clean energy & technology - hsbcnet | global banking …€¦ · · 2012-07-24emea equity...

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EMEA Equity Research Clean energy & technology July 2012

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Clean energy & technology

Clean energy & technology team Sean McLoughlin* Analyst HSBC Bank plc + 44 20 7991 3464 [email protected]

Christian Rath*, CFA Analyst HSBC Trinkaus & Burkhardt AG, Germany + 49 211 910 3049 [email protected]

Jenny Cosgrove*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6619 [email protected]

Charanjit Singh* Analyst HSBC Bank plc +91 80 3001 3776 [email protected]

Murielle André-Pinard* Analyst HSBC Bank plc, Paris branch +331 56 52 43 16 [email protected]

Gloria Ho*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6941 [email protected]

Sector sales Sonja Kimmeskamp Sales HSBC Trinkaus & Burkhardt AG, Germany +49 211 910 4854 [email protected]

Tim Juskowiak Sales HSBC Trinkaus & Burkhardt AG, Germany +49 211 910 4452 [email protected]

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

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cSector structure

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Clean energy & technology sector

Multi-theme industrials

EDP RenovaveisChina Longyuan PowerAcciona

EDP EDF

Doosan Heavy IndustryChina Guangdong Nuclear Power Group

GCL PolyTrina SolarSMA Solar

VestasXinjiang GoldwindSuzlon

AndritzSinohydro Corporation

Sâo Martinho

AixtronImtechSeoul Semiconductor

KronesRationalCrompton Greaves

DelachauxVosslohALL-America Latina Log

InfineonDialog Semiconductor

Veolia EnvironnementPennon GroupSéché EnvironnementChina Everbright

Johnson MattheyUmicore

ABB, Alstom, Samsung, Schneider Electric, Siemens

NexansPrysmian

Saft

IntertekSGS

Demand

Energy efficiency & management

Energy transmission

Renewable OEMS

Solar

Wind

Hydro

Biofuels

Low carbon OEMS

Nuclear

Power storage

Low carbon power providers

Renewable utilities

Transmission infrastructure

Building efficiency

Pollution control

Conversion efficiency

Transport efficiency

Industrial efficiency

Water & waste

Support services

Resource efficiency & managementRenewable & low carbon energy production

Supply

Clean energy & technology sector

Multi-theme industrials

EDP RenovaveisChina Longyuan PowerAcciona

EDP EDF

Doosan Heavy IndustryChina Guangdong Nuclear Power Group

GCL PolyTrina SolarSMA Solar

VestasXinjiang GoldwindSuzlon

AndritzSinohydro Corporation

Sâo Martinho

AixtronImtechSeoul Semiconductor

KronesRationalCrompton Greaves

DelachauxVosslohALL-America Latina Log

InfineonDialog Semiconductor

Veolia EnvironnementPennon GroupSéché EnvironnementChina Everbright

Johnson MattheyUmicore

ABB, Alstom, Samsung, Schneider Electric, Siemens

NexansPrysmian

Saft

IntertekSGS

Demand

Energy efficiency & management

Energy transmission

Renewable OEMS

Solar

Wind

Hydro

Biofuels

Low carbon OEMS

Nuclear

Power storage

Low carbon power providers

Renewable utilities

Transmission infrastructure

Building efficiency

Pollution control

Conversion efficiency

Transport efficiency

Industrial efficiency

Water & waste

Support services

Resource efficiency & managementRenewable & low carbon energy production

Source: HSBC

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HSBC clean energy & technology sector benchmark indices: price history

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2004 2005 2006 2007 2008 2009 2010 2011 2012

Wind Solar Energy Efficiency & Energy M anagem ent Water, Waste & Pollution Control MSCI World

