China Cleantech Investing in 2012: Back in Full Swing – New Sectors Emerging

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L.E.K. Consulting is seeing a steady rise in cleantech investment in China including the broader green energy landscape beyond traditional renewable sectors. In fact, investors have been very active …

L.E.K. Consulting is seeing a steady rise in cleantech investment in China including the broader green energy landscape beyond traditional renewable sectors. In fact, investors have been very active during the past few years and deal flow is among the highest across all Chinese economic sectors.

Our 2012 report examines the recent trends in China’s cleantech investing landscape and argues that the sector should be given further consideration by investors looking for attractive investment opportunities.

Cleantech can incorporate a range of technologies and sectors such as recycling, information technology, transportation solutions, chemicals and lightweight materials, and lighting – essentially any application that provides energy efficient services or reduces air or water pollution. Investment in these new areas has been driven by increased public awareness and government initiatives, particularly in recent years, following the renewable energy investment boom.

Our report highlights include:
- An analysis of private equity (PE) investments and exits in China by market sector (i.e., cleantech vs. construction, etc.)
- Key insights regarding investment opportunities in growing Chinese cleantech industry sub-segments
- A perspective regarding investment opportunities in the seven national strategic industries identified in the Chinese government’s (12th) Five Year Plan

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  • 1. Executive insights VOLUME XIV, ISSUE 23 China Cleantech Investing in 2012: Back in Full Swing – New Sectors Emerging Following a surge in cleantech investing 4-5 years ago, it looked years with most of the funds starting in the 2006-08 period still for a number of years as if the focus from private equity inves- having ample dry powder. tors was moving away. The Copenhagen summit on climate change was a disappointment and as the global financial crisis Cleantech Group estimated 2011 investments by financial and has unraveled, many investments made around that time have corporate investors around the globe totalling US$9 billion, turned sour. Yet in 2012, when we consider the broader clean- a 13% increase over 2010. Cleantech mergers & acquisitions tech landscape beyond traditional renewable sectors, we can reached record highs in 2011 with 391 deals and a dollar see that there has been a steady rise in investment in China. In volume of US$41.2 billion, a robust 153% growth over 2010. fact, investors in the field have been very active over the past Given the current market uncertainty, investors are charging a few years and dealflow is amongst the highest across all sec- higher risk premium which is supressing valuations. This is in- tors in China. In this update, we explore the recent trends in creasing the opportunity for larger returns in an industry where cleantech investing in China and argue that the sector should the long-term fundamental drivers are strong. On the other be given further consideration by investors looking for attractive hand, market conditions mean exiting investments remains investment opportunities. challenging with little appetite for new IPOs and investors hav- ing to accept lower valuations. Cleantech can incorporate a range of technologies and sec- tors such as recycling, information technology, transportation Cleantech in China: Muscling its Way Towards the Top of solutions, chemicals and lightweight materials, and lighting – the Charts essentially any application that provides energy efficient services China is seeing a resurgence in interest in cleantech investing. or reduces air or water pollution. Investment in these new areas A recent survey of global fund managers listed China amongst has been driven by increased public awareness and government the top regions in terms of attractiveness, and the country has initiatives, particularly in recent years, following the renewable taken centre stage in terms of global cleantech investment energy investment boom. activity. China invested US$45 billion in cleantech in 2011, very closely behind the U.S. , the most active cleantech investor Considering first the global picture, cleantech investment has globally. However China has seen the fasted growth of close to increased over the last few years to reach US$255 billion in 40% per annum since 2006, far outpacing the growth seen in 2011. The vast majority has been in the form of project financ- the U.S. and most other markets around the world. ing and infrastructure funds, with private equity and venture capital historically accounting for a small portion of total invest- Historically, few private equity professionals placed much ment (c.3-5%). However, despite this relatively small scale, PE attention to the cleantech. In terms of sector performance, and VC activity in the industry remained strong over the last 3 cleantech is placed outside the top 10 when looking at the China Cleantech Investing in 2012: Back in Full Swing – New Sectors Emerging was written by Michel Brekelmans, a Director and Co-Head of L.E.K.’s China practice; and Lane Chen, a Manager in L.E.K.’s Shanghai office. Please contact us at lekchina@lek.com for additional information.L.E.K. Consulting / Executive Insights lek.com
