China’s Green Policies could Influence Companies in the Emerging Markets

Scott Snyder & Rob Young, ICON Advisers – Portfolio Managers

June 1, 2018

China’s focus on green policies and the rise of eCommerce have influenced paper companies’ rise to value within the ICON system. Portfolio Managers Scott Snyder and Rob Young discuss these influences and their potential effects going forward.

“Green China” was first incorporated in the Country’s 11^th Five Year Plan (FYP) (2006 – 2010), but it wasn’t until 2013 when legality, regulation and an institutional framework enhanced its viability. In February 2017, the Country announced its 13^th FYP, in which President Xi Jinping specifically emphasized environmental-related mandates in ten of the 25 targets, all of which are binding and should be met by 2020. The FYP’s purpose is to address the country’s “unbalanced, uncoordinated and unsustainable growth” and replace it with a “moderately prosperous society in all respects through green, and inclusive growth.”¹ See Figure 1 for a timeline of China’s environmental journey.²

Our valuation system and investment process have led us to a number of potential beneficiaries of the “Green China” theme, on both a direct and indirect level.  Direct beneficiaries are perhaps the more obvious examples and could include companies whose core operations explicitly align with such government initiatives.  Examples of these include businesses involved in environmental energy production (biomass, solar, and wind power), as well as waste treatment facilities.  In other words, these are the companies that are actually creating clean energy or cleaning up the pollution of the past and present in mainland China.

Potential indirect beneficiaries of the “Green China” theme may seem less obvious, but currently represent a larger allocation to the ICON Emerging Markets Fund.  We consider these to be companies whose competitive positions have strengthened due to the adoption of efficient and environmentally friendly manufacturing processes.  One example of this is the paper and packaging sub-industry, and, more specifically, cardboard box producers.  The industry is being affected in two distinct ways: 1) regulators are shutting down smaller, inefficient mills that tend to have higher waste production, water usage and coal energy consumption, and 2) the government is imposing import quotas on old corrugated containerboard (“OCC”), which has forced greater usage of the domestically produced recycled material for cardboard box manufacturing.  As a result, the surviving companies have seen a resumption of pricing power and improved earnings.

The ICON Emerging Markets Fund’s paper and packaging exposure within China comes from Cardboard Box manufacturers in the country. Our full allocation (as of April 30^th) to the paper and packaging sub-industry is approximately 6% globally and roughly half of that weighting is in the China paper and packaging names.  This represents an overweight industry allocation versus the benchmark MSCI Emerging Markets Index.

1 Koleski, K , ‘The 13th Five-Year Plan’: U.S.-China Economic and Security Review Commission 2017 ; 1 – 65

2 Chan, W , ‘A greener China: Battles in the war on pollution’ : HSBC Global Research April 11, 2018 ; 2 – 3

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