Investment-based methodology| Ping An Fund Chengjun: We are experiencing an energy revolution

#Touji Methodology #162, originally published in Xinhua Finance

On November 4th, Cheng Jun, Index Investment Director of Etf Index Department of Ping An Fund, was a guest of today's headline financial channel and Xinhua Finance's online interview column "Investment Methodology" to share the investment strategy of the new energy industry.

Profile: Cheng Jun, Ph.D. of Shanghai Jiao Tong University, Postdoctoral Fellow of Nanjing University and Shanghai Stock Exchange, 11 years of experience in the securities industry, worked in the Fund Department of Shanghai Stock Exchange, Cathay Fund, Harvest Fund Product Department and Index Investment Department, Ping An Life Investment Management Center, joined Ping An Fund in February 2017, and is currently the Index Investment Director of etf Index Department of Asset Allocation Division. He has participated in the development of China's first batch of innovative products such as cross-market ETFs, bond ETFs and cross-border ETFs.

Q: Welcome to Mr. Cheng Jun, Index Investment Director of Etf Index Department of Ping An Fund, as a guest of today's headline financial channel and Xinhua Finance's online interview column "Investment-based Methodology", the theme of new energy vehicles is one of the hot spots in the recent market, what do you think are the main factors affecting the new energy vehicle sector?

Cheng Jun: On the road to achieving the goal of carbon neutrality by 2060, new energy vehicles are undoubtedly an energy revolution that we are experiencing, and new energy vehicles will eventually replace traditional fuel vehicles. Therefore, its long-term investment logic has a high degree of certainty.

In the phased indicator, the change in penetration rate needs to be paid attention to. The space of "penetration rate" represents the future growth space of the industry, and the production and sales data of new energy vehicles is a monthly frequency indicator, reflecting the prosperity of the industry. Taking September as an example, the production and sales data reached a new high. In the case of tight chip supply chain, production and sales reached a new high, highlighting the high prosperity of the industry. In addition, the price of lithium continues to rise, and its price itself can also be used as one of the auxiliary indicators to judge the degree of prosperity of the industrial chain.

The new energy automobile industry index actually reflects the prosperity of the new energy automobile industry chain. When we make individual stock investments, we pay attention to in-depth research on fundamentals, while the theme of the investment industry is more focused on the choice of track. Indices are an effective tool for quickly expressing views on industry topics.

Q: The new energy vehicle sector from August to October is relatively flat, but there seems to be signs of the return of the king after mid-October, what is the reason?

Cheng Jun: After July, there was also differentiation within the new energy automobile industry index, and the performance of upstream raw materials represented by the lithium ore plate was outstanding, until it was adjusted after the disclosure of the mid-report on August 31. As the price of upstream raw materials continues to rise, the market is worried about the erosion of midstream and downstream profits, and the performance of the middle and lower reaches is general, reflected in the index, and the overall is relatively flat.

After mid-October, there is a three-quarter report disclosure period. Investors mostly have a judgment on the new energy vehicle industry chain that exceeds expectations. Especially in the midstream battery link, core battery companies rely on their management capabilities in the case of general price increases in raw materials, and the gross profit margin has increased month-on-month. As a result, the previous market's concerns about mid- and downstream profits have decreased, driving the performance of the overall new energy vehicle sector.

Q: What industrial chains are included in the new energy vehicle sector, and are there other parts besides the whole vehicle and battery? What is the proportion?

Cheng Jun: For example, the CSI New Energy Automobile Industry Index, which represents the new energy vehicle sector, includes upstream materials, midstream batteries, midstream others, and downstream vehicles. The proportion of each part is about 44%, 37%, 7% and 12%. This year in the CSI new energy automobile industry index, the performance of upstream lithium resource companies in the first three quarters is very eye-catching, due to the price increase of lithium materials, many people are worried about the price increase and shortage of raw materials on the midstream manufacturing and downstream vehicles have profit erosion. But in fact, due to the production and sales of new energy vehicles, the power battery itself is also very scarce this year. There is no reason to suffer from a high degree of prosperity and favorable supply and demand. Secondly, compared with the traditional car sold to the user, the profit behind the customer's payment for the whole vehicle is only operation and maintenance, but the downstream vehicle of the new energy car covers a wider range of content, not only can earn money for hardware, but also can earn money for software such as driving systems. The software can also be upgraded online, unlocking a wide variety of features and turning the car into an internet platform similar to a mobile phone. Under this trend, users can continue to create more cash flow for car companies by purchasing services in the future, so these characteristics presented by new energy vehicles are very competitive.

Q: Many people say that the market for new energy vehicles is driven by Tesla, so can we speculate on new energy vehicles according to the previous day's gains of Tesla in the UNITED States?

Cheng Jun: Regarding the leading relationship between US stocks and A shares, we once did a study. The conclusion is that Tesla's increase in the previous day has a certain correlation to the performance of the new energy vehicle index the next day, but it is not significant. When Tesla rose or fell at a large level the day before, the probability of the new energy car index opening high or going low in the morning will be greater the next day. For example, on October 25, 2021, Tesla soared 12.66%, entering the trillion dollar club, becoming the fifth largest listed company in the us stock market. On October 26, the CSI New Energy Automobile Industry Index rose sharply in the morning, once touching a record high, but the closing fell back, and finally closed slightly.