Ky oto enters into force

Stern report on clim ate econom ics

EU Energy & C limate package

US Green Stim ulus Bill

Copenhagen Sum mit

Fukushima nuclear disaster

'Green austerity ': Spain freezes

renew able subsidies

Note: Sector indices are generated by HSBC Equity Quantitative Research (HSBC Climate Change Benchmark Index). Source: HSBC Equity Quantitative Research, Thomson Reuters Datastream

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HSBC clean energy & technology sector benchmark indices: EBIT margin versus asset turnover chart (2011)

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-40.0% -30.0% -20. 0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

EBIT margin (%)

Asse

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Low carbon pow er

Energy efficiencyResource efficiency

Source: Company data, HSBC

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Sector description This sector comprises a wide range of businesses involved in the production and use of technologies that

are intended to enable the shift away from carbon-intensive fossil fuels, such as coal, as part of the

gradual decarbonisation of the global economy, and towards more sustainable and cleaner products.

These technologies include those for the generation of renewable and low carbon power, and more

efficient production, distribution and management of energy and resources.

From an equity perspective, clean energy cuts across traditional sector boundaries where pure plays and

incumbents both feature. HSBC clean energy and technology research is closely related to the work of our

climate change team globally, which analyses cross-sector macroeconomic trends associated with the

climate change theme.

Low-carbon power includes power generation using no fuel or less fuel than conventional power-

generation technologies, and producing no pollutants or fewer than conventional technologies. It uses

renewable energy sources that, unlike fossil fuels, are not depleted over time, such as biomass and

biofuels, solar power, wind power, geothermal and hydropower. It also uses nuclear energy which, though

it consumes a limited mineral resource, produces low levels of carbon over its lifetime compared with

conventional power generation. This sector includes manufacturers of equipment for renewable energy

production and generation companies, such as utilities.

Energy transmission includes companies involved in the transmission of low-carbon power through

distribution networks. A rising proportion of renewable power, which is intermittent in nature, requires

greater grid flexibility to handle the higher variability of power supply. This sector includes grid operators

and equipment providers for transmission and distribution infrastructure.

Energy efficiency and management involves replacing existing technologies and processes with new

ones that provide equivalent or better service but consume less energy. The sector includes energy-saving

technologies to reduce energy consumption in buildings, industries, transport and in power conversion,

and also includes energy-storage technologies such as batteries.

Building efficiency includes: improved building materials that control the transfer of heat into and out of

buildings; more efficient lighting, which relies on the use of light-emitting diodes, compact fluorescent

lamps and sensors; energy-efficient chillers and directional lighting; and smart systems that control power

consumption in buildings.

Industrial efficiency encompasses products or processes to conserve energy in industrial sectors. These

include process automation, control systems, instrumentation and energy control systems.

Conversion efficiency includes devices involved with power management within electronics products

and with conversion of power for grid compatibility of generation equipment.

Transport efficiency includes technologies that reduce the carbon emitted by conventional transport.

Low-carbon fuels like biodiesel and ethanol are also included. A shift from road to rail transport and use

of electric and hybrid-electric vehicles, which emit less carbon than fossil-fuel vehicles, falls under

transport efficiency. Mass transit – buses, trains and trams – is considered part of transport efficiency as

well, as are companies that supply efficient-engineering systems or parts that are supplied to cleaner

forms of transport.

Sean McLoughlin* Analyst HSBC Bank Plc +44 20 7991 3464 [email protected]

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

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Resource efficiency and management includes companies involved in the treatment and recycling of

resources such as water and waste, and in the application of chemical and materials to carbon abatement

processes such as pollution control. In the water sector, companies provide efficient water supply, water

conservation and recycling, and advanced water-treatment technologies. Waste management comprises

mainly the collection, transport and disposal of waste. Some support-services companies provide

environmental consulting, which also falls under this theme. Companies in pollution control are involved

in carbon-abatement technologies such as catalysts in vehicle exhaust systems.

Key themes Capital intensity The sector relies on investments in new energy generation infrastructure or replacement of existing

energy management products with more energy-efficient products or improved use of resources.

