Notes from the road: Post-COVID China, a decarbonisation investor’s perspective

Life in China continues to be hampered by COVID, but a research trip highlights that some green-economy sectors are looking ahead to healthy sales in the new year.

5 Nov 2021

5 minutes

Yunli Liu
Postcard from the road
  • This was my first trip to my country of birth since 2019, following the pandemic hiatus. I met with 25 companies across 13 cities, including the four held by the Global Environment strategy at the time of travelling.
  • China is still being impacted by COVID-19, more than I had expected, with travel restrictions continuing to hamper activity.
  • In the solar sector, supply-chain disruptions this year have worked in favour of the more established and vertically integrated players.
  • In the electric-vehicle sector, cost pressures are pushing manufacturers towards lithium iron phosphate batteries.
Travel experiences

Having been away from my hometown Beijing for almost two years, I finally managed to return to China in August this year. Restrictions on even Chinese citizens traveling into China have been extremely tight, and I had already postponed my trip multiple times as planes kept getting cancelled.

My relatives have been able to enjoy life more or less as normal since April last year. But contrary to my expectations, China hasn’t fully moved on from COVID-19, with sporadic outbreaks still weighing heavily on domestic travel and consumption. Recently, there have been two mini outbreaks: one originally centred in Nanjing (1551 cases by day 7), and the other in Putian, Fujian province (2722 cases by day 7).

Travellers in China are required to show the screen from an app (see Figure 1), whose name roughly translates as ‘telecom data-based travel itinerary card’, which lists the cities and provinces visited in the past 14 days. The app flags if any of the cities have active COVID cases, and if it does you may be turned away from hotels, trains and aeroplanes, depending on the rules of the local authority. This disrupts the plans of many business and leisure travellers, including me, and conversations with hotel staff and taxi drivers suggest that activity is still quite a long way from pre-COVID levels.

Most companies and factories I visited required either a clean itinerary card or a negative COVID test within 48 hours before granting access. COVID tests are quite affordable in general, ranging from 15 RMB (under £2 or US$3) in some parts of Shenzhen to 80 RMB (under £10 or US$15) in most other cities. Tight controls have generally enabled manufacturing-related companies to keep their staff healthy and their factories running.

Figure 1: COVID app — a must-have for travellers

COVID app — a must-have for travellers

Source: Ninety One.

Solar industry developments

I visited a number of solar-sector companies during my trip. The Chinese solar industry is evolving very rapidly, and one gets the feeling that information gleaned from field research may have a shelf-life of only a week (which is a useful insight in itself). Nevertheless, module suppliers’ improving capacity utilisation rates suggest that the industry is expecting a very robust H2, in both Chinese and international markets. Despite 251% inflation in the price of polysilicon in the year through the start of September, the prices of mainstream PERC modules – a highly efficient type of cell that has 86% market share – only increased 12% (see figure 3) for the mainstream 400W product. Even after the price rises and notwithstanding the presence of some price-sensitive customers, there is still room for suppliers to generate good returns, depending on where in the value chain they sit.

Ancillary materials companies in the solar sector – like Xinyi Solar*, Flat Glass and First Applied Materials – all expected price increases, mostly driven by improving demand, but also by inflation of their own costs. The supply-chain disruptions this year have worked in favour of the more established and vertically integrated players, like Longi Solar, Jinko Solar, JA Solar and Trina Solar, which have more control over upstream products. Perhaps unsurprisingly, they are also the ones that tended to talk down the potential disruptive impact of technology innovations (such as a solar cell technology called heterojunction, which essentially combines two technologies to increase the energy generated by one cell, and even larger wafer form factors).

Polysilicon and PERC prices

Figure 2 and Figure 3

Polysilicon and PERC prices

Source: Haitong Securities. Data as at end-September 2021.

On the demand side, many companies were optimistic about distributed solar photovoltaic demand (residential, industrial and commercial), encouraged by a number of policies supporting such projects. I even saw some interesting use cases, such as solar ‘carports’ (see Figure 4).

Figure 4: Solar ‘carports’

Solar ‘carports’

Source: Ninety One.

Potential future uses of solar panels include in car-charging stations.

Electric-vehicle industry developments

The EV industry in China has shifted focus from demand to supply. Whereas in previous years discussions tended to centre on short-term regional demand forecasts and uncertainties over government subsidies, the industry now has much higher conviction in global EV demand in the long run. Consequently, it is paying a lot of attention to the sub-industries that are more likely to experience sustained levels of under-supply. That said, from a demand perspective, most Chinese EV companies believe that 1) China’s target of 20% EV penetration by 2025 is too conservative; 2) EU demand will be very strong, driven by emissions-reduction regulations; and 3) US demand is still uncertain. (1) and (2) are already factored into Chinese EV companies’ capacity expansion plans. However, (3) is an upside risk for the whole supply chain, given the uncertainty of US demand.

Supply-chain cost inflation this year has tilted the balance in favour of lithium iron phosphate batteries (LFP), rather than nickel-based ternary batteries. The latest Chinese value-chain data shows that, on a per KWh basis, LFP cathodes are less than 50% of the cost of ternary cathodes (RMB 130 vs. more than RMB 300), and technologies such as cell-to-pack have helped LFP overcome drawbacks such as lower energy density. LFP batteries’ market share overtook that of the high-energy density alternatives in May 2021, as shown in Figure 5. Most industry players expect LFP to continue to be the mainstream product in the Chinese EV battery market, supported by new models adopting LFP batteries, such as the Tesla Model Y made in Shanghai.

Figure 5: Chinese EV battery shipment market share by chemistry

Chinese EV battery shipment market share by chemistry

Note: Ternary batteries refer to nickel-based battery chemistries, mainly NMC (nickel manganese cobalt) and NCA (nickel cobalt aluminium).
Source: Haitong Securities.

Recent car-sales data shows that hybrid EVs (extended-range EVs or plug-in hybrids) are the best-selling models in the mid-end market, rather than pure battery EVs. Companies such as BYD and Li Auto are betting on the electrification potential of this segment with their hybrid models. So far, the fastest-growing EV markets have been the premium segment (led by Tesla and NIO) and the low-end segment (led by Wuling Hongguang’s mini EV). Mid-range customers are mostly first time or family buyers in tier 2, 3 and 4 cities, where ‘range anxiety’ is more prevalent and charging infrastructure patchier than in Shanghai and Beijing.

I noted that the Wuling Hongguang mini EV is everywhere (and it is surely a blessing for people like me who struggle to park).

Figure 6: Wuling Hongguang mini EV

Wuling Hongguang mini EV

Source: Ninety One.

*This stock is held in the Global Environment portfolio.
1 Source:
2 Source:

General risks

The value of investments, and any income generated from them, can fall as well as rise.

No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. This is not a buy, sell or hold recommendation for any particular security.

Specific risks

Geographic/Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that the resulting value may decrease whilst portfolios more broadly invested might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Authored by

Yunli Liu

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

All rights reserved. Issued by Ninety One.

For further information on indices, fund ratings, yields, targeted or projected performance returns, back-tested results, model return results, hypothetical performance returns, the investment team, our investment process, and specific portfolio names, please click here.