We discuss a number of changes to government incentives schemes in Europe and update investors on the fund s progress

Transcription

1 Matthew Page Ed Guinness Commentary and Review by co-portfolio managers Edward Guinness and Matthew Page Alternative Energy We discuss a number of changes to government incentives schemes in Europe and update investors on the fund s progress Subscribe to other Guinness Atkinson services View Archive Briefs Geothermal Overview Sector and Geographic Breakdown Portfolio Highlights Fund Performance ALTERNATIVE ENERGY 1

2 Alternative Energy Geothermal Overview In the place of our normal section on latest news, we have written a short piece extolling the virtues of the geothermal sector. A full round up of latest news will feature next month. We are fans of the much overlooked geothermal energy sector. In the long run we believe it should have at least as much prominence in the energy mix as solar and wind. Geothermal is cheap, has a long life and most importantly provides baseload power. The environmental impact of geothermal is low and increased uptake of geothermal should improve energy security for the US and Europe. From our perspective, we divide the technologies that are considered to be the main geothermal options into two sub-categories - Hydrothermal Energy and Enhanced Geothermal Systems. We then consider a third category, Geothermal Heat Pumps. Hydrothermal Energy Hydrothermal Energy power plants turn hot water or steam close to the earth s surface into electricity. The plants use conventional steam turbines similar to those used in fossil fuel fired power stations. For lower temperature sites, the plants transfer the heat to a substance with a lower boiling point such as Ammonia which then drives the electric turbines. The output is reliable and constant with availability as high as 95% and can be generated at low operating costs. There are no fuel costs. While the attributes of hydrothermal power are very attractive, the main reason that it has not become the world s principle source of energy is that there are a limited number of viable conventional hydrothermal sites. Enhanced Geothermal Energy There is an emerging technology for extracting geothermal energy that is referred to as Enhanced Geothermal Energy, but is also known as Hot Rock Geothermal. Enhanced Geothermal involved drilling deep to use heat resources at high temperatures and pumping down water to recover from other wells nearby having captured heat from the rocks. The heat is not only derived from heat emanating from the earth s core but also from the decay of radioactive material in the rock. MIT has produced an extensive study on the potential for Enhanced Geothermal in the US. MIT demonstrates the potential scale of the opportunity the enhanced geothermal resource in the US is 1000 s of times higher than the current energy use. ALTERNATIVE ENERGY 2

3 Alternative Energy With plants built or under construction in Australia, France and Germany, we believe that the technology can mature enough to possibly merit wide commercialisation over the next ten to fifteen years. Geothermal Heat Pumps There is a further technology Geothermal Heat Pumps, that is often included within the geothermal sector, but for the Guinness Alternative Energy Fund s sector definitions we categorize geothermal heat pump companies as Efficiency stocks. This is because geothermal heat pumps typically involve lowering energy consumption for heating and cooling rather than producing energy for sale. Geothermal heat pumps involve connecting heat pumps to piping that is placed underground. There are other approaches, but this is one of the most common. The heat pump is powered by electricity from any source (eg the power grid) and uses the natural temperature below ground to help in heating or cooling a property. The energy savings can be as high as 75%. We believe that this provides one of the most economic ways to lower long term energy consumption. It is a mature technology, having seen widespread adoption in Scandinavia and is relatively inexpensive to install for new build property. Investing in Geothermal The Fund has five holdings in the technologies described above: Company Subsector Domicile % of NAV (28/2/10) Ormat Technologies Geothermal (Hydrothermal) US 2.94 Energy Development Geothermal (Hydrothermal) Philippines 3.26 Waterfurnace Renewable Efficiency (Geothermal Heat Pumps) US 3.30 LSB Industries Efficiency (Geothermal Heat Pumps) US 3.66 Geodynamics Geothermal (Enhanced Geothermal Australia 0.45 Systems) Total Ormat Technologies is the world s leading installer and operator of geothermal power plants. Government support has increased for the geothermal plants and Ormat should benefit from improved economics on plants they build and increased demand boosting their installations business. Energy Development Corporation is a utility in the Philippines which derives most of its electricity generation from geothermal power plants. The company should be a beneficiary of possible future growth in the Philippines economy and from construction of new power stations. We believe that the Philippines economy should be able to benefit from the abundance of geothermal energy resources available to it. ALTERNATIVE ENERGY 3