The sector thus requires supportive policy – the rapid growth in the uptake of renewables has come about

thanks to favourable policies rewarding investors with a long-term return on their investment via a range

of subsidy schemes. Rising regulatory uncertainty from governments reducing subsidies for renewables in

a time of austerity and potentially applying retroactive measures to existing generation infrastructure

where investments have already been made, has raised the perceived risk premium and the corresponding

cost of capital for future investments.

Availability and cost of financing are also important determinants of demand for new clean energy power-

generation projects. Wind and solar projects in the developed world are typically funded 75% by project

finance and 25% by equity. Projects are being rendered uneconomical, unfinanceable or subject to delays

owing to tightening project finance availability and widening finance spreads. This is owing to the collateral

damage to banks’ balance sheets from the euro crisis and increased capital adequacy requirements.

Resource and energy efficiency: theme for next decade In parallel to reducing the carbon intensity of power production by curbing emissions from fossil fuels,

notably coal, oil and gas, and providing incentives for low-carbon sources, notably renewable and nuclear

energy, a growing trend is for taking energy out of growth, by promoting energy efficiency in buildings,

industry and transport. Energy efficiency is generally less capital intensive than clean energy (many small

projects, rather than single large infrastructure projects), as well as generally having short payback times,

so is a theme better suited to austerity. Additionally, it results in the retention and even creation of many

highly localised jobs owing to its manufacturing and installation dynamics.

So far, the low-carbon economy has been dominated by changes in energy supply. We believe that will

change in the coming years as governments implement policies to deliver ‘negative cost’ improvements in

building and industrial efficiency, and push for a shift in transport to hybrid and electric vehicles. Saving

costs through energy efficiency should make the economics compelling for expansionary plus replacement-

cycle spending as global economic growth improves. We estimate the energy-efficiency market will

outgrow other clean-technology sectors and may grow to between USD722bn and USD1.4trn by 2020.

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Ongoing shift from developed to emerging markets The developed world has been the mainstay of the low-carbon economy over the past decade, primarily

because it has a larger base of installed nuclear and renewable generation capacity and more focus on

installation of energy-efficient technologies. Recently, China has risen to become a dominant force in

clean energy (China accounted for ~50% of new wind installations globally in 2011 and hosts nine of the

top 10 solar manufacturers). With China’s goals for low-carbon energy and energy efficiency implying

that Chinese demand for clean energy technologies is likely to outstrip that of its developing-market

peers, we expect China to continue to exert a strong influence globally in clean energy. Increasingly,

other emerging markets in Asia and Latin America are supplanting developed markets as growth drivers

for clean energy demand.

Sector drivers Policy support The EU-27 nations, which have binding 2020 targets and a National Renewables Energy Action Plan

(NREAP) as a driver for subsidies, accounted for 90% of solar and 75% of wind installed globally by the

end of 2011. As green stimulus measures come to an end with central cutbacks to public spending,

governments are threatening to reduce subsidies for renewable energy, or have already done so.

Uncertainty in government subsidy regimes remains the biggest hurdle for investment in capex-intensive

projects (this applies to solar and offshore wind projects in particular, which are more expensive per

MWh than onshore wind) and constitutes a risk for suppliers, developers and operators. Hurdle rates for

projects have risen to reflect a growing perception of this risk as well to account for the rising cost of

financing. In the EU, policy visibility beyond 2020 should help support longer-term government

commitments to clean energy.

For energy efficiency, no binding targets exist at an EU level, unlike for renewables and emissions

reductions. Nonetheless, national governments in the EU, including France, Germany and the UK, are

continuing to support efficiency measures in spite of austerity pressures. An EU energy-efficiency

directive, currently in advanced discussions and expected soon to be voted into law, would set hard

targets for energy-efficiency measures in Europe, thus providing a stable policy basis for sustained growth.