  • 2. Executive insights cumulative number of deals completed between 2008 and business early last year. 2012 YTD (September). However in 2011, cleantech was the 4th most active sector in which PE deals where done in China, However, it’s not all been plane sailing. Clearly, some investors behind traditional leaders in manufacturing, chemicals and health have gotten their hands burned betting on the wrong ‘techno- care. In 2011, cleantech was one of the most active sectors in logical breakthrough’ that has never materialized or as business terms of private equity deal flow, with 45 investments made (see performance has deteriorated. The latter has been influenced Figure 1), and cleantech was also amongst the top sectors for by a number of factors including the collapse of European PE exits last year (see Figure 2). According to the statistics from subsidies, intensive competitive pressure as new entrants have ZeroIPO Group, 4 cleantech related IPOs of China took place in flooded the market, and fast market saturation due to the overseas stock market, raising US$1.402 billion, including over extremely rapid uptake of a number of cleantech products and US$790 million for Huaneng listed in H-share; meanwhile, 15 services, often induced by ‘pressure and incentives’ from the IPOs took place in domestic stock market, raising US$3.67 billion, Chinese government to adopt specific technologies in order including US$1.44 billion for Sinovel. In 2012 the momentum to reach energy saving standards. A number of PE investors for cleantech IPO’s has slowed somewhat. Partly this is explained were simply caught out by the speed at which new technolo- by the overall slowdown in IPOs in China (and indeed around the gies were adopted, seeing incredible growth in one year but world). But the lacklustre performance of a number of cleantech demand dry up in the following one. players, especially in the solar solar, has dampened somewhat the enthusiasm of investors in the sector. China Cleantech Investing: Where Do We Go Next? So, the billion dollar question in cleantech investing today China’s cleantech sector has already created significant returns is: where next? What is going to make up the next wave of for a number of early investors. Forbes Magazine reported technologies and businesses set to create superior returns for that 5 of the world’s 10 richest green billionaires in 2011 were investors? The attractive sub-segments in the Chinese clean- from China including Gongshan Zhu from GCL-Poly Energy tech industry are changing. The industries which experienced and Junliang Han from Sinovel Wind Group. Private equity the initial investment such as on-shore wind and solar have players have often played an important role in financing the now matured. These industries face overcapacity and increased expansion of these businesses and have been rewarded hand- competition which will likely cause consolidation. There may still somely. New Horizon Capital was one of the anchor investors be some room in these more established areas, though this will in Sinovel in 2008 and saw returns explode upon listing the rely on the company being able to sustain a cost advantage in a Figure 1 Figure 2 PE Investment in China by Sector (2011) PE Exits in China by Sector (2011) No. of deals No. of deals Machinery 61 Machinery 16 Chemical 56 Electronic 15 Life science / healthcare 55 Construction 14 Cleantech 45 Chemical 12 Internet 44 Food & beverage 12 Energy 38 Finance 12 Construction 38 Automobile 10 Real estate 36 Cleantech 9 Electronic 36 Energy 8 Agriculture 30 Textile and apparel 8 0 10 20 30 40 50 60 70 80 0 5 10 15 20 Total 695 deals Total 150 exits Source: Zero2IPO, L.E.K. research and analysisPage 2 L.E.K. Consulting / Executive Insights Vol. XIV, Issue 23 lek.com
  • 3. Executive insights market experiencing substantial downward price pressure. As is often the case in China, the government plays an active role in shaping the development of industry and creating condi- The next wave of investments will likely be in new power gen- tions for companies to thrive in. Given the stated intention eration sub-segments such as offshore wind farms and environ- to increase the development of the key strategic industries, mental protection (waste treatment, pollution monitoring, CBM companies in these sectors will likely benefit from increasingly (coal bed methane) capture). favourable government policy in the form of, e.g., reduced red tape, subsidies, tax incentives, and guaranteed loans, just According to China Venture, 10 cleantech deals each with a as was seen in renewable energy over the last 5-7 years. This deal value over US$50 million were completed between Janu- will encourage increased investment and focus in the sector, ary 2011 to May 2012, including a US$114 million investment providing significant opportunities for private equity firms with by KKR, the U.S. buyout fund, in United Envirotech Limited, a the right capabilities to identify and invest in the future market water