4 Alternative Energy WFI Renewables and LSB Industries are two of the leading companies in the US geothermal heat pump business. These companies have suffered as the property market has fallen, but not as much as might have been expected because of the trend for new build housing being more energy efficient. We believe that when the property market returns, the market for geothermal heat pumps may pick up significantly and these companies may be beneficiaries. We have a small holding in a Geodynamics, which is an Australian developer of Enhanced Geothermal Systems. Their first wells, named Habanero (named after its high heat) have been drilled and the company has successfully proven the concept works. The next phases of development could see the company moving to commercial production and increasing scale. We hope that geothermal energy will gain more support and prominence and that we will be able to position the fund to benefit from this. Today there are only a limited number of public geothermal companies, but we expect there to be a number of interesting investment opportunities in the geothermal sector over the next few years. At some point, we believe that geothermal, and particularly enhanced geothermal may reach the stage of maturity where both politicians and business recognize the huge potential of geothermal and propel the sector s growth significantly. Sector and Geographic Breakdown Sector % of Assets Domicile % of Assets Solar 47.98% Europe 45.35% Wind 30.74% North America 32.39% Efficiency 10.08% Asia 19.28% Geothermal 6.65% Latin America 3.35% Hydro 3.35% Australasia 0.44% Biomass Energy 1.64% Cash -0.81% Biofuel 0.37% % Fuelcell 0.00% Wave/tidal 0.00% Cash -0.81% % The portfolio is quite concentrated in the wind and solar sectors, with 47.98% in solar and 30.74% in Wind. We believe these sectors have the best long-term growth potential of the alternative energy space. Within the solar sector we have exposure to thin film solar panel manufacturing via our holding in First Solar and are otherwise invested across the silicon photovoltaic value chain. For our wind exposure we are invested in turbine manufacturers and wind farm developers. For our wind exposure we are invested in turbine manufacturers and wind farm developers. Efficiency is an area where the Obama stimulus plan will likely provide a wealth of opportunity. However, the biggest beneficiary is the eventual energy user. We have interesting investments in ground source heat pumps, building efficiency and heat recycling, with some exposure to transmission grid growth. ALTERNATIVE ENERGY 4

5 Alternative Energy We are invested in three geothermal companies, of which one is the principal builder of systems, Ormat, the second is a Philippine utility and the third (research) position is invested in a hot rock project in Australia. We expect geothermal to become a more important part of alternative energy plans as a result of its low costs and established technology. Our biomass investment is in one Canadian independent power producer with a portfolio of biomass plants. We think there are some interesting niche biomass projects and we are interested in those companies that do not have constraints on future biomass supply, but are cautious about the upside in stocks in the sector at the moment given specific project exposure of the investments available. We have only a small research holding in biofuels. We monitor the sector closely, but have concerns about overcapacity and negative margins in the US ethanol refining sector. We have no investments in fuelcells, tidal or wave power companies, but remain interested in these areas. Portfolio Highlights The Fund has 45.35% of its holdings in companies domiciled in Europe, reflecting the more mature European industry. North America accounts for 32.39% of the Fund of which 8.68% is in Canada. The Fund s 23.07% of emerging markets holdings is principally in Asia, with our investment in Chinese companies making up 16.01% of the Fund. Top Ten Holdings as of 02/28/10 % of Assets Clipper Windpower 4.66% STR Holdings 4.49% Energy Development Corp 3.99% LSB Industries 3.90% Waterfurnace Renewable Energy 3.60% Trina Solar 3.51% Iberdrola Renovables 3.44% Cemig 3.38% Acciona 3.36% Phoenix Solar 3.34% ALTERNATIVE ENERGY 5

6 Alternative Energy Liquidity analysis as at 02/28/10 Mkt Cap $M Positions % of Assets >1, % 500-1, % % % % < % Position Size No % of Assets Units % Half units % Research units % The liquidity of the Fund remains excellent, with 57.90% of the Fund in companies with a market capitalization over US$1,000 million. The Fund now has 27 full units and 6 half units. Valuation as at 02/28/10 Valuation metrics EST 10 EST 11 P/E P/Sales EV/Sales EPS growth 12.03% % 32.39% 37.92% Sales growth 13.91% 1.24% 20.75% 14.24% % of NAV with positive earnings 88.13% 74.45% 90.21% 97.06% Source: GA estimates, Bloomberg. P/E based on total portfolio value but include negative earnings at zero. We think that the Fund s earnings multiple of 21.8x 2009 P/E while high in absolute terms can be justified by the depressed state of earnings for 2009 and the strong growth potential for 2010 and beyond. The Fund P/E falls to 16.46x in 2010 and 11.94x in 2011, with potential upside from earnings exceeding estimates and strong growth in the years following The percentage of holdings with positive eps increases from 74.45% in 2009 to 90.21% in On an EV/Sales basis, the Fund is trading on 1.15x 2009 sales, falling to 0.95x 2010 sales. These are not multiples that reflect the long term growth potential of the sector, notwithstanding that there may be delays in some projects in the sector while the financing market recovers. We think that the table above emphasizes how the alternative energy companies in which we are invested are companies that are achieving real sales and earnings today and can be analyzed using conventional financial metrics - they do not require a new paradigm to justify valuations. Projected future sales and potential earnings growth over the long run suggest potential for higher valuations. ALTERNATIVE ENERGY 6

