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In this article we will talk about the  company an interesting glimpse into  china's plans for its renewables  industry. 

China's plans for its renewables Energy industry

china's biggest IPO of 2021 so far is  not some super sexy semiconductor player  or mobile app but rather a renewable  energy company with a very familiar name  that company is called three gorgeous  new energy and it is a subsidiary of  china's three gorgeous corporation  builder of the world's biggest dam.

in june 2021 the company sold 8.57  billion shares on the shanghai stock  exchange to raise 22.5 billion RMB or  3.5 billion  USD.  as of this writing in august 2021 the  unit is worth about 160 billion RMB or  24.5 billion  USD.

it trades under the stock ticker  shanghai SH:600905 which means americans  can't buy this  and americans shouldn't buy this because  this is a company profile not an  investment brief.

Intro to three Gorges Renewables

the name is a little deceiving the  business unit does not actually own or  operate the three gorgeous dam. the operations associated with the  company's eponymous dam belongs to a  sibling company -china yangtze power.

rather three gorgeous new energy builds  and operates wind and solar farms it had  once been a state-owned corporation  within the ministry of water resources  working on water conservation methods.

three gorgeous corporation then bought  it and for whatever reason turned it  into the renewable energy resources  vehicle  the company still has some very small  hydropower projects left.

 wind provides  about 55 percent of revenue onshore  about 47  and offshore about 8 percent.  solar provides most of the rest about 44.

About Three Gorges Corporation, the majority Owner

three gorgeous new energy is 74.9  directly and indirectly owned by china  three gorgeous corporation, I’m going to call it  CTG for the sake of  brevity.   CTG is a power  industry development  company,  when the party decided that it was going  to build a dam across the three gorges  they established  CTG to do the  construction.

After the dam was completed  CTG then  founded another subsidiary “china yangtze power” to operate and receive the cash  flows from the three gorgeous dam.

yangtze also operates other dams on the  yangtze river including the  Xiluodu and  the xiangliaba dam.

yangtze power now publicly trades on the  shanghai stock market under the ticker  symbol 600900  as of this writing the company's market  cap is 449 billion RMB or 69 billion  USD.  it yields an annual dividend of 3.57  percent.

The question is why two  subsidiaries why didn't  CTG simply roll  its solar and wind energy plays into  yangtze energy  yangtze is already a large  well-established public company after  all.

 I cannot pretend to know what they're  thinking but I reckon that it has to do  with policy and growth  the Chinese government is pushing the  development of quote-unquote new energy  sources.  it classifies new energy has wind, Solar, Tidal  and water power without regulation  capability whatever that means.

hydropower is not included and so does  not receive the same treatment and  feeding tariffs  so it's not really a growth stock.

china is the most damned country in the  world they have been damning since the  days of Mao.  not that many more dams to build.

 the two companies PE ratios as of this  writing reflect this  through gorgeous new energy as a 38.8  ratio while yang c has 16. 

the utility has been  expanding its portfolio quite  rapidly in 2008 the company had about  143 megawatts of installed capacity, at the end of September 2020 that number  has grown 12 times over to 11,900  megawatts an annual growth rate of 45.7  percent.

this trend is expected to continue as  china's 14th five-year plan dictates the  quadrupling of total installed renewable  energy capacity from 2021 to 2025. 

the company has projects in 30 provinces  autonomous areas and municipalities  across the country  the majority of its revenue derives from  china's north northwest and east.

Offshore Wind and Solar

the party has set a path for china to be  a leader in offshore wind energy thus  this is a special focus for the company.  three gorgeous new energy is in the  midst of quote unswervingly implementing  the strategy end quote as they so often  like to say in Chinese media.

the company estimates that by the end of  2020 total installed and in production  capacity of offshore wind power will  reach 4,270 megawatts  which assuming they hit that number  would be as much as what japan has in  total overall installed wind capacity.

Offshore wind projects are more  complicated than their onshore  counterparts they require engineers to  deal with confounding factors like  sudden severe weather, icing issues, deep water and complex seafloor topography.

this is the company's chosen core  competency so they are doing the  end-to-end installation all by  themselves  it has required them to build amongst  other things.

china's first indigenous  submarine cables and sea booster stations  which is a kind of dredging machine.

the company has also been doing some  interesting things to best make use of  old coal mine infrastructure. in the city  of Huainan in the Anhui province the  company has set up a 150-megawatt  floating solar installation in the “Panyi coal mine”.