Therefore, just looking at the US stock speculation A-share is not a strategy with a particularly high winning rate. Compared with the European and Australian stock markets, the correlation between A shares and the performance of US stocks is small, and it has its own operating rules.

Q: The photovoltaic sector is also a hot topic in the market this year, what do you think are the main factors affecting the photovoltaic sector?

Cheng Jun: I think among the factors affecting the photovoltaic sector, the most important one is the impact of supply and demand.

Under the dual carbon target, the long-term demand growth of photovoltaics is relatively certain. In the short and medium term, the rhythm of demand release is affected by the changes in the price of the industrial chain. Especially in the recent past, due to the impact of dual control of energy consumption, there has been a more obvious price increase in silicon materials, silicon wafers and auxiliary materials recently, which may lead to the postponement of downstream demand. The mutual game between the price increase of upstream materials and the demand for downstream installed capacity has driven the photovoltaic market this year.

In addition, the impact of the policy on the photovoltaic sector is also very large. The introduction of major policies will lead to an improvement in the expectation of PV demand, which will drive the sector up.

Q: Can you explain the impact of the establishment and launch of the "1+n" policy system on the photovoltaic sector?

Cheng Jun: On October 24, 2021, the Cpc Central Committee and the State Council issued the Opinions on The Complete, Accurate and Comprehensive Implementation of the New Development Concept to Achieve Carbon Neutrality. This is the "1" in the "1+n" policy system centered on the double carbon target.

On October 26, 2021, the State Council issued the Notice of Carbon Peak Action Plan by 2030. This is the policy document headed by the "n", and the follow-up supporting documents will be introduced one after another. It mentions:

Carbon emissions per unit of GDP in 2025 will be reduced by 18% compared with 2020, and the proportion of non-fossil energy consumption will reach about 20%.

Carbon emissions per unit of GDP in 2030 will fall by 65% compared with 2005, and the proportion of non-fossil energy consumption will reach about 25%.

The proportion of non-fossil energy consumption will reach about 80% in 2060。

As an important component of photovoltaics in non-fossil energy, last year's installed capacity of 48gw, to achieve the double carbon target, according to authoritative agencies forecast, the next five years, ten years of photovoltaic annual installed capacity will reach 80gw and 150gw. The photovoltaic sector is expected to usher in the medium and long-term market driven by the demand for photovoltaic installed capacity.

Q: Like new energy vehicles, PV also ushered in a phased market in October after experiencing the box shock in September. How to see the market for photovoltaic and new energy vehicles next year?

Cheng Jun: After the phased box shock in September, after entering October, the protagonist of the new energy vehicle and photovoltaic industry returned. The current energy shortages we face are expected to continue in the short term. Taking thermal coal as an example, the gap between supply and demand this year is around 200 million tons, of which the largest gap between supply and demand may be in November and December.

Rising energy prices have pushed up the stock prices of core companies in the traditional energy and new energy sectors. The recent increase in the floating range of transaction electricity prices is conducive to the improvement of photovoltaic demand. On the other hand, the long-term demand for new energy applications under the goal of carbon neutrality is constantly clear. The penetration rate of new energy vehicles exceeded 17% in September, compared with about 5% last year.

Many institutions have begun to lay out their investment strategies for the next year. In the several market exchange activities I have participated in recently, almost all institutions will use new energy as the main line of investment when talking about investment strategies for next year. I think that whether it is new energy vehicles or photovoltaics, as the core long-term track, it is not only the object of institutional investors to step up the layout, but also suitable for individual investors in long-term layout.

Finally, from the perspective of a long-term cycle, the two tracks that continued to be strong from last year to this year are new energy vehicles and photovoltaics. There may be investor friends who are worried about whether the valuation of the two is too high, but in fact, the valuation of growth stocks can not simply look at static valuations, but more importantly, future earnings expectations. Just looking at the absolute level of valuation is like carving a boat and asking for a sword. And the market's valuation of the photovoltaic industry has actually undergone a round of cognitive changes. Two years ago, many researchers would classify the photovoltaic industry as cyclical stocks, and the valuation generally given was not high. However, with the deepening of the market's understanding of the global new energy trend, the cost of superimposed photovoltaic core technology changes has been reduced, and the photovoltaic industry has become an important part of the new energy and technology sector, and is a representative of emerging growth stocks.

In summary, whether it is a new energy vehicle or a photovoltaic industry, the market gives it a higher valuation from the expectation of profitability, from the long-term dimension of the industry fundamentals and macro liquidity of the general trend has not changed, the development is in line with expectations, so there is no need to be afraid of high valuations and miss good investment opportunities.

Funds are risky and investments need to be done with caution. The above is the transcript of the guest interview questions and answers, which only represents the personal views of the interviewees, and does not represent today's headlines and xinhua finance views.