How To Profit From China's Energy Crisis
The Dynamic Wealth Report
October 22, 2009
by Robert Morris, Editor
China’s strong economic growth is well documented. Their economy has
been growing at a better than 10% average annual rate for decades. This
extraordinarily fast growth has vaulted China’s economy to third largest
in the world.
But, all this growth has come with a heavy price.
The skies over China are now some of the most heavily polluted in the
world. Two-thirds of the 338 Chinese cities that measure air quality
suffer from moderate to severe air pollution. And, acid rain falls on
30% of the country.
One of the biggest contributors to China’s air pollution problem is coal
burning furnaces. China is the largest consumer of coal worldwide. They
use it to generate 70% of the country’s electricity and to power their
many factories.
Thanks to all this coal burning, China is now the world’s leading
emitter of greenhouse gases.
China’s rapid economic growth has also led to another problem.
They don’t have enough electricity-generating capacity to sustain their
growth. The International Energy Agency estimates China needs to add
more than 1,300 GW of electricity-generating capacity to keep pace with
demand.
That’s about the same size as the entire U.S. power grid!
The Chinese government recognizes the magnitude of these problems. Now,
they’re starting to do something about them.
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China’s energy policy now promotes improving energy efficiency and
reducing emissions. Specifically, the government endorses greater use of
distributed power generation (DPG) systems and renewable energy sources.
DPG systems are simply combined heat and power systems. They have a
coal-fired boiler to produce heat for driving industrial processes as
well as a steam turbine and generator to generate electricity.
These systems are remarkably energy efficient. They convert an amazing
90% of fuel used into useful power and heat. That compares to efficiency
levels of just 30% to 40% for traditional coal-fueled power plants.
Many factories in China that buy power from the national grid also burn
coal to generate heat. By using a DPG system, a factory can generate its
own electricity and heat. This helps reduce emissions and energy costs
significantly.
The Chinese government believes DPG systems are essential to its energy
policy. Their goal is to have 22% of China’s total power capacity come
from DPG systems by 2020 (up from 12% in 2005).
Another top-priority for the Chinese government is generating more
energy from wind power.
They plan on spending $260 billion to expand China’s wind power capacity
from 12.8 GW today to 100 GW by 2020. In addition, they’ve enacted a
series of preferential policies and tax incentives to stimulate the
growth of the domestic wind power industry.
So, how can we profit from these trends?
A terrific small-cap growth company, A-Power Energy Generation Systems
(APWR), is positioned to benefit from both of them.
APWR engages in two lines of business.
First, they’re the largest private provider of onsite DPG systems in
China. They’ve completed 17 systems since business inception. And, they
have another 17 projects under construction in China and overseas.
APWR’s other line of business is manufacturing wind turbines.
With a massive 320,000 square foot manufacturing facility, APWR has
total production capacity of 1.1 GW. And, while most manufacturers in
China are limited to producing smaller turbines, APWR is focusing on the
larger, more advanced (and more profitable) turbines.
While APWR’s business is down due to the recession, it’s now starting to
accelerate. Just take a look at second quarter numbers compared to the
first.
Revenue jumped 84% to $57.5 million. Net income soared 298% to $6.25
million. And, earnings per share nearly quadrupled to 19 cents. These
numbers would have been even bigger but some DPG projects were delayed.
For full year 2009, management expects $320 million in revenue and $32
million in net income. That’s year over year growth of 22% and 12%
respectively.
It’s important to understand the second quarter numbers are all from the
DPG systems business. The wind energy business had yet to be officially
launched.
But, that’s about to change… in a big way.
APWR just signed two huge wind energy deals.
The first deal is to build a 49.5 MW wind farm in China’s Inner Mongolia
region. The project will start in October and be completed in June 2010. The total contract value is a whopping $90.5 million.
Getting a foothold in Inner Mongolia is a big opportunity for APWR. This
region offers the most potential wind power capacity in China. And, only
1.6 GW of the estimated 787 GW of exploitable wind power has been
installed.
The sky’s the limit here!
The second deal is to develop a 19.5 MW wind farm in Shandong Province. The project will begin in November 2009 and should be completed by
November 2010. The total contract value is $36.2 million.
As you can see, the wind energy business is off to a fast start. I
expect it to provide a big boost to APWR’s growth rates going forward.
In fact, explosive growth is forecast for 2010.
Analysts are expecting revenue to rocket 77% higher to $574 million. And, they’re forecasting earnings per share to jump 53% to $1.30.
Despite this huge growth potential, APWR is significantly misvalued by
the market. Their forward P/E is just 9 times next year’s earnings
estimate. And, their PEG ratio is a meager 0.65.
Take a closer look at APWR for your own portfolio. They’re a great way
to play the long term trend in China toward more efficient and
environmentally friendly energy.
Oil prices have jumped in the past week to over $80 a barrel. They had
been trading in a range of $65 to $75 a barrel for the past four months. As a result, ETFs tied to the price of oil are surging higher. In the
past week, the double-leveraged Ultra DJ-AIG Crude Oil ProShares (UCO)
is up more than 17%. And, the unleveraged Ultra Oil & Gas ProShares
(DIG) is showing a better than 10% return.
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