purification and treatment company, and a US$105 mil- winners. lion investment by a group of investors in Chengdu Xingrong Investment Co., Ltd., which monitors and controls pollution The cleantech sector will continue to see big investment op- levels (see Figure 3). portunities across a range of technologies. As the economy continues to growth substantially over the coming 20-30 years, In September 2010 The State Council, China’s cabinet, selected China’s energy demand will growth accordingly and solutions seven national strategic industries that it hopes will advance have to be found and adopted to change the energy mix, to the nation’s economic development and which it is specifically increase efficiency or to reduce environmental impacts. The targeting for China to become world leaders in over the next winners will be in proven technologies which have a big impact (12th) Five Year Plan period (see Figure 4). These industries are: in addressing China’s sustainability needs. energy-saving and environmental protection; alternative-fuel cars; alternative energy; advanced materials; biotechnology; We expect to see rapid growth in nuclear power and shale gas new-generation information technology; and high-end equip- as alternative fuel sources. We will also see big opportunities in ment manufacturing, 3 of which directly relate to the cleantech low-emissivity glass and insulation materials that reduce energy industry, while advanced materials is indirectly linked through demand from buildings. We will also see medium term op- areas such as biodegradable plastics and energy efficient glass. portunities in new technological areas where China will play a Figure 3 Examples of Recent PE / VC Investment (2011 – 2012) Size of Investment Investor(s) Target Sector Date ( US$m ) Haitong-Fortis Private Equity Fund Weihai Golden Sun Co. Ltd Solar thermal 50 Mar-12 Management Co. Ltd Sequoia Capital China Growatt New Energy Co. Ltd On-grid photovoltaic 100 Mar-12 KKR United Envirotech Limited Water purification 114 Aug-11 & treatment CIC / Standard Chartered Huaneng Renewables Solar energy 230 Jun-11 PLC / Temasek / Olympus Capital / GE Co., Ltd. Capital / Invesco Group / Bank of China Jiuding Capital Jiangxi Sornid High-Tech Solar energy 90 Jun-11 Co., Ltd. Beijing SSJ Investment / Jinglong Xinjiang Guanghui Gas exploration 88 May-11 Investment / Fund Investment / Zunfangde Investment / ZRT Investment TPG Comtec Solar Systems Battery and energy 97 Apr-11 Co., Ltd. storage technology Dinghui Investment Sinomen Technology Ltd Water purification & 277 Mar-11 & Fund Management Corporation (CDH) treatment Zhejiang Tiantang Guigu Investment / China Chengdu Xingrong Pollution monitoring 105 Mar-11 Life Insurance / Taikang Asset Investment Co., Ltd. and control, Management / China Galaxy Investment water treatment Source: China Venture, ISI, L.E.K. research and analysisL.E.K. Consulting / Executive Insights lek.com
  • 4. Executive insights Figure 4 Development of Strategic Government Focus on Cleantech-related Industries Old pillar industries New strategic and emerging industries National defense Energy saving and environmental protection Telecommunication New energy (nuclear, solar, wind, and biomass) Clean energy vehicles Electricity ( PHEVs and electric cars) Oil New materials (special and high performance composites) Coal High-end manufacturing Marine shipping Biotechnology Airlines Next generation information technology Industries directly contributing to China energy and environment goals Source: State Council, NRDC, L.E.K. research and analysis role in ground breaking new technologies with global potential. L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective Examples here include scaled carbon capture and storage solu- owners. tions, battery technology for storing renewable energy sources and smart grid applications. Both for near term and longer term © 2012 L.E.K. Consulting LLC investors, there will continue to be very exciting investment op- portunities across a broad range of technologies in China. L.E.K. Consulting is a global management For further information contact: International Offices: consulting firm that uses deep industry expertise and analytical rigor to help clients Shanghai Auckland Floor 34, CITIC Square Bangkok solve their most critical business problems. 1168 Nanjing Road West Boston Founded nearly 30 years ago, L.E.K. employs Shanghai 200041 Chennai more than 1,000 professionals in 21 offices China Telephone: 86.21.6122.3900 Chicago across Europe, the Americas and Asia-Pacific. Facsimile: 86.21.6122.3988 Los Angeles L.E.K. advises and supports global companies London that are leaders in their industries – including Melbourne the largest private and public sector organiza- Beijing Milan Unit 1026, Floor 15 tions, private equity firms and emerging en- Yintai Office Tower No. 2 Mumbai trepreneurial businesses. L.E.K. helps business Jianguomenwai Avenue Munich leaders consistently make better decisions, Beijing 100022 New Delhi China New York deliver improved business performance and Telephone: 86.10.6510.1075 Paris create greater shareholder returns. Facsimile: 86.10.6510.1078 San Francisco Singapore Sydney Tokyo WroclawPage 4 L.E.K. Consulting / Executive Insights Vol. XIV, Issue 23 lek.com