Investment in Cleantech | Yong Zhang

Cleantech under the drive of macro-control

Now is the time to invest in energy conservation within the traditional industries. The government emphasises environmental solutions everyday. There won't be a harmonious society if we don't carry out air pollution control and water treatment. There is no doubt that the whole of society is supporting the development of clean technology. But there is a key issue that there are a lot of Chinese laws lacking of implementation, even though Chinese laws covers a wide range of issues. We see that there is a lot missing focusses during the so-called legislative impel. However, with economic development, not only the Chinese economic system, but also the government system has been continued to improve.

From an investment point of view, Chinese government has taken many measures in clean technology and there is a fairly solid foundation.

Firstly, the legal system in China is gradually improving.

Secondly, it is getting more and more strict in terms of the legislative implementation. I would like to see two things happening in amending of the new Environmental Law:

1) The sanctions towards perpetrators of environmental issues should continue, because it creates a strong deterrence. 

2) There should be not only financial penalties, but also administrative penalties.

Thirdly, now money talks. Same as PPP mode, it needs a very fine provision in term of money. It is not only the PPP business model, but also questions of “how to make an orderly division to the central and local finance in terms of funds”; “how to form a complete set of private and government funds'? Moreover, how shall the Chinese funds interact with foreign funds and to boost the entire industry in a advantageous order?

Investment in Clean Technologies

Cleantech industry meets the policy demands and are also welcomed by the public. However cleantech industry has been receiving very little attention in the primary market and it has been difficult to finance in the equity market for cleantech companies. This is not a business issue, but the entire industry format decides that cleantech is popular in the secondary market and only praised in the primary market. Especially when there is massive investment and a high bid price on the TMT sector, and the total amount of VC in the entire primary market has been declining. The main reason is that there are investments from people without expertise and with high expectations and the irrationality from the whole industry creates an unreasonable set for the entire capitals.  You can say that the global investment in clean technology is  almost collapsing. For investment in clean technology, it requires a constant put-in, and it needs a lot of money to get things done, but the return is not very high, generally around 10 times. Therefore, the expectation to Cleantech investment can only be a fine subject with good development. In a way, should cleantech not be a business to VC, but to PE.  The problem is that the investment to cleantech will not wait until the technology is mature. Therefore it is very important in the primary market that we can draw a standard for forerunners.

Actually, there is an equation in the Cleantech investment to how these VC/PE make money. The return to VC/PE is the earning plus the enlargement to the company value. When the return to cleantech is relatively stable, the investor needs to understand the industry and nurture the company growth. Therefore, investors hope to find qualified companies that they share values with, and on this basis, magnifying the company's core business.

M & A in China

It has been booming on the mergers and acquisitions in the Chinese capital market since 2013. However, on the secondary market, there are a lot of M&A, which are not for an industrial purpose, but for the purpose of capital requirements and operations. Although there are a lot M&A in the existing capital markets, but most of them are irrational and non-systemic behaviour. Within the next two to three years, the real rational M&A action should consider how to enlarge the unique value of the company. Therefore, no matter how many competitive acquisition actions happened in the capital market, we need to be cautious on the current ones, which can easily lead to  losing your own company. Is the purpose of business really to make quick money?  How to coordinate a listed company to make quick money? There are risks. We need to think about if we can push a company to a better platform through M&A.

M&A from an Innovative Perspective

In the field of research and development, China's advantage of innovation inclines more to develop than to research. Chinese companies are doing better at developing and improving existing products. Furthermore, though the highly effective domestic capital market, with the strong ability of engineering development and a huge market advantage, Chinese companies can keep pace with foreign companies that hold know-how expertise.

It is clear that China has two advantages of innovation. First is the ability of industrial  re-development, which is so-called developing faster and better products in a low-cost way. China is very good at this. The second is the massive market in China. China provides a lot of funds and massive market. However, it is not only important to sell products within China market after producing, but also having this best trial market concerning the process of product development.