I met a traveller from an antique land,
Who said—“Two vast and trunkless legs of stone
Stand in the desert. . . . Near them, on the sand,
Half sunk a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed;
And on the pedestal, these words appear:
My name is Ozymandias, King of Kings;
Look on my Works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal Wreck, boundless and bare
The lone and level sands stretch far away.”— Ozymandias by Percy Bysshe Shelley
In this week’s piece we discuss the Paris Agreement — a global accord signed in 2015 with the aim of mitigating global warming — and the progress made on curbing carbon emissions since the signing of the accord. We also identify two long ideas in the clean & renewable energy and waste management sectors. Finally, we briefly touch upon the surge in Chinese credit growth during January.
Environmental Concerns
On 12 December 2015, at COP 21 in Paris, the 190-plus parties to the United Nations Framework Convention on Climate Change (UNFCCC) signed onto the Paris Climate Agreement, which committed countries to do their best “to combat climate change and to accelerate and intensify the actions and investments needed for a sustainable low carbon future“.
The agreement was seen as “a turning point in the history of common human endeavour, capturing the combined political, economic and social will of governments, cities, regions, citizens, business and investors to overcome the existential threat of unchecked climate change“.
Three years since the Paris accord was negotiated, we were amazed to learn that there has been no reduction in global emissions. In fact, there has not even been a decline in the rate of increase in emissions. Much rather, the rate at which emissions are being added to the atmosphere has increased!
Coal-fired power generation is still increasing — coal powered plants continue to be built and existing plants are not being removed as fast as new ones are being added.
What has gone wrong?
The lack of progress since Paris is attributed, by some, to the opacity of pledges made in the agreement, and the parties to the agreement remaining vague on the specific policies they will adopt to meet them. Further, there is no official mechanism for measuring progress.
The governing body and framework for the agreement, we think, are both highly bureaucratic and politicised. As is their wont, politicised bureaucracies are as much about not offending their stakeholders as they are about effective governance, if not more. The implications of this, we think, are that the goals of the Paris Agreement are likely to prove far too ambitious and meaningful, if any, progress on curbing global emissions will have to be made through the participation of the private sector.
The private sector, however, is unlikely to participate of its own volition. Rather, the powers that be, as ever, will need to create incentives, if, of course, they want profit seeking enterprises to participate in the mission to curb global emissions. Incentives can come in the form of regulations — a cost of doing business, per say — or rewards — profits or higher relative valuations.
Higher relative valuations would be a result of supranational, multi-lateral and public institutions limiting their investment allocations to securities of companies adhering to a set of predefined environmental, social and governance (ESG) standards. Thereby increasing the relative demand for ESG-compliant securities ipso facto a higher relative valuation to that of non-compliant securities.
Ideas on the Long Side
Below we highlight two stocks we consider to be interesting potential long-ideas in the clean & renewable energy and waste management sectors below.
Advanced Emissions Solutions $ADES
Advanced Emissions Solutions is an emissions solutions provider with a focus on mercury and gas control solutions for coal-fired power plants in the United States. The company supplies electric coal-fired generation facilities with systems that chemically pre-treat various types of coal prior to the burn process. It also up sells existing customers by providing consulting services and chemicals used to remove mercury and other hazardous airborne pollutants from the emissions resulting from the burning of coal.
The company supports coal-fired electric generation facilities in complying with the United States Environmental Protection Agency’s Mercury and Air Toxics Standards (MATS) for Power Plants.
$ADES has a market capitalisation of US dollars 233 million, trades at estimated 2018 price-to-earnings of 6.5 times and dividend yield of 8.5 per cent. Short interest in the company is high at more than 11 per cent of free float.
Heritage Crystal Clean $HCCI
Heritage-Crystal Clean is a US-centric company that helps businesses clean parts and dispose of highly regulated waste materials, such as cleaning solvents, used oil, and paint, that cannot be discarded through municipal trash systems or standard drains. Customers, primarily small to midsize companies, include car dealerships, auto repair shops, trucking firms, and manufacturers such as metal fabricators. $HCCI serves customers in 42 states in the central and eastern US.
$HCCI has a market capitalisation of US dollars 600 million, trades at a rich valuation of estimated 2018 price-to-earnings of 36 times. The company, however, has a strong growth profile with earnings estimated to increase by more than 70 per cent in 2019.
China: Soaring Credit Growth
From Bloomberg:
China’s credit growth exceeded expectations in January amid a seasonal lending surge at the start of the year.
- Aggregate financing was 4.64 trillion yuan ($685 billion) in January, the People’s Bank of China said. That compares with an estimated 3.3 trillion yuan in a Bloomberg survey
- Financial institutions made a record 3.23 trillion yuan of new loans, versus a projected 3 trillion yuan. That was the most in any month back to at least 1992, when the data began
The Chinese leadership’s efforts to reinvigorate credit growth and support economic activity in the latter half of 2018 may be beginning to bear fruit. Credit growth, in January reached 10.6 per cent year-over-year — welcome relief given the less than stellar showing in the latter half of last year.
The data from January is the first sign that the Chinese credit cycle may have bottomed out.
Chinese banks originated new loans amounting to CNY 3.23 trillion, increasing by more than 13 per cent year-over-year and setting a new monthly record in the process. The reading was well above both the CNY 1.08 trillion distributed in December and market expectations of CNY 2.80 trillion.
Net corporate bond issuance came in at CNY 499 billion, the highest level in almost in three years. As impressive as this may seem, state-owned enterprises accounted for more than nine tenths of gross corporate bond issuance. Suggesting that Beijing’s recent calls for banks to provide greater support to the private sector has not yet had the desired effect. Moreover, credit growth tends to be higher in January, and ahead of the Chinese New Year. We will not be surprised if February data is less encouraging and only expect greater clarity after March.
If, indeed, credit growth remains strong over the coming months, it will still take time to show up in economic data. Typically, a spike in Chinese credit growth has led a corresponding spike in domestic demand by nine months. We still expect first quarter data to be weak as exporters suffer a hangover from the fourth quarter rush to get US orders out ahead of the original tariff hike deadline.
Nonetheless, early indications from credit growth and the looser monetary policy stance of the People’s Bank of China are of Chinese economic activity, as we have posited previously, to get incrementally better, not worse, in 2019.
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This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.