China is facing its longest, hottest and most-widespread heatwave on record, with 71 straight days of hot weather and counting. That has prompted the government to declare a national drought alert in response to blazing-hot temperatures, particularly in the Yangtze River basin.
Parts of the Yangtze have dried up in central China, disrupting river shipping and the production of hydropower. Lake Poyang, the largest freshwater body in China, has also shrunk ahead of schedule, deprived of the Yangtze's flow, and with the Three Gorges Dam upstream already causing a decline in its size. The dam, which was being monitored last year for signs of buckling due to heavy rains, is discharging half its normal flow during this drought.
I promised in my last column to take a look at several Asia-focused investment ideas that reflect the rising role of climate change. What better place to start than China, where the authorities have on Monday declared a "red alert" for the heat, the 11th straight day they have done so?
The heat has been worst in northwest, central and southeast China, as you can see on this map from the China Meteorological Administration, which says this heatwave is the worst since it started keeping records in 1961.
Surging demand for air conditioning is also placing a strain on the power grid in Sichuan Province, which gets some 80% of its electricity from hydropower. Its power generation is functioning at half of normal capacity.
In the central megacity of Chongqing, just east of Sichuan, temperatures hit 45°C (113°F) late last week. The government has issued notices to many shopping malls telling them to cut back their opening hours in a bid to preserve power. Reuters reports that more than 500 malls and commercial venues in Chongqing have been issued government notices with shorter hours of operation.
It's somewhat ironic, then, that the companies hit by production disruptions at their factories in Sichuan and Chongqing include the battery maker CATL SZ:300750 and the electric-vehicle maker BYD (BYDDY) and HK:1211.
Both are companies that stand to gain as China presses the initiative in a bid to persuade consumers to buy and drive electric. They're two of the best "green-economy" stocks in China, poised to see long-term secular growth.
CATL - an acronym for Contemporary Amperex Technology Co. Ltd. - is the world's biggest maker of lithium-ion batteries for vehicles. It supplies Tesla (TSLA) but also its rivals such as Xpeng (XPEV) and HK:9868.
It has been a darling of the Chinese stock market. But after a correction of almost 50% between December and mid-May, there's an opportunity to benefit from the concerns over China's stop-start recovery from Covid-19. CATL shares have also rallied almost 50%, but that leaves them trading at similar levels to July 2021. The rally looks set to continue, with a strong underpinning for battery demand.
China originally hoped to hit a target for electric-vehicle sales to make up 20% of all new auto sales by 2025. It hit that ahead of time, and raised that target in a clarion cry to see EVs account for 40% of new-car sales by 2030.
It's well on the way. Plug-in all-electric vehicles have a 20% share of the new-car market in China in the first six months of 2022, with plug-in hybrids accounting for another 6% of the market.
The Tesla Model Y is the third-best-seller in China so far this year, with the Tesla Model 3 at No. 6. But BYD accounts for six of the top-10 models: the BYD Song, Qin Plus, Han, Dolphin, Tang and Yuan Plus.
Meanwhile, the best-selling EV in China is the microcar Wuling Hongguang Mini EV, made by SAIC Motor SH:600104 in its joint venture with General Motors (GM) and Wuling Motors (WLMTF) and HK:0305.
The Li Auto (LI) and HK:2015 model One, the Aion from GAC (GNZUY) and HK:2238 and the Volkswagen (VWAGY) model ID have all recently garnered good sales, too. But BYD, with 26.9% market shares, and SAIC, with a combined 13.4% market share when you include its joint venture with GM, are the clear market leaders, with Tesla claiming third spot and 8.3% market share.
BYD, famously backed by Warren Buffett, is also a market darling. But the Chinese economy looks certain to miss the government's growth target of "around 5.5%," perhaps posting half that if lucky. The travails of the country's snap lockdowns have eaten into consumer confidence, with Chinese citizens unsure about economic and personal prospects, and therefore holding back on big-ticket purchases like homes and cars.
Those concerns have caused BYD shares to come off their highs by 16.1% as of today's close in Hong Kong. It continues to dip, so BYD may be best revisited as a buying opportunity once it's clear China's Covid recovery is full and permanent.
Nationwide, residential electricity usage surged 17.7% in June and 26.8% in July, having fallen in May. By contrast, Nomura notes, industrial-sector power usage fell 0.1% in July, after a narrow 0.8% increase in June. Factory demand is still lackluster due to poor corporate confidence, and economic worries in key export destinations.
The power shortages have also disrupted operations at multinationals such as Toyota Motor (TM) and T:7203 and the Apple (AAPL) assembly supplier Foxconn (HNHPF) and TW:2354. In another irony, some electric-vehicle charging stations are offline in the Sichuan Province capital, Chengdu, due to rationing by the local government.
Power rationing will continue to weigh on factory and producer sentiment. Sichuan Province (4% of national GDP) and Chongqing (2%) are sizable drivers of China's economic engine. There will be disruptions to lithium-ion battery output - there are also lithium mines in Sichuan - while the solar-panel industry is also concentrated in that province, another irony.
The record heatwave is currently hampering production in renewable-energy resources and battery production. Exports out of China's eight-largest ports were essentially flat in the first 10 days of August, up only 0.2%, compared with 14.7% growth in July. As such, exports look set for poor performance in August.
China has tended to set lofty goals on "greening" its economy, which are not always met with on-the-ground change. The Beijing authorities have, for instance, cracked down on a series of EV factory frauds, in which local governments paid incentives for facilities that only produced electric cars on paper, not on the roads.
But it will not be lost on Beijing that the cause of these heatwaves stems from a dependence on fossil fuels. That means there will be strong policy support underpinning companies such as CATL and BYD. The heat is due to break mid-week in Chongqing, but the drivers behind Chinese "green" stocks will stay strong in the years ahead.
(Apple is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells AAPL? Learn more now.)