Corporate and private equity funding to replace banking credit shortfall With Basel III rules limiting the ability of banks to provide project finance loans, many banks are pulling

out of long-term lending for large infrastructure projects such as energy developments involving wind or

solar. Despite high upfront capex costs, the stable cash flow and low operating costs of clean energy projects

are proving attractive to corporates, and private and institutional equity players, which are increasingly

investing in the sector. As commodity prices continue to rise and resource scarcity becomes an increasing

reality, companies have begun to step up their environmental efforts and revise their sustainability

strategies. Rising quantities of corporate equity should help support clean energy market growth.

Rationalisation of OEM capacity The wind, solar and LED industries currently suffer from oversupply, which is putting pricing and

producer margins under pressure. In solar, the emergence of low-priced Asian competitors and low

barriers to entry for manufacturers led to a glut of module production capacity in 2011. Bankruptcies and

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capacity rationalisation in the solar sector will help industry winners emerge more quickly. In wind, fierce

competition and low-priced Chinese manufacturers have helped depress turbine pricing, and an expected

downturn in global demand in 2013 suggests production margins will remain low.

Key segments Renewable OEMs It seems increasingly clear to us that subsidies for new renewable capacity will continue to decline until

they are withdrawn entirely. This cut in support will force the industry to become competitive with

traditional power generation, presumably at the expense of many present participants that cannot breach

such a transition. We therefore expect strong medium-term growth prospects for wind and solar,

notwithstanding the current near-term pressures.

Renewable and low-carbon utilities We believe the green utility names will benefit in a number of ways from the adverse macro conditions in

the wind and solar sectors. First, falling prices in solar and more competitive turbine prices lead to lower

capex requirements and hence better returns. Second, a reduction in capex commitments in an

unfavourable environment for future projects can improve cash flow and potentially lead to higher

dividend payouts.

Energy efficiency Energy efficiency refers to the ratio between energy outputs (services such as electricity, heat and

mobility) and inputs (primary energy). It is the simplest way of curbing emissions and can target a wide

range of industries and processes along the three major steps of the energy value chain (generation,

transmission, consumption). For example, higher efficiency in power conversion could not only lower

CO2 emissions but also reduce material and electricity costs. In particular, lighting is one of the main

drivers of a building’s energy use, accounting for approximately 40% of energy consumption and 36% of

EU CO2 emissions (source: EU). In LEDs, we believe that declining LED prices will fuel a transition to

this form of lighting. Although we expect this to result in above GDP growth rates over the next five

years, we have a cautious view on the industry’s long-term winners. High price pressure on LEDs,

competition from new entrants, increased cyclicality and a declining replacement market will reduce

margins and capital returns in the long run, in our view.

Resource efficiency Resource efficiency refers to improving the productivity of resource inputs. With evidence of mounting

stress in global food, water and energy systems, policymakers are turning their attention to improving

resource efficiency. The argument is that moving upstream and reducing resource inputs – whether

energy, materials or water – is not only a more effective way of cutting the output of greenhouse gas

emissions, but it also enhances security of supply. Currently, the global economy ‘harvests’ around c60bn

tonnes of resources in terms of primary raw materials: construction minerals, ores and industrial minerals,

fossil fuels and biomass. This could more than double to 140bn tonnes per annum by 2050 on ‘business

as usual’ trends. In 2007, the world average per-capita resource use was c9 tonnes, with industrialised

countries consuming c16 tonnes per capita compared with c5-6 tonnes for developing countries.

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Valuation The clean technology sector encompasses different product industries (wind, solar, light-emitting diodes,

semiconductors and so on) as well as different positions in the renewable value chain – manufacturers versus

developers, owners and operators (utilities) – so different valuation methodologies are needed. We prefer,

in many cases, to use a blend of valuation techniques to capture both short-term earnings pressure and

market risk along with long-term growth potential. In our view, this helps us combine a floor for current

negative expectations while factoring in additional value, which could crystallise in the longer term.