Industry Dynamics: Costs and Margins

we can boil down the renewable energy  industry into three large sections; we have the upstream components makers,  the midstream manufacturers and the  downstream end users.

china's solar efforts the renewable  energy industry's value chain between  these three sectors kind of looks like a  horseshoe.

upstream component makers often hold  very specialized knowledge and thus can  charge high margins for their work. downstream providers hold the critical  customer relationship  and midstream makers thus are worse off  between the three they are first in line  to eat price cuts when things go bad.

three gorgeous new energy used to  manufacture and sell their own wind  turbines but in 2017 they withdrew from  this business and fully committed to  developing power generation plants. the company has gross margins  approaching 60  furthermore these margins are rising  year after year a trend that roughly  begins after the 2017 decision to  withdraw from turbine manufacturing.

we can also tie these rising gross  margins to cheaper wind turbines the  company procures them from two major  suppliers “Xinjiang Goldwind” and “mingyang” smart energy.

 three gorges appears to be holding  their feet to the fire. this trend of course can't last forever  at some point we're going to hit some  red line where turbine and solar costs  cannot decline any further, until then though it looks like the  utility gets to reap the benefits of the  improving economies.

Industry Dynamics: Revenue

on the revenue side electricity prices  are regulated by their local government. the exact dynamics are quite complicated  and differ from province to province.  for instance in sichuan from november to  may, there is a regulated government  price from june to October.  electricity  is sold at market  in Yunnan, electricity is always sold at  market price, unregulated it appears. I  guess yunnan is like the texas of china.

i reckon that the utility is losing  money when the government sets the price  so probably the best way three gorgeous  new energy can deal with this  uncertainty is to diversify into as many  provinces as possible  and this seems to be the case so far.

the number of areas with ideal solar and  wind properties is limited as more of  these get built out the marginal benefit  of the next site declines hurting their  overall profitability.  furthermore the Chinese government has  started to work in additional  competition into the market. policy makers are starting to reduce  feed in tariffs for wind and solar which  shrinks the whole pie for everyone in  the industry.

three gorges is well positioned here  being a state-owned enterprise to  develop on the best sites but being an  soe is no golden ticket in china.

Comparisons

other companies in this space includes  “jinke Technology”, “jiaze new energy” and  “jiangsu new energy”  their gross margins are in the same  neighbourhood or better but none have the  same size or scale nor are they backed  by a state-owned entity.

 out in the united states it is tough to  pin down a close comparison for three  gorgeous new energy.  people invest in utilities all the time  but these massive companies “southern  california Edison”, “pacific gas and  electric” and so on are quite old school  and are not pure new energy plays anyway.

renewable energy sources might be a  significant part of their power  generation portfolio but they still rely  on non-renewable or hydroelectric power  for a big chunk of their revenue.

the closest analog that i can find is  “next era energy” partners which is a  publicly traded limited partnership  subsidiary of next era energy. next era is one of the largest electric  utilities in the united states and was  formerly known as “florida power and  light”.

But you cannot compare this one with  three gorgeous because one next era is a  limited partnership and there are  investor tax implications associated  with that clouding the stock's true  value  and two next era derives a significant  portion of revenue from natural gas  pipelines. it is not a pure play  renewable stock.

Conclusion

IPO in tis the subsidiary was an  interesting play by three gorgeous  corporations  fundamentally three gorgeous new energy  is a utility company operating in a  favourable macro space.  it has a few key advantages in this  space  these are capital intensive projects and  this company is suited for deploying  lots of safe capital thanks to its state  ties.

 the company is focusing on a core  competency of developing and operating  renewable power plants. they are trying  to build up a special competitive edge  in offshore wind and possibly offshore  solar, but let's see about that. so, from an operation standpoint they  have their differentiation.

 CTG the parent company now has two  publicly traded subsidiaries with strong  value for their investor audiences.  Yangtze for those wanting income and now  new energy for those looking for growth.