JD Capital: Build a Clean and Efficient Future Through Energy Restructuring and Well-placed Investme

2016-11-23

Source: Eknower

“The key of China’s energy restructuring is ‘green, low-carbon, safe, and efficient’. This is also the fundamental logic of energy investment in China”, according to JD Capital. 

Statistics show that China has been the world’s largest energy consumer for eight years since 2009 when it surpassed the US. However, due to historical reasons and resource limits, the energy structure of China has been unreasonable over a long period, with coal taking up 70% of the primary energy consumption, while non-fossil fuels only representing a very small percentage. There is huge room for improvement.

Over the past five years, 40% of the world’s new clean energy facilities were established in China. The country has promised to raise the percentage of non-fossil fuels to 20% by 2030. This would require an increase of 800-1,000 gigawatt of wind energy, solar energy and other clean energies – equivalent to the current gross power generation of the US.

In the process of energy restructuring, capital investment institutions specializing in energy investment will become one of the key drivers.

“The key of China’s energy restructuring is ‘green, low-carbon, safe, and efficient’. This is also the fundamental logic of energy investment in China”, according to the investment team for energy, fuel gas and public utilities of JD Capital (the team). Based on this judgment, the company has invested in over 10 leading companies in various market segments, such as clean and efficient use of traditional energies, renewable energies, and efficient energy management. Currently two (Xintai Natural Gas and Jiahua Energy) of these companies have gone public, five have been listed, and three exited.

Source: Bloomberg New Energy Finance

Focus on increments and make new energies cleaner

As China transforms and upgrades its economy and energy structure, the development of renewable energy resources not only optimizes the energy structure, but also drives investment and helps upgrade the industrial structure. This is like killing two birds with one stone – “resource and environment restraints” and “economic transition limits”.

“The key of this round of energy revolution is to shift from traditional fossil fuel energies to renewable energies, or more specifically, from high-carbon to low-carbon, from concentrated to scattered, and from one-way to interactive. We should first focus on energy increments, and aims to create cleaner energy, diversify energy structure, and improve the efficiency of energy production and utilization technologies”, according to JD Capital.

As China pushes forward energy restructuring, natural gas, as the cleanest energy commodity, is widely used in both civil, industrial and business areas.

“Cheap and clean, natural gas also boasts a high calorific value. All these are in line with the basic state policy to reduce emissions and promote sustainable development. With its wide application in downstream industries, natural gas also promises economic and social benefits. It has been one of our focuses ever since the early stage of the 12th Five-year Plan, especially regional urban pipeline gas operators with natural monopoly positions. Particularly, we’d invested in urban gas companies advantageous in source gas, price, pipeline network, customer, and those with expansion potentials”, according to JD Capital. Xinjiang Xintai Natural Gas Co., Ltd. (603393), in which the fund under JD Capital invested in 2012, is a typical example.

“Xintai is a private fuel gas enterprise very competitive in north Xinjiang. At first we thought the company had distinct core advantages. Located in an area with rich oil and gas resources, it is capable of supplying multiple gas sources at competitive prices. Its natural gas all come from upstream gas supply stations and it has built pressure pipelines of its own”, according to the team. Also, for a long time, over 10% of the natural gas in cities of Xinjiang are supplied by Xintai. This gives it a first-mover advantage in the region in terms of network infrastructure and user management of urban pipe gas.

However, Xintai is also confronted with increasingly intense competition from its peers in Xinjiang. Therefore, it is in dire need of capital to secure market share and grow faster. Under such circumstances, JD Capital and Xintai reached agreement and started to cooperate. After four years of endeavor, Xintai went listed on the A-share market in 2006, stepping into a new stage of development and meanwhile bringing substantial returns to JD Capital.

Similar to the logic behind Xintai, JD Capital also invested in other quality regional private enterprises including Xinjiang Huoju Gas (832099), Lantian Gas (833371), Hongtong Gas and Tongyu Gas. 

 “We’ve seen a CAGR of over 30% in our investment in the urban gas sector. And we are still talking about cooperation with many other companies”, says the team head.

Pay attention to stored energies and improve energy efficiency

While we are exploring clean energies, the huge amount of stored energies will remain as the mainstay of global economy growth for a long time to come. Therefore, JD Capital has been focusing on enterprises with technological advantages, good reputation and great potentials.

Zhuhai Pilot Technology Co., Ltd. (831175) is an enterprise engaging in power utilization and management. It is one of JD Capital’s early choices of investment in the sector. “At first, the company mainly manufactured smart electric instruments. Business was simple at the time”, according to the project manager. After JD Capital became a shareholder and increased its capital, Pilot began its shift towards a supplier of energy management general solutions. Currently the company’s found wide application in rail transport, data centers, hospitals and other energy- and power-intensive industries.

“BST Power (831373) in Shenzhen is a similar example. On top of its traditional products, the company strove to expand in the stored energy market. Now it has grown into a supplier of new energies and new power supply solutions”, said the team.

Also, JD Capital has taken the initiative in the lithium battery market which is now fast growing. Just before there was a booming demand for new-energy electric vehicles, JD Capital invested in multiple technology-driven enterprises along the industry chain, especially in areas essential to the improvement of technical characteristics of batteries, such as anode, cathode and diaphragms. These enterprises include Anda Technology (830809), the supplier of anode materials for BYD, China’s leading electric vehicle company, and BTR, a bellwether in cathode materials for lithium batteries.

Seize the opportunity of energy restructuring and support the rising of industry bellwethers

Currently, the percentage target for non-fossil fuels is not only an important indicator of China’s energy restructuring, but a key contributor to the goal of reducing 18% of the amount of CO2 produced per unit of GDP growth during the 13th Five-year Plan period compared with the 12th. So this is now part of the national strategy.

“In the future, we will explore investment opportunities in non-fossil fuels from three perspectives, namely technology, service, and resource,” according to JD Capital. 

As for technologies, they are still the primary driving force behind industrial growth. So JD Capital will focus on tech-enterprises with cutting-edge clean energy technologies and which have the potential to industrialize. It will also invest in manufacturers that are technology-driven and have cost advantages.

In terms of service, as the regulation on energy use strengthens, people’s awareness of energy saving grows, the role of the market becomes prominent, and the interaction between suppliers and consumers gets frequent, service providers which are market-driven and able to meet the demands for instant response and diversified management will become valuable investment targets.

As for resources, as the pilot reforms of the sales side of electricity are gradually implemented and the cost of stored energy solutions drops, owners of clean energy will embrace more possibilities. JD Capital is to focus on clean energy project operators capable of industrial integration and advantageous in terms of size and cost.

Apart from the above-mentioned investment targets, JD Capital suggests that China is now growing from a “major energy consumer” to a “clean energy leader”. However, the shortage of new products and technologies still restrains the growth of its energy industry. Therefore, professional institutional investors will help domestic bellwethers to improve their competitive margin through M&As.

“Our mission is to fully tap in the potentials of enterprises so that they can grow into industrial leaders. More importantly, we need to discover quality targets for M&As and then make it happen. This is how we improve the core competitiveness of these enterprises”, according to JD Capital.

JD Capital says that since its establishment, the company has approached hundreds of enterprises in the energy industry and established a project development system across the world, which provides itself with great operation platforms and abundant project resources.

For a long time, private energy enterprises have been subject to some state restrictions in certain market areas. But according to JD Capital, as the reform on our energy system and mechanisms goes forward, more and more areas will be open to private players, and this is already happening.

“Under the market mechanism and with support from the capital market, a group of capable, sizable, and innovative private bellwethers in the energy industry will also enjoy a huge room to grow in the near future”, according to JD Capital.