When it comes to investing in the Middle Kingdom, tech companies such as Alibaba Group (NASDAQ:BABA), Baidu Inc.(NASDAQBIDU), Tencent Holdings (OTCPK:TCEHY), and NetEase Inc. (NASDAQ:NTES) tend to hog the limelight (and investor dollars).
However, bargain hunters may want to think twice before piling into China’s beaten-down technology stocks.
Despite the recent selloff, China’s tech giants are still trading at valuations pretty much in line with their three-year averages and well above levels that marked the bottoms of the last two big downturns.
On the other hand, Chinese energy companies appear deserving of a second look.
First off, they might not be cheap when viewed in terms of potential earnings but are still trading at multi-year lows thanks to last year’s energy crisis.
Second, not only do Chinese oil and gas companies continue to dominate the global oil and gas sector when it comes to revenues, but their renewable energy brethren are equally dominant, with 7 of the 10 biggest renewable energy companies coming from China.
China’s biggest oil and gas companies are state-owned energy conglomerates with sprawling international operations in diverse segments such as exploration and production, storage and transportation, petroleum and chemical processing, as well as many other functions along the vast oil and gas supply chain.
That said, some of China’s energy companies are good potential investments, especially over the long haul, while others might offer a bumpier ride.
Here are our top picks on either side.
Buy:
#1. China Petroleum & Chemical Corp. (Sinopec)
China Petroleum and Chemical Corporation (NYSE:SNP), also known as Sinopec, is one of China’s three state-owned oil companies and the largest oil and gas company in Asia Pacific and the world by revenue after bringing in revenue of $407bn at the end of the 2019-20 fiscal year. It’s also the second-largest company listed on U.S. exchanges in terms of revenue, behind only Walmart (NYSE:WMT).
Sinopec’s operations include oil and gas exploration, refining, and marketing, as well as the production and sales of petrochemicals. The company’s products include gasoline, diesel, kerosene, jet fuel, synthetic rubbers and resins, and chemical fertilizers.
Sinopec’s FY 2020 profit fell 42% Y/Y to 5.1B, the lowest since 2015 due to the global pandemic and extensive lockdowns. The company, however, expects the current year to be much better and says it plans to increase capital spending by 24% to $25.55B while raising refinery throughput by 5.5% this year to 250M metric tons, or ~5M bbl/day.
Sinopec says China is on goal to become the world’s biggest oil refiner by 2025 with a refining capacity of 20M bbl/day, according to Sinopec’s Economics & Development Research Institute.
#2. PetroChina Co.
PetroChina Co. (NYSE:PTR) is the world’s second-largest oil and gas company, currently holding assets in 30 countries across the globe. PetroChina–the exchange-listed branch of the Chinese state-owned China National Petroleum Corporation (CNPC)– specializes in oil and gas operations, oilfield services, petroleum engineering and construction, equipment manufacturing, financial services, and new energy development.
PetroChina has unveiled plans to spend 239B yuan ($37B) in annual capital spending–the highest for any gas and oil company globally–in an effort to increase domestic production over the next five years and also to improve China’s energy security.
#3. Li Auto
Shares of one of China’s leading EV players, Li Auto (NASDAQ:LI), have been rallying hard after the company reported stellar earnings recently.
LI shares are up 16% on Wednesday after the company topped earnings estimates, with revenue of $545.7M (+319.8% Y/Y) beating by $42.26M though GAAP EPS of -$0.06 missed by $0.05.
The company delivered 12,579 Li One vehicles in Q1 2021, representing a 334.4% Y/Y increase. Quarterly gross margin reached 17.3%, 900 basis points better than Wall Street’s estimate of 16.4%.
Although the company’s Q2 revenue guidance of between RMB3.99B ($609M) and RMB4.27B ($651.7M) came in below the consensus of RMB4.31B ($663.51M), it still represents a healthy 104.6% to 119.0% Y/Y increase.
