Brookfield Renewable Stock: Asia Presents Opportunities (NYSE:BEP)

Sustainable power is the future

ljubaphoto

Introduction

My thesis is that Brookfield Renewable (NYSE:BEP) (NYSE:BEPC) will have many opportunities in the years ahead to replace coal with solar and wind in Asia Pacific.

The Numbers

Over the years Brookfield’s strength has been hydro power in North and South America where they have 11,963 GWh from the US, 5,178 GWh from Canada, 15,717 GWh from Colombia and 4,811 GWh from Brazil per the 2Q22 supplement. Overall, hydro is 37,669 GWh of their total 62,336 LTA GWh. Hardly any of their power comes from Asia; right now it is merely 2,428 GWh of their wind power:

Brookfield Renewable Overview

Brookfield Renewable Overview (2Q22 supplement)

Currently only 2% of Brookfield’s proportionate revenue comes from Asia:

Revenue by region

Revenue by region (2Q22 supplement)

In the 2Q21 call, Mark Jarvi from CIBC asked about equity deployment, saying a little more than 10% was going to China and India that year. He then asked about a Bloomberg New Energy forecast saying deployment of capital in Asia could be 40% to 50%. BEP CEO Connor Teskey said they remain flexible such that capital is deployed where the best opportunities present themselves. He then went on to say that they want 3/4ths of investments to go to developed countries and 1/4th to go to developing countries:

What we have seen in India and China since we entered those markets in 2017 is we’ve built out our platforms, both operational and investment platforms regionally on the ground in both those markets. And what we’re seeing now is the ability on an almost continuous basis to do small attractive bolt-on acquisitions in those regions, and we would expect that to continue going forward. I think when it comes to geographic focus of our investments, we’ve long said that 75% plus of our portfolio and our equity is going to be deployed into developed countries, and then 20%, 25% in developing countries.

I think Brookfield’s ratio may not change much over time but China will be perceived more as a developed country as opposed to a developing country as the years go by. China has embraced more battery-electric-vehicles (“BEVs”) than any country in the world per McKinsey:

Global BEVs

Global BEVs (McKinsey)

It is laudable that China is embracing BEVs but unfortunately they are often powered by coal. Per CNBC, China continues choosing coal for electricity generation at this time because of its reliability. Deputy Secretary-General of the National Development and Reform Commission Su Wei said the stability of coal is needed right now:

Because renewable energy sources such as wind and solar power are intermittent and unstable, we must rely on a stable power source. We have no other choice. For a period of time, we may need to use coal power as a point of flexible adjustment.

What Deputy Secretary-General Wei is saying is that wind power is only available when the wind is blowing and solar power is only available when the sun is shining; we don’t have economic ways to store electricity from these sources for long periods of time. Sooner or later, the storage issue will be solved such that wind and solar power will be stockpiled, making them stable sources. At that point, it will be a boon for companies with renewable expertise like Brookfield. BP (BP) shows electricity generation by fuel in their Statistical Review of World Energy reports and coal generation in Asia Pacific is by far the biggest segment below:

Global electricity generation by fuel

Global electricity generation by fuel (Author’s spreadsheet from BP reports)

In the 1Q22 call, Nelson Ng from RBC asked about the 235-megawatt wind acquisition in China and the rest of the 700-megawatt portfolio in Asia. BEP CEO Teskey answered by saying they are building up relationships in China and India such that they will be able to do repeat business over the years:

If you look over the last several quarters, we’ve been pretty consistent and pretty regular in doing small, low-risk, very attractive deals in both the India and Chinese markets. And increasingly, what those are doing repeat business with the same counterparty. What I would say is we look forward, we’re developing increasingly strong relationships with those partners. And as their pipelines grow, they’re increasingly coming to us as a buyer of those assets. Because we execute quickly, we execute on time, we provide certainty of closing. And we would expect to do more repeat business with those high-quality counter-parties in terms of the timeline of the next 700 megawatts, definitely within the next 2 years.

From a valuation standpoint, Brookfield Renewable has historically made the point that it is important to differentiate between return on capital and return of capital; 52% of their proportionate revenue is hydro and they note that this is better than solar and wind for the former. As such, they deserve a higher valuation multiple than peers who have less hydro on a relative basis. The Brookfield Renewable 2020 Investor Day presentation shows that they have a history of providing good returns for investors:

BEP track record

BEP track record (Brookfield Renewable 2020 Investor Day presentation)

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