushed entire cities into a state of lockdown and threatens to slam the breaks on the economy.

Connection to Pure Climate Stocks

With Chinese stocks undergoing their worst selloff since the 2008 financial crisis, it begs the question: are Pure Climate Stocks based in China suffering the same grim fate? Have their prices fallen less or more than the average Chinese market?

Let’s look at some examples.

JinkoSolar Holding (NYSE: JKS), one of the world’s largest solar panel manufacturers, has been outperforming the Chinese market. Since its IPO in 2011, the company’s share price has grown by a whopping 672 percent. In the last year alone, it grew by 67 percent, including a 38 percent boost in the last month, even despite current geopolitical crises.

Xinjiang Goldwind Science & Technology Co. (OTCMKTS: XJNGF), a wind power solution provider, has succumbed to a different fate. Since its IPO in 2011, the company has lost 17 percent of its value, mostly due to an 18 percent drop in the last year.

The electric vehicle manufacturer Xpeng (NYSE: XPEV) has had more mixed development. Since its IPO in 2020 and up until now, the stock price has increased by 21 percent. However, it has dropped 15 percent on average over the last 12 months, with a 44 percent decrease attributable to 2022 alone. However, things might be looking up again for the company, with 40 percent regained last month.

Now let’s look at one final example. NIU Technologies (NASDAQ: NIU), the electric two-wheeler giant, garnered renewed investors’ attention last week. Despite losing almost 70 percent of its value last year, the stock has seen a 21 percent rise over the last month. So, it might just be the right time to deep-dive into our recently published stock analysis, to find out if the stock might to be undervalued and worth the risk.

To sum it all up, despite some varied results, some Chinese Pure Climate Stocks have still performed better than the general Chinese market over the last year. They don’t seem to be critically affected by recent regulatory crackdowns and political turmoil.

What does this mean for your investments in Pure Climate Stocks in China?

Some Pure Climate Stocks could resist the downward market trend in China. Does this mean that the worst is over? Is this a good time to invest in China again? Personally, China is an investment no-go zone for me at the moment. In the last year already, The market has  only been appropriate for investors with a generous risk appetite. As long as the war in Ukraine has not stopped and the geopolitical tensions between China and the US resulting from it are not over, I will not buy in China. But, what if you still hold Chinese stocks? Could the stock prices go down further? For sure they could. That is why you might want to exercise great care and check for yourself, if you are ready to accept the immanent risks, or if you want to sell now despite potential losses. For my part, I have decided to continue holding my shares in NIU Technologies that I bought last year. From a fundamental perspective, the company looks massively undervalued to me. I might even consider to stock up, if the dark geopolitical clouds disappear and the stock still looks cheap.

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