2024 China New Energy Sector Outlook: A Pivotal Year

The global transition towards new energy is irreversible. China’s new energy sector has experienced significant growth in recent years due to its relatively large market size, high demand, technological advancements and government support. However, the sector has faced various challenges in the past year or two, including intense competition, overcapacity, fluctuations in raw materials prices, and phasing out of certain subsidies. These headwinds have weighed on the profitability of new energy companies and resulted in underwhelming overall performance, leading to a decline in investor confidence. Nevertheless, industry consolidation and structural adjustments have helped mark 2024 as a pivotal year for the sector.

1) From fierce competition to survival of the fittest, industry chain integration and improvement:

In the past few years, the new energy sector has witnessed a period of rapid expansion, with numerous Chinese companies entering the market and expanding their production capacities. However, demand has slowed down and the increased capacities have resulted in an oversupply situation. One consequence is significant fluctuations in prices of upstream components in the photovoltaic industry, such as silicon wafers and silicon materials. Since mid-November 2023, silicon wafer prices have been greatly affected by surplus in the market. Additionally, some battery manufacturers have suffered losses, prompting them to shut down outdated battery production units.

However, the situation has shown signs of improvement. Some third-tier factories faced losses due to low-capacity utilization and these companies with low profitability are expected to gradually exit the market. This process of elimination of weaker players and survival of the strong is likely to accelerate integration of certain segments within the industry chain in 2024, while prices of raw materials may stabilize. On the other hand, demand in the new energy market is projected to experience faster growth in 2024, and that should help address the supply-demand imbalance. Global sales of new energy vehicles (NEVs) are expected to continue to rise and reach a total of 16 million units, representing a 20% year-on-year growth. Furthermore, the increase in sales of electric vehicles overseas may boost the demand for batteries from China. Global demand for energy storage batteries is also

projected to grow rapidly, reaching 1,250 gigawatt-hours (GWh) in 2024, with an annual growth rate of 26%. The surge in global sales of NEVs would benefit assemblers in the automotive industry, potentially alleviating the oversupply situation in certain segments of the new energy industry, providing a potential tailwind for the sector.

2) Phase-out of subsidies, transitioning to market-driven demand:

The Chinese government's consistent support has played a vital role in the growth of the new energy sector in recent years. Certain policy priorities have been adjusted to align with market changes. For instance, the Ministry of Finance reduced subsidies for NEVs by 30% in 2022. On the international front, the US Department of Treasury announced that starting from 2024, electric vehicles manufactured in the US but containing battery components made or assembled in countries like China would no longer be eligible for tax credit of up to $7,500 provided by the US Inflation Reduction Act. These policy shifts, both domestic and foreign, have shaken investor confidence in the new energy sector. Nonetheless, various supportive measures are still in force, though the policy focus has shifted from the industry chain to the consumer level. Favorable policies for the automotive industry, such as license registration, vehicle purchase taxes, and exemptions from traffic restrictions in certain cities, are still in place. Additionally, some local governments have introduced consumer vouchers and subsidies for vehicle replacement, aiming to stimulate demand for NEVs.

Furthermore, local governments continue to provide subsidies for offshore wind power projects. The "14th Five-Year Plan for Renewable Energy Development" established by the National Development and Reform Commission emphasizes the active promotion of offshore wind power projects in coastal regions. Shandong, Zhejiang, Guangdong and cities such as Shanghai have responded positively and have gradually implemented local schemes providing subsidy for offshore wind power projects. These subsidies aim to alleviate financial burdens on developers and expedite the progress of offshore wind power construction. Factors hindering offshore wind power, such as military and shipping routes issues, have shown signs of resolution since September 2023. Offshore wind power development in Jiangsu, Guangdong and other regions is steadily advancing, with initiation of several deep-sea offshore projects. This momentum has propelled the offshore wind power industry into a new phase of growth and expansion.

