Expert: Mary Manning – 3 stocks to watch as the world embraces renewables

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that covers our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going? 

Alec: [00:00:30] I'm very good, Bryce. Very excited for this episode. Earlier this week, we had a crack at talking about the world's energy transition. But I'm glad today we've got an expert joining us to, I guess, correct misunderstandings. Go deeper on the topic and really understand the investing opportunity that's here. 

Bryce: [00:00:48] Absolutely. And not just any expert, but an Equity Mates favourite expert. We've had a lot of demand for this expert to come back on the show, so it is with great excitement and an absolute pleasure to welcome back Mary Manning to the show. Mary, welcome. 

Mary Manning: [00:01:02] Hi, guys. Thank you so much for having me back. It's always a pleasure to speak with you. 

Bryce: [00:01:06] And I do not lie. It's in the last couple of weeks we've had a lot of the community reach out being like, When's Mary back? 

Mary Manning: [00:01:11] Oh, that's very nice to hear. 

Bryce: [00:01:14] So we're excited for this one. If you haven't come across Mary before, firstly, go back and listen to our first episode where we spoke about the Asia opportunity, which was a fantastic episode. But Mary is a portfolio manager at Alphinity Investment Management. She manages the Alphinity Global Fund and Global Sustainable Fund has plenty of experience, having worked at Oaktree Capital and Soros Funds Management in New York as well. But please do go and listen to our previous episode. It was an absolute pleasure. We certainly got a lot out of it. Today we are going to be discussing the energy transition and the investment opportunity of decarbonisation, and this episode is proudly sponsored by InStyle Solar, who are one of the largest companies in Australia, solar companies in Australia and the Clean Energy Council approved retailer. Not only is solar a clean energy solution, but there are plenty of financial benefits as well, some of which we'll touch on later in the episode. So if you would like to get a solar system for yourself, InStyle solar are offering Equity Mates community 10 percent off a new solar system. You can book a personalised consultation at InStyleSolar Dot Com slash mates. And enough of that, let's get onto the show. 

Alec: [00:02:22] Let's do it. So, Mary, after that long run up from Bryce there, I think I think we would love to start by taking a step back and framing the conversation in what's happened over the past few decades because there's been a lot of change and there's been a lot of headlines around, you know, obviously climate change, but also the need to decarbonise the electricity grid. If you can take us back, maybe let's go a couple of decades. Where were we and where are we today? 

Mary Manning: [00:02:51] All right. That is a fantastic place to start. So about 20 years ago, the energy mix was still almost exclusively in fossil fuels, so oil, gas and coal. And if you look at any of the charts that are out there that look at the energy mix before that, even for hundreds of years, it was all predominantly fossil fuel based. And then probably a decade or two ago, that started to change for a number of reasons. But obviously the the push towards decarbonisation was one of those. And so you started to see the rise of different renewables. So in renewables, obviously there's solar, wind, hydro. Increasingly, there's different kinds of renewables like biofuel or other sorts of renewables. And right now, the mix is still about 80 20 in terms of 80 at fossil fuels and 20 in renewables. But as you guys know from your previous podcast to make some of the Paris Agreement targets or even to make targets that are even close to that, that energy mix has to continue to change over time so that renewables take a much, much bigger slice of the pie and fossil fuels take an increasingly smaller slice of the pie.

Bryce: [00:03:49] So you did mention there are a number of reasons for this change, but let's start with the cost side of things. How does the cost of renewable generation compare with fossil fuels, and how has this changed over the past decade?