7 Alternative Energy Fund Performance (February 2010) The Guinness Atkinson Alternative Energy Fund had a total return of -5.98% in February Total Returns as of 03/31/10 Q YTD 10 1 Year From Inception Guinness Atkinson Alternative % % 33.18% % Energy Fund (inception 03/31/06) WilderHill New Energy Global % % 38.92% -3.83% Innovation Index Wilderhill Clean Energy Index -9.74% 2.16% 30.25% % MSCI World Index 3.37% 3.37% 53.12% 0.03% Gross Expense Ratio 1.69% Total Returns as of 02/28/10 Feb-10 QTD 10 YTD 10 1 Year From Inception Guinness Atkinson Alternative Energy Fund (inception 03/31/06) WilderHill New Energy Global Innovation Index -5.98% % % 40.67% % -4.37% % % -5.09% 14.44% Wilderhill Clean Energy Index -1.22% % % % 14.56% MSCI World Index 1.23% -2.71% -2.71% 55.13% -1.50% Gross Expense Ratio 1.69% All return figures represent average annualized returns except for periods of one year or less which are actual returns. Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www. gafunds.com or calling The Funds impose a redemption fee of 2% on shares held less than 30 days. Performance data does not reflect the redemption fee. If reflected, total returns would be reduced. ALTERNATIVE ENERGY 7

8 Alternative Energy Portfolio Changes We did not make any changes to the portfolio in February. Stock Performance Top 5 Size February Bottom Five Size February Innergex Half 47.62% R.E.C. Full % JA Solar Full 15.35% Clipper Windpower Full % After Renesola the strong Half performance 15.23% Solarworld since Full March % and LSB Industries Full 8.06% Greentech Half % Boralex Half 5.50% Ormat Technologies Full % as the equity analysts update their models to reflect We were pleased the more with the transaction accurately announced by current Innergex to merge earnings with its sister income prospects, smaller independent the multiples power producers and of helped the support fund the Boralex have valuation. increased. JA Solar and fund and the stock responded well. We believe this is indicative of the value of some of the Renesola performed well as some of the Asian solar names showed indications of strong order We demand. think that the fund is reasonably priced at a The 25.06x European solar 2009 sector continued P/E, to given perform poorly the in February depressed as concern continued state about of the potential level of the German feed-in tariff reduction. REC announced poor results and there are concerns about future capital needs we think the company should recover well from here. earnings for 2009 and strong growth potential for 2010 and beyond. The Fund P/E falls to Solarworld suffered amid concerns about the cost competitiveness of the European players. We think Solarworld has a unique proposition with its brand and distribution. Clipper is executing poorly and had a weak quarter. While we think it will take some time for orders to pick up, its improved balance sheet and new 49.5% shareholder (United Technologies) may see its situation 15.19x improve in in Greentech 2010, is a with small developer potential who is waiting upside to finance their from current project earnings and strong growth thereafter. this should be a catalyst for the stock, but until then stock is underperforming. We position the Fund to benefit from the long term growth of the alternative energy sector and The believe that percentage long term both energy of markets holdings and banking markets with will positive function to the eps benefit of increases from 78.70% in 2009 to 92.80% in sector companies and investors. Thank you for your continuing support. On an EV/Sales basis, the fund is trading on 1.65x Commentary for our views on global energy and Asia markets is available on our website. Please 2009 click here to sales, view. falling to 1.36x 2010 sales. These are not multiples that reflect the long term growth potential of the sector, notwithstanding that ALTERNATIVE ENERGY 8

9 Alternative Energy Total returns reflect a fee waiver in effect and in the ab sence of this waiver, the total returns would be lower. Opinions expressed are subject to change, are not guaranteed and should not be considered investment advice. This information is authorized for use when preceded or accompanied by a prospectus for the Guinness Atkinson Global Energy Fund. The prospectus contains more complete information, including investment objectives, risks, charges and expenses related to an ongoing investment in The Fund. Please read the prospectus carefully before investing. The Fund invests in foreign securities which will involve greater volatility and political, economic and currency risks and difference in accounting methods. The risks are greater for investments in emerging markets. The Fund is non-diversified meaning its assets may be concentrated in fewer individual holdings than diversified funds. Therefore, the Fund is more exposed to individual stock volatility than diversified funds. The Fund also invests in smaller companies, which will involve additional risks such as limited liquidity and greater volatility. Current and future portfolio holdings are subject to risk. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security. The WilderHill New Energy Global Innovation Index (NEX) is a modified dollar weighted index of publicly traded companies which are active in renewable and low-carbon energy, and which stand to benefit from responses to climate change and energy security concerns. The WilderHill Clean Energy Index (ECO) is a modified equal dollar weighted index comprised of publicly traded companies whose business s stand to benefit substantially from societal transition toward the use of cleaner energy and conservation. The MSCI World Index (MXWO) is a capitalization weighted index that monitors the performance of stocks from around the world. Price to earnings ratio (P/E) is equal to a stock s market capitalization divided by its aftertax earnings over the previous 12 months. Earnings per share (EPS) measures total earnings divided by the number of shares outstanding. The price to sales ratio (P/S) is equal to the total capitalization of the company divided by total sales (revenue). The enterprise value to sales ratio (EV/S) measures a company s enterprise value in relation to its total sales (revenue). One cannot invest directly in an index. Distributed by Quasar Distributors, LLC (4/10). ALTERNATIVE ENERGY 9