Morgan Stanley and others pick stocks that could benefit from China's climate goals

Published Tue, Dec 28 20216:18 PM EST

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

For analysts in Greater China, one of the big investing themes for next year is finding companies that could benefit from Beijing's push to reduce carbon emissions. There needs to be technological advancement, as simply cutting back on fossil fuels or using other incentives to reduce carbon emissions will not be enough — and will even shock the economy, said Peng Wensheng, chief economist and head of the research department at Beijing-based investment banking giant CICC. "The key to achieving lower carbon emissions is relying on technological progress. Otherwise, the economic impact will be rather large," he said in Mandarin, translated by CNBC. Peng was speaking in October at the media release of CICC's latest outlook report, a thick book of more than 400 pages outlining China's need to innovate — out of long-term necessity and to keep up with competition from the United States. It's not clear how consistently China will pursue its goal of reaching carbon neutrality by 2060. A coal shortage and high power needs in the last few months have increased fossil fuel demand. An official said earlier this year that coal dominates China's energy use and the country must rely on it for now. But in the long term, analysts expect China will remain committed to reducing carbon emissions, and companies with the technology to support this goal will benefit. CICC didn't share stock picks, but here are some from other investment analysts keen to play the trend: Fangda Carbon New Material Shanghai-listed Fangda Carbon New Material is one of Morgan Stanley's two picks for stocks that could benefit the most from China's plan to reach peak carbon emissions by 2030. Fangda "stands to benefit from [a] bigger push on steel recycling," Morgan Stanley analysts wrote in a Nov. 30 report about rising investor interest in Asia sustainability plays. The stock is rated overweight, which generally means it's expected to exceed that of the firm's industry coverage in the next 12 to 18 months. China aims to boost use of scrap steel by 23% — to 320 million tonnes from 260 million tonnes, the National Development and Reform Commission said in July. That's the top department for implementing economic policy. Kingfa Sci & Tech Kingfa is Morgan Stanley's other pick for a Chinese stock that could benefit from Beijing's plans to meet climate goals. The Shanghai-traded company "is likely to benefit from higher solid waste utilisation, which includes plastic," the report said. "Despite plastic recycling, the regulator continues to encourage the promotion of degradable plastic, and Kingfa should be a key beneficiary." Kingfa's main product categories include fully biodegradable plastics, according to the company's website. Morgan Stanley rates the stock equal weight, which generally means it's expected to perform in line with that of the firm's industry coverage in the next 12 to 18 months. Baosight Software Beijing has been releasing industry-specific plans for achieving carbon neutrality, and one of the latest, out on Dec. 8, focuses on the sustainable development of data centers. "We believe the plan is conducive to the healthy and orderly development of the [internet data center] sector," Huang Yayuan, chief telecom analyst at Chinese investment bank Citic Securities, wrote in a Dec. 9 report. One of his top recommendations in the data center industry is Baosight Software, owing to its competitive research and development as well as its operational capabilities. The company is a subsidiary of state-owned giant Shanghai Baosteel Group. Contemporary Amperex Technology Contemporary Amperex Technology (CATL) , a major producer of electric vehicle batteries, is "well positioned for the carbon neutrality theme" since it is a leader in battery power and has a fast-growing energy storage business, China Renaissance analysts wrote in their September strategy report for investing for the next three to five years. The analysts expect that Chinese battery companies will benefit from growing global demand for electric vehicles as other countries plan to ban sales of traditional fuel-powered vehicles. Supported by a high barrier to entry, Chinese power battery shipments could grow by 48% a year through 2025, the analysts said. Within China, the world's largest auto market, the analysts expect that accelerating demand for new energy cars will help carbon emissions in the automotive industry peak in 2028 and fall 20% from that level by 2035. CATL had 51% of the China electric vehicle battery market share in November, based on installations, according to Nomura. Wuxi Lead Intelligent Equipment Battery production equipment supplier Lead Intelligent is China Renaissance's other pick for playing carbon neutrality, partly owing to its strong ties with CATL. CATL took a 7.29% stake in Lead Intelligent in 2020, and subsequently agreed that it would buy at least half of its new core equipment for battery cell production from Lead. Not only is Lead a leader in lithium-ion battery production equipment, but the company is also expanding its product lines and has an early-mover advantage in the solar power industry, according to the China Renaissance analysts. — CNBC's Michael Bloom contributed to this report.

A man waters plants in front of a coal-fired power plant on October 13, 2021, in Hanchuan, Hubei province, China.

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For analysts in Greater China, one of the big investing themes for next year is finding companies that could benefit from Beijing's push to reduce carbon emissions.

There needs to be technological advancement, as simply cutting back on fossil fuels or using other incentives to reduce carbon emissions will not be enough — and will even shock the economy, said Peng Wensheng, chief economist and head of the research department at Beijing-based investment banking giant CICC.