Mary Manning: [00:04:02] So this is one of the main things that has has driven the rise of renewables, and it's important to point out that this is this is relative, right? It's not just the absolute cost of renewables, it's the cost of renewables relative to what's going on in fossil fuels. So solar would probably be one that I would call out as as the renewable. It has the most reduction in cost over the last few years. So say, from 2009 to the beginning of 2020, the cost of solar is down about 89 90 percent. So that is that is absolutely massive. When we get to the impact investment part, we can talk about why that is and what that means for companies, because that's great if you if you don't want to use solar energy, but if you're if you're a company and your ASP is going down by that much, that can actually throw up problems from an investment perspective. So solar has gone down a lot. And then wind, you know, onshore wind has been historically where where a lot of the wind power has come from, that cost has gone down. And now you're seeing a larger push into offshore wind. And those costs are expected to come down over time. So wind and solar are the two where I would. I would call it the significant decrease in cost. On the other side of the relative trade, you need to look at what's going on with fossil fuels. And this is why I think doing this episode at this time is absolutely fascinating because you have an energy crisis. Almost in Europe and a lot of of the northern hemisphere. So I mean, if you think back to Covid, no oil was around 20, and there was that one day when oil futures actually went negative. Everyone was thinking, Well, what does that even mean? And so if someone had told you, you know, fast forward a year, 18 months and oil is going to be at 80, I don't think anyone would have anticipated that. And natural gas prices are. I've also had a huge leap higher. And so when you look at that relative trade, you know, renewables costs are still going down and that you've seen this sort of resurgence for a number of reasons, both the demand and supply side, the relative attractiveness of renewables is quite strong right now. The other thing that I will highlight is that there's no OPEC in renewables. So on the on the oil side, you know, since many, many decades, you've had a big international body where there's lots of participants and they they have mechanisms to sort of control the oil price. And there's no, you know, analogy or similarity in terms of renewables. So that that also has that has a big impact sort of on the relative pricing of renewables versus fossil fuels. 

Alec: [00:06:18] Solar generators don't get any ideas. We don't need a renewable open. Yeah, that 

Mary Manning: [00:06:24] was a suggestion. That was just a comment. 

Alec: [00:06:27] So on the point of it, it's all about relative cost. The cost of putting on like a megawatt of solar or wind compared to putting on a megawatt of coal or gas is one now absolutely cheaper than the other? Or is it, you know, still dependent on where it is and how they're building it and stuff like that? 

Mary Manning: [00:06:47] No. So absolutely cheaper. The interesting thing that you brought up coal is that the cost of coal has been relatively stable through all this. That's one, you know, it's not in the oil and gas bucket and it's not in the renewables bucket. So it's been relatively stable. So if you look at a chart of the pricing like solar and wind have gone down and coal has gone flat and the other ones are sort of up and down with the trend generally down. So, yeah, in terms of adding additional capacity, actually, another thing that I should add is that we're talking about global here and within different countries, and there can be a huge differential between the cost of different renewables and a fossil fuel. So one of the reasons that there is this crisis in Europe right now is because, you know, you had very little wind in the North Sea during the summertime and you had a drought in large parts of Europe. So hydro like literally dried up and you know, wind wasn't wasn't producing as much into the grid as it is it had historically. And then natural gas, which is by some seen as a sort of transition fuel, there are issues with the natural gas supply coming out of of Russia. So all of a sudden you have, you know, and nuclear is very, very hotly debated in Europe about whether it's renewable and whether it's good and whether it's bad and a lot of things. So you had sort of that that perfect storm that resulted in a very specific issue in Europe. And you're not seeing that in other parts of the world. You are seeing that a little bit in China. It's just something we can talk about later. China obviously has a 2060 net zero commitment, and to get there, they have to, you know, work backwards and have very specific interim targets. And right now, you're seeing a sort of power crisis in China also because even those very near-term targets, I mean, companies just can't make them. So they're trying to meet the targets by shutting down, which is obviously not good for the overall economy. So, yeah, in general, renewables cost is going down and is getting cheaper than a lot of the traditional fossil fuels. But it does differ around the world depending on what country you're talking about. 

Bryce: [00:08:35] A second driver for this transition that we're seeing is obviously the commitments from a lot of governments from around the world. You know, Biden's come out to, say, 100 percent carbon free by wood carbon free generation by 2035. I guess the question is how these commitments actually translating into policy or action? And are they? 