Bank of America has remained bullish on Li Auto after the latest report, with analyst Ming Hsun Lee expecting Li Auto’s sales growth to pick up in Q3 and Q4 with the new Li One model set to generate interest in its autonomous driving features.
Meanwhile, the BofA analyst team also points to a capacity increase to 10K per month in September and the expected return of chip supply by then.
Avoid:
#1. Jinko Solar (NYSE:JKS)
One of the biggest trends that has been driving the phenomenal growth being witnessed in the renewable energy sector is falling costs. And nowhere has this been more evident than the solar sector. Indeed, solar photovoltaics (PV) has seen the sharpest cost decline of any electricity technology over the last decade, with the International Renewable Energy Agency (IRENA) finding that between 2010-2019, the cost of solar PV globally dropped by 82%.
But that bullish thesis is now in grave danger.
A quadrupling in the cost of polysilicon has pushed solar module prices up 18% YTD and threatens to lay to waste years of gains.
Polysilicon makers have been struggling to keep up with demand, lifting prices to as high as $25.88/kg, up from $6.19/kg less than a year ago.
Related: OPEC+ Set To Proceed With Plans To Boost July Oil Production
One of China’s leading solar names, Jinko Solar (NYSE:JKS), has been feeling the full brunt of the price inflation.
Jinko’s been in correction mode for seven months already. Since January, it’s lost nearly 50% of its value.
After being cut in nearly half this year, it’s tempting to load up on JKS stock given how hot this name has been in the past. However, we still don’t think it’s time because solar in general is having a hard time dealing with soaring prices of raw materials that are making it difficult to move forward with projects economically.
#2. Daqo New Energy
Daqo New Energy Corp.(NASDAQ:DQ) is a Chinese company that manufactures monocrystalline silicon and polysilicon solar PV systems.
Daqo shares have held up relatively better than sector peers, with a 26% YTD gain being well above the sector average. However, overall market weakness could continue to put short-term pressure on the stock.
Also, strong anti-China sentiment, specifically in connection with Xinjiang where Daqo’s polysilicon plant resides, could prove to be a major challenge for Daqo
But for the contrarians, strong industry demand could keep polysilicon prices high and portends strong earnings potential for Daqo.
#3. CNOOC Limited
Last year, one of China’s oil supermajors, CNOOC Limited (NYSE:CNOOC), crashed after the Trump administration added the company and chipmaker SMIC (OTCQX:SMICY) to a blacklist for alleged military ties.
U.S. investors hold nearly 17% of CNOOC’s shares in its Hong Kong-listed unit, something that could potentially trigger major outflows if Trump’s ban takes hold and the company is forced to divest its holdings.
CNOOC, one of China’s so-called big three NOCs (National Oil Companies), was allegedly targeted due to the company’s drilling activity in the controversial South China Sea. CNOOC’s operations in the South China Sea have run into controversy because Beijing has been claiming drilling rights in waters far from its borders, and as close as 200 miles off the coasts of the Philippines and Vietnam.
Although US investors have to sell CNOOC shares by November 2021 due to the investment ban, Wall Street is increasingly optimistic that the ban will be lifted by the Biden administration.
Another major lure: CNOOC offers a consensus forward FY 2021 dividend yield of 7.3% and trades at 8.4 times consensus forward FY 2021 P/E.
Other major attractions: CNOOC is China’s main deepwater explorer, with its partnerships with ExxonMobil (NYSE:XOM) in offshore Guyana being some of its most successful to-date.
CNOOC, Exxon and Hess Corp. (NYSE:HES) have made 18 discoveries totaling ~9B boe in Guyana’s massive Stabroek block southwest of Kaieteur. Unfortunately, other discoveries by the trio have not been as promising as the Stabroek find with their Tanager-1 well–the deepest well drilled so far in offshore Guyana–revealing hydrocarbons but initial analysis showing that the well might not be economic on a standalone basis.
Still, we feel that the possibility of the Biden administration upholding the Trump ban remains a dark cloud over CNOOC that investors might want to avoid.
By Alex Kimani for Oilprice.com
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