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Capturing alternative energy growth in China - Buy China Agri and Sinofert
We believe that the renewable/alternative energy sector in China is set to grow at
unprecedented speed in the next decade due to both central government policy
directives and private sector initiatives. We initiate with a Buy rating on China Agri,
a leading ethanol fuel producer in China with fast expansion plans. We also
maintain our Buy on Sinofert, as the global interest in renewable biofuels made
from grains and oilseeds is having a positive impact on fertiliser demand.
China’s energy consumption has risen by 11.2% CAGR in the past five years to
1.7bn tonnes of oil equivalent in 2006, making it the world’s second-largest energy
consumer. As China’s economy develops, it is set to overtake the US to become
the world’s largest energy consumer soon after 2010. Fast demand growth
coupled with flat domestic production led to a jump in crude oil imports, which
accounted for 48% of China’s apparent demand in 9M07, from a low of 16% in
1998.
The government has set aggressive targets on clean and renewable energy
The government aims to increase the use of renewable energy sources (including
hydropower) to account for 10% of total energy consumption by 2010F (from
about 7.5% at present) and further to 15% by 2020F. It intends to increase fuel
ethanol consumption by 24% CAGR to 3Mtpa and natural gas consumption by
18% CAGR to 109bcm by 2010F.
The private sector has been actively exploring opportunities
Seeing the challenges as well as opportunities presented by the country’s fast
energy demand growth, the Chinese industrial and corporate sector has come up
with various solutions based on alternative fuels. Some are renewable, such as
ethanol, and some are non-conventional, such as DME, CBM and synfuels (coal-toliquid).
Although with different properties as fuels, they all provide various
approaches to China’s energy diversification.
Identifying key players
We initiate with a Buy rating on China Agri (0606.HK, Buy, TP HK$6.18), a leading
fuel ethanol producer in China with fast expansion plans. As global interest in
renewable biofuels made from grains and oilseeds is having a positive impact on
fertiliser demand, we also like Sinofert (0297.HK, Buy, TP HK$7.30), the largest
fertiliser distributor in China, which has exposure to the profitable potash
production industry through a recent acquisition.
Key risks
The principal risks to our positive view include 1) regulatory policy change e.g.
removal of subsidies for fuel ethanol producers, 2) rapid capacity expansion in
sectors not strictly regulated by the government, 3) lack of proven track record in a
new area, and 4) margin pressure from rising feedstock costs.
Table of Contents
The drive to alternative energy ........................................................ 4
I. Biofuel: Ethanol/biodiesel dynamics ............................................ 8
II. Methanol/DME dynamics ........................................................... 17
III. CBM dynamics............................................................................ 25
IV. Synthetic fuel (CTL) ................................................................... 28
V. Methanol to olefins (MTO) ......................................................... 33
China Agri......................................................................................... 38
China Bluechem............................................................................... 66
Sinofert............................................................................................. 68
China Coal Energy ........................................................................... 74
China Energy Ltd ............................................................................. 76
China Grand Forestry ...................................................................... 78
Datang Int'l Power........................................................................... 80
Shenhua Energy............................................................................... 82
Yanzhou Coal ................................................................................... 84
Zhongyu Gas.................................................................................... 86
209806.pdf
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