Mary Manning: [00:08:54] Yes. Well, that is also a good question. I think it's important to highlight that there's again, a very wide range around the world and we sort of divided up into there's net zero in law, there's net zero in policy, there's net zero that are under construction. And then there's countries that are like, We don't care. We're not saying anything about this at all. And so, you know, the interesting thing is if you look at like countries like France, so they have a net zero 2050 target and that's actually in law. And then you have a lot of other European countries or, you know, Canada, Japan that have net zero 2050 targets that are in policy. And then you have big countries like Russia and India who are massive economies with massive populations and a very fast growing, and they have no net zero target at all. So there's a very wide range out there. I think you started the question by talking about Biden. As you would know, the original initial Paris agreements were signed in 2015, and then Trump came in and pulled America out. And that sort of lost a lot of momentum. So any kind of country that wasn't committed that Trump kind of gave him an excuse to not not get committed. And then near the end of Trump administration in 2020, China actually came out with the 2060 net zero, and that is an absolutely huge. Anything you know, we've talked about China extensively before in another context, but to how China is by far the biggest emitter globally. So to have them on board is is a very strong signal. And China is also a developing country. And so a lot of the commentary around just transition and can you have developed countries and developing countries having to have net zero targets at the same time? China really dealt with a lot of that all at once. So then obviously, Biden became president and he re ratified or rejoin the Paris Agreement. And then you've seen a lot of of more policies coming from there. Europe, as you know, is far, far ahead, way far ahead. So, you know, if you have the European Green Deal and you have that translating into fit for 55 sort of policy, it's not legislation yet, but like policy initiatives. There is a lot going on in Europe, and I think that Europe will continue to be a global leader. The thing is, like I mentioned before, is is what happens to the laggards Russia, India and will China be able to make that 2060 target? These are these are very long term things, and I don't think anyone there, there's certainly a commitment there. But I spend a lot of time looking at the near-term targets. So the interim targets for 2030. This goes for both governments and for corporates, because 2030 is not that far away. And you know, when people first started talking about it, it was it was long away. But now, if you're a CEO, you could still be the CEO in 2030. So you better be really careful about what you're saying about your company's net zero targets because you may still be around when you have to deliver on those and the same for governments. If you're a president or a prime minister and you commit your country to something in 2030, that could be an election issue for you if you don't deliver. Yeah, I guess to sum up, there's a wide range of what's going on in terms of policy. I think it's important to focus on both the interim targets and in the longer term goal for 2015. 

Alec: [00:12:01] So we've mentioned cost and we've mentioned government policy. Are there any other key drivers that we should be aware of when we're thinking about this transition? 

Mary Manning: [00:12:10] Yes, I think that the collaboration between governments and corporates is absolutely amazing. It is a rare example. Covid is maybe another example of where, you know, a lot of the world is is pulling together and different stakeholders are pulling together, all working towards one goal. So I'll give you some examples from our portfolio and affinity. And just to be clear, I'm one of a number of portfolio managers that manage the fund. So it's not just me, but we do have the global fund and we have a global sustainable fund in the Global Sustainable Fund. We have eight of the top 10 positions have a carbon target. Three of them are already carbon neutral. And if you are in a meeting with with investor relations or with management, it's rare for a lot of these big global companies to not have any carbon policy at all. And even five years ago, that was that was not the case. And so I think it's really important that corporates are on board. Investors are asking this of corporates like what is your what is your carbon policy? What is your net zero policy? What what are your interim targets? We have a whole sort of 10 point checklist that you can go through with companies to make sure that they're on board. So I think that's that's something that you need to be aware of is that it's not just governments driving it, but it's a collaboration between governments and corporates and civil society and academia. And there's just a lot of different stakeholders on board that makes me more confident or enthusiastic that there's, you know, these targets can actually be met because there is a lot of momentum behind it. 

Alec: [00:13:36] One thing that Bryce and I noticed when we were looking and listening to the latest reporting season was the amount of Australian companies that were talking about carbon neutral targets or they were already carbon neutral. It was definitely a big thing coming out of reporting season, which was great to say when a company achieves carbon neutrality and you know, that can be done through buying carbon offsets. So if the company can afford to, they can do it pretty quickly. As a sustainable fund manager, what what are you looking for next like? Is this something once a company's carbon neutral? What sort of the next milestone that you're there trying to hit or you want to see them hit? Is there anything after that? 

Mary Manning: [00:14:16] So I think before you get to what's after that, you need to get to what's before that. Because because so so for the sustainability fund, it affinity. We have a charter and sustainability charter and it lays out very, very clearly what kind of companies we can invest in and what kind of companies we can't. And fossil fuels is is I can't. So we cannot invest in fossil fuels. So a lot of the and then, you know, on the flip side of that, you have a lot of the biggest companies in global markets Google, Apple, Microsoft, you know, Netflix, the classic sort of fang asset light companies that have very impressive and very aggressive carbon neutrality targets. And they I think they are sort of leading the world in where you can go. So when you're running a sustainability fund that is sort of screening out or is not investing in some of those, I'm bad. I'm using bad companies that need a very specific plan to change their whole energy mix and to change their emissions. We are generally not invested in those, those companies anyway. So when you're in asset light already, you know, good companies. The discussion is is is very different. So a lot of the discussions that that we have with companies are, first of all in terms of understanding the targets and understanding those interim targets, like I've said before, because that's very critical. And then you raise a great point in terms of using offsets. So not all carbon neutrality is is created equally. There needs to be discussion in a lot of analysis in terms of how you're getting to to carbon neutral. And then I guess, well, we're not in any sort of like bad or dirty companies. There is autos, which is a sector where you can have the discussion. So like Daimler would be an example. So they have a whole fleet or like a so installed base, if you will, of icy cars, but they're moving very aggressively towards EVs. So having a discussion of how do those two things offset each other? And then what does the company look like going forward to your initial question? What does the company look like moving forward? So I think for for a lot of companies, you're not at the stage yet. Google might be one example where they're carbon neutral and sort of that's in the past and what's going forward. Most of the discussion with with companies is still, how are you going to get to carbon neutrality and what is the quality of that trajectory? You know, it's it's very risky if they're just buying offsets and very low quality offsets because that's not fixing the underlying problem. 