We use DCF-based valuation to capture the sector’s long-term growth potential. For utilities, for example,

a DCF-based SOTP in our view captures the visible and long-term cash generation profile of generation

assets. We also use fair RoE-implied PB valuation, which is an absolute valuation metric but, unlike the

DCF methodology, allows us to take a conservative and more short-term view and capture the current

market situation and risks. For example, DCF currently provides little support to the assessments of fair

value for solar companies, in our view, given low or negative earnings and heavy consolidation in the

industry. We also adopt a peer-group-based approach (EV/sales or EV/EBITDA) where appropriate and

for stocks with cyclical sales/earnings growth potential (for example, semiconductor producers).

Clean energy & technology: growth and profitability

2008 2009 2010 2011 2012e

Growth Sales 11.1% -5.2% 8.5% 4.4% 3.2% EBITDA 0.4% 1.5% 11.9% 1.5% 1.5% EBIT -1.9% -1.9% 13.8% -4.2% 7.9% Net profit -7.5% -25.4% 29.1% -9.3% 10.4% Margins EBITDA 19.6% 18.8% 21.1% 18.2% 17.4% EBIT 13.5% 11.8% 14.3% 9.7% 9.9% Net profit 8.7% 6.6% 8.8% 4.9% 4.9% Productivity Capex/sales 0.21 0.19 0.16 0.15 0.10 Asset turnover (x) 0.92 0.76 0.78 0.75 0.71 Net debt/equity 0.60 0.52 0.73 0.55 3.68 ROE 0.20 0.21 1.14 0.06 0.13 Note: based on all low-carbon power producers, energy efficiency and waste & water stocks under HSBC coverage Source: company data, HSBC estimates

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Sector snapshot Key sector stats

HSBC Climate Change Benchmark Index

Trading data 5-yr ADTV (EURm) n/aAggregated market cap (EURm) 638 (340 constituents)Performance since 1 Jan 2000 Absolute 21%Relative to MSCI ACWI 2%3 largest stocks Siemens, Honeywell Int, ABB LtdCorrelation (5-year) with MSCI ACWI 0.95Note: All data is as of 31 May 2012 Source: MSCI, HSBC Equity Quantitative Research Top 10 stocks: HSBC Climate Change Benchmark Index

Stock rank Stocks Index weight

1 Siemens 19.7% 2 Honeywell International 18.6% 3 ABB 18.5% 4 Emerson Electric 9.1% 5 Exelon 7.6% 6 Schneider Electric 5.6% 7 Nextera Energy 4.9% 8 Waste Management 4.8% 9 Enel 3.6% 10 Southern Co 3.3% Note: All data is as of 31 May 2012 Source: HSBC Equity Quantitative Research Country breakdown: HSBC Climate Change Benchmark Index

Country Weights (%)

US 41.6% Germany 10.3%Japan 9.6%France 8.5%Canada 3.3%UK 3.3%Switzerland 3.0%Italy 2.2%Taiwan 2.0%Brazil 2.0% Note: All data is as of 31 May 2012 Source: HSBC Equity Quantitative Research

Core industry drivers: clean energy & technology

Cleantech

Construction cost

Raw material prices

Technology

Weather

Cost competitiveness

towards grid parity

Policy including Tariff

Financing cost

Cleantech

Construction cost

Raw material prices

Technology

Weather

Cost competitiveness

towards grid parity

Policy including Tariff

Financing cost

Source: HSBC

PE chart: HSBC Climate Change Benchmark Index

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2004 2005 2006 2007 2008 2009 2010 2011 201212M forw ard PE

Source: HSBC Equity Quantitative Research

PB vs. ROE: HSBC Climate Change Benchmark Index

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12M forw ard PB (LHS) 12M f orward R OE % (RHS)

Note: PB/RoE is calculated based on the top 10 index constituents. Source: Thomson Reuters Datastream, HSBC Equity Quantitative Research

clean energy & technology - hsbcnet | global banking …€¦ · · 2012-07-24emea equity...

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