In fact, phasing out of government subsidies is not entirely a drag to the sector. Rather, it serves as a catalyst for stimulating organic demand growth and encourages companies to prioritize technological innovation and cost efficiency, enhancing their competitiveness. This shift in focus contributes sustainable and long-term development of the new energy market. 

3) Relatively healthy overall valuation

Investor concerns regarding the development prospects of the new energy industry are evident, as reflected in valuations of new energy stocks. The industry's overall price-to-earnings (P/E) ratio has reached a historic low of only 12 times. However, as the supply and demand dynamics continue to improve, earnings growth of the new energy industry is expected to reach 19.5% in 2024, surpassing the broader China equity market. The earnings growth of the industry may accelerate in 2025.

On the other hand, the China equity market has fallen by nearly 45% from recent highs. After nine consecutive quarters of decline, corporate earnings of A-shares may have bottomed out in 2023 Q2. China's economic data have also shown signs of stabilization in recent months. The People's Bank of China has maintained accommodative monetary policies by cutting the reserve requirement ratio (RRR) by 0.5 percentage point for financial institutions in February, injecting long-term liquidity into the market. Considering the backdrop of fiscal policy support and a potential recovery in household spending, China's macroeconomic conditions are expected to improve. In 2024, the local equity market is projected to benefit from earnings recovery and valuation restoration. The currently low valuations of the new energy sector present an entry opportunity for investors.

Investment Outlook:

Looking ahead to 2024, we believe that investors could focus on the NEV and offshore wind power industries.

NEVs: We are optimistic about the future development of the new energy vehicle industry. Despite an overall penetration rate of 17% in 2023, there remains substantial room for growth towards the target of 50-70% penetration. In 2025, the introduction of low-cost vehicle models and implementation of carbon emission standards in Europe are expected to accelerate the increase in the penetration rate of NEVs. Our optimism extends to leading lithium battery companies that enjoy cost advantages, technological leadership and a strong international presence. Despite significant losses experienced by their peers, these companies have demonstrated resilience in profitability, and have positioned themselves to gain market share and further enhance profitability in the upcoming upward cycle. Given the recent valuation pullback, 2024 may present a relatively favorable opportunity for investors to position themselves in this sector.

Offshore Wind Power: During the "14th Five-Year Plan" period, the target for installed capacity of offshore wind power sector is in excess of 61 gigawatts (GW), while the current cumulative installed capacity is approximately 25.6 GW. In 2023, as most of the issues related to shipping routes and military constraints on offshore wind power have been resolved and local governments continue to provide subsidies, the annual installed capacity is projected to increase further in coming years. It is expected to reach 5 GW in 2023, 10 GW in 2024 and 15 GW in 2025. The global commercialization of floating offshore wind power is also progressing rapidly, while the cost of floating offshore wind power in China is decreasing. This trend presents favorable market opportunities for China. In addition, China's offshore wind power industry is getting a further boost from policy initiatives in other parts of the world. For instance, the European Union signed the Ostend Declaration in 2023, which raised the offshore wind power target from 130 GW to 300 GW by 2050. The US has also reaffirmed its plans to achieve 30 GW by 2030 and 110 GW by 2050 for offshore wind power installations. We expect global offshore wind power capacity to grow from 12 GW in 2023 to 26.7 GW in 2025, with a significant part of the installations coming from China. Overall, there is optimism regarding the offshore cable and offshore pile industries in particular. As the distance of wind farms from the shore increases, the value of these industry chains may gradually rise.

Conclusion:

In summary, the Chinese new energy sector has faced headwinds but is now undergoing industry consolidation and structural adjustments. With the anticipated recovery in overall demand, the sector is expected to regain momentum in 2024, presenting an opportune time for investors to position themselves in the early stages of recovery. In the long run, the sector is set to benefit from supportive government policies and sustainable development trends. Furthermore, there will be new opportunities for investors through innovative technology research and development, as well as effective cost-control measures.