Unconventional Profits from China's Problems

 |  Includes: DUK, EVX, GE, NEU, NLC, PZD
by: Sam Subramanian

China has emerged as a major manufacturer of capital and consumer goods and much has been written about China’s economic miracle. Even though most of the world is mired in a deep recession, China’s economy continues to grow. The Chinese economy grew 6.1% in the first quarter from a year earlier.

Toll on the Environment
The economic miracle has however come at the cost of the environment: Air, water, and land have become tainted. China has surpassed the U. S. as the largest per capita emitter of carbon dioxide. Nearly 40% of Chinese cities face significant water shortages and 37% of China’s land mass is plagued by soil erosion problems. Serious acid rain falls on 415 of Chinese cities. Exacerbating the damage, China is building coal-fired power plants at a frenetic pace to narrow the gap between electric power generation and demand.
$500 Billion Opportunity
The Chinese government is now proactively addressing the issue through its Green GDP strategy. U. S. trade officials expect China's Green GDP market to tally $186 billion by 2010 and expand to nearly $500 billion by 2020. To push things forward quickly in the near-term, about 38%, or $221 billion of China’s $586 billion domestic stimulus package announced in late 2008, is earmarked for cleantech-related initiatives.
Cleantech in China means more than just wind turbines, solar cells, or electric cars. It includes advanced technology to free air, water and soil of harmful pollutants. China expects the Green GDP strategy to provide its economy a long-term competitive edge by lowering raw material costs in addition to combating severe pollution problems. With no major state-owned Chinese companies operating to clean up things, the giant Chinese market is creating significant opportunities for companies with a cleantech edge.
So, Who’s Poised to Profit
Here are some names to play this investing theme. While smaller companies typically will provide more exposure to this theme, they tend to be more volatile than larger ones.
Small and Mid-Sized Companies
Nalco Chemical (NYSE:NLC), a Warren Buffett holding, is a leading provider of water treatment chemicals and services. It also offers many technologies that reduce nitrogen oxide and sulfur dioxide emissions from coal-fired plants. Seeing huge potential in China, Nalco has recently moved its Asia headquarters from Singapore to Shanghai. Nalco already has manufacturing plants, research centers, and 554 employees in China.
Afton Chemical, a unit of fuel-additive maker NewMarket (NYSE:NEU) specializes in fuel and lubricant additives. Its Greenclean products include a diesel fuel detergent that boosts engine performance and cuts harmful emissions. With nearly 170 million motor vehicles already rolling on Chinese roads, NewMarket sees opportunity for petroleum additives here.
Large Companies
General Electric (NYSE:GE) is pushing its Ecomagination initiatives in China and GE China is already a $5 billion business. GE’s Ecomagination unit focuses on green technologies and clean-energy products. The unit has been growing revenue at a 20% annual rate and pulled in revenue of $17 billion in 2008. With China contributing handily to growth, GE’s Ecomagination unit targets a ‘stretch’ revenue goal of $25 billion in 2010. Investors should however note that GE’s finance unit faces substantial challenges, a factor that stands to be a bigger driver of the company’s stock price.
Duke Energy (NYSE:DUK) is working to enter into a series of joint ventures with Chinese firms to develop a range of energy capabilities from clean coal to wind power. By leveraging such partnerships. Duke seeks to reduce the cost of deploying renewable technologies and to mitigate technical risks.
How Mutual Fund and ETF Investors Can Profit
If one does not want to deal with company-specific risk and prefers to invest in a basket, there are a few sector funds and ETFs for consideration. These include Fidelity Select Environmental (MUTF:FSLEX), Market Vectors Environmental Services (NYSEARCA:EVX), and PowerShares Cleantech (NYSEARCA:PZD). FSLEX and EVX include Nalco Holdings among their top 10 holdings while PZD has nearly 61% of its holdings in the Industrials sector.