Bryce: [00:16:39] So, Mary, when when you're looking forward to 2030-2050, do you expect that the momentum that we've seen over the last decade to sort of continue? And where do you at an affinity sort of think the world's energy is going to be coming from?

Mary Manning: [00:16:52] So 2030 is, as we mentioned before, pretty close. And I would expect that the trajectory towards more renewables in the sort of global energy pie continues the way it it is going, if not accelerating quite significantly. So we were talking before about how the UN conference called COP26 is coming up in Glasgow. That's at the end of October, beginning of November. You know, we're expecting quite significant policy pronouncements. I don't know whether these these are going to actually turn into actual legislation, but certainly policy pronouncements and commitment to do more decarbonisation to come out of out of that. So there's a lot of momentum. I think that's accelerating, I think 2050. This is my personal view. This is not an alternative view, but as you know, I have a Ph.D. in economics and as part of my Ph.D. thesis, I spent a lot of time like reading about Thomas office because I was looking at economic development. He's obviously a famous economist and demographer from the 18th century, and his his theory was ended up being totally wrong, right? Because he said that population grows exponentially and the words food production grows linearly and you're going to run into a big problem. Everyone's going to starve at some point. And he was wrong because of technology. He just didn't didn't think about fertiliser. He didn't think about changing the technology of agriculture, and he totally missed the industrial revolution. Part of it, which was a big thing to do, is with all due respect to Thomas analysis, that was a big thing to miss. But I sort of feel like on a 2050 view, which is which is unlike 2030, it's decently far away that what things we don't. I don't know what things are going to look like in 2050. I think that there are technologies out there that we haven't even thought of. And you know, we can talk about Tesla later on, but Tesla's is a stock that I absolutely love. And if you go back 30 years from now, nobody was thinking, Tesla is going to be a massive solution to the EVs or these. This is going to be a big solution to the energy transition and to decarbonisation. So 2050, certainly renewables will have it will continue to have a bigger slice of the pie. But I think there's there's unknown unknowns out there that are going to sort of change things from a technological perspective that we haven't thought about. And that's actually really exciting from an investment perspective because there may be little nascent ideas right now that are not investable. But as those get bigger and as you can get more visibility on where those are going, I think those are going to be pretty exciting ideas. 

Bryce: [00:19:09] So, Mary, we've we've got that context. You've sort of really help us set the scene on what is going on with this transition. But we want to talk about the economic opportunity, as you just mentioned. It feels like we're at the beginning of something that is going to be pretty significant for investors. Before we get into that, though, we'll just take a very quick break to hear from our sponsors. So, Mary, let's chat about the investment opportunity as an investor. How do you approach investing in such big change in what is now this world's energy transition? 

Mary Manning: [00:19:41] So I think there's two ways to approach it, and then I'll tell you what the sort of affinity way is so you can take a top down approach and you can say, OK, I know there's this very big thematic that's going to happen and what are the some thematic there? And then what are the, you know, stocks that sort of fall out of that and then invest in that stock? When China came out with the China 2060 net zero policy, I was super excited, like the sleepless nights. I was so excited about this. So I tried to take the top down approach. And so I divided the China net zero into different categories. There's going to be renewables are going to be a beneficiary electric vehicles and electrification is going to be a beneficiary. There's going to be the EV supply chain. And then there's other whether it's, you know, hydrogen or carbon capture and storage or sort of other ideas. And so, you know, each of the analysts on my team took took one of these buckets and we hired a special summer intern to do extra work on this. And we're like, we're going to come up with a whole raft of ideas from the top down approach. And six months later, we had very, very few ideas. And yeah, I know it was a bit depressing, 

Bryce: [00:20:45] like sleepless nights and other others 

Mary Manning: [00:20:47] exactly. Just did a 180. And the reason was because at a thematic level, this can sound absolutely amazing. And then when you drill down to a company specific level, there are issues with with a number of renewable companies. So this is specifically with China and this was in my my old role. Like a lot of the smaller supply chain is based in China and it gets their production of polysilicon from Xinjiang, and that has a lot of ESG issues. So for the fund that I was working at at the time, you know, that was out. So you had a big part of of one of the most attractive stories that that was sort of off in terms of of wind. You know, there are some very good wind companies out there, but they're also sometimes the economics of wind because these are very big investments. And it's a very long dated investments that they they didn't stack up. And so where we sort of landed on the China analysis was that EVs and even supply chain are a very, very attractive way to play the the energy transition. The affinity we are feeling is very focussed on on bottom up stock picking and specifically looking at earnings leadership for stocks. Again, interestingly, whether you take a top down approach or a bottom up approach, you're kind of getting to the same answer. So if there's any advice that I could give to your listeners, it would be that make sure you do the investment case because if you just do the thematic case and you get really excited, you can get in some stocks that turn out to be absolute dogs. So be excited about the thematic because it's definitely worth being thematic excited about, but then do the work. So I don't find it looking for earnings leadership. You know, some of the stocks that we've identified, some of the wind stocks in Europe are quite interesting on a longer term basis. But right now, as you well know, there's a lot of supply chain issues in the world. And for some of these big wind turbines, they're not, you know, this is an Amazon or Nike where you just charter a plane and stick the shoes on the plane and bypass all that like. If you have supply chain issues for some of these big wind turbines, that can be quite extensive. A lot of those stocks are like wind in particular. In Europe, they're long term winners, but they're just not investable right now. So in terms of other winners, kind of the same conclusion that I came to with China electric vehicles in the whole electrification sub thematic, I think, is is very attractive. And part of the reason is because companies like Tesla, they're just revolutionising the whole auto industry. And so it's not the sort of like a traditional energy company where you they may be doing some renewables, but they still have that legacy fossil fuel business or like Daimler, like I mentioned before, they have the the bad cars and the good cars, and these are sort of cancelling each other out. If you can find sort of EVs or EV supply chain companies that are that are just focussed on this. That's a very good place to be. I guess the other thing for for your listeners, which I'll highlight, is is very, very simple analysis like Porter's five forces kind of classic business school MBA sort of stuff. Because the issue in some of these renewable businesses, which makes them not great investments, is that they either have very low barriers to entry. So there might be an example there. And so the product just gets completely commoditized, and that's why you've seen the, you know, falloff in prices. Yeah, that's great. If you're a consumer, that's not great if you're a company and it's it's a volume times ESP sort of game. So looking at those forces, like what are the competitors? What are the barriers to entry? What is the bargaining power of suppliers? That's really important analysis to do when you're looking at renewables from an industry perspective. So to answer your question, you can look at it top down, you can look at it from bottom up. Some people do both. Affinity is very focussed on earnings leadership from the bottom up, and we have sort of a more right now. Anyways, there's not a lot of earnings leadership in some of the renewables. 

Alec: [00:24:27] So you've mentioned a number of Covid. Degrees of investment there, shall we say, there's a supply chain, wind generation, solar generation, solar components, are there any other sort of major categories that we should be aware of in the energy transition space? 

Mary Manning: [00:24:43] Yeah. So there's renewables, EVs, EV supply chain. And then one thing which I almost hesitate to bring up because there's there's so few stock ideas to point to, but this is maybe one of those those, you know, nascent ideas that we should keep an eye on. If you look at the agenda for COP26, one of it is actually part of it is based on on biodiversity and looking at nature based solutions to a lot of the environmental issues in the world. So under a sort of an NBS, so nature based solutions, you know, biofuels is something that's really interesting. I know you guys, this is not under nature based solutions, but you guys have done a podcast on hydrogen that could have a lot of, you know, hydrogen. I read an article recently that it's like the Swiss Army knife of decarbonisation because it has so many uses. And I think that that's a really good headline. It's it's true. So how that comes out in corporate earnings or company earnings still yet to be seen, but that's something I'd keep an eye on. And then energy efficiency is actually a totally different sector, which this is maybe why I didn't