China Overtakes the U.S. -- What Now?

Chalk up another milestone for China on its growth path. Yesterday, the International Energy Agency revealed that China overtook the U.S. in 2009 as the largest energy consumer in the world. In 2000, China's energy consumption was half that of the U.S. What are the implications of this formidable rise for investors?

Demand goes up … and so does competition
For starters, China represents an enormous growth market for energy companies, and increases in demand will help support commodity prices. I also expect China to continue vacuuming up energy assets all over the globe. It's a voracious and formidable opponent: China has a vital strategic need and deep pockets, and its companies are not always constrained by the same profitability requirements.

Just ask ExxonMobil (NYSE: XOM  ) , which had a binding agreement to purchase an interest in a Ghana oil field last year when China's state-owned CNOOC (NYSE: CEO  ) muddied the waters by discussing a joint bid with the Ghana National Petroleum Corp.

An old hand at China speaks
This growing appetite for energy in a world of finite traditional energy sources also creates an enormous opportunity for alternative energy solutions. In 2008, I interviewed Jack Perkowski on behalf of Motley Fool Global Gains. A former U.S. investment banker who has spent more than 15 years building one of the largest Chinese auto-parts suppliers, he fingered three growth areas in China, one of which was "any technology that has anything to do with the environment."

In fact, U.S. investors can already choose from multiple Chinese companies that fit that description, including:

Company 

Forward Price-to-Earnings Multiple*

JA Solar

8.9

Suntech Power (NYSE: STP  )

18.7

Yingli Green Energy (NYSE: YGE  )

13.0

Trina Solar

12.4

LDK Solar (NYSE: LDK  )

10.4

Solarfun Power (Nasdaq: SOLF  )

9.7

Source: Capital IQ.*Next 12 months' estimated earnings. 

These green energy stocks aren't expensive
Though these companies are at the intersection of "green energy" and "Chinese stocks" -- characteristics that can easily produce investor exuberance -- four of them trade at multiples that are more consistent with stodgy value stocks. Of these, I like LDK Solar best, as it provides the widest set of products and services and is thus less vulnerable to commoditization. But don't forget about traditional energy companies, which have lower business risk. Yanzhou Coal Mining (NYSE: YZC  ) , for example, trades at just nine times forward earnings.

Since Tim Hanson recommended China Green Agriculture in November 2008, the stock has more than quadrupled. Tim recently returned from a trip to China with his Global Gains colleagues, where they were looking for more winning stocks. If you’d like an in-depth look at what they learned, for free, click here.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Suntech Power Holdings is a Motley Fool Rule Breakers choice. CNOOC is a Motley Fool Global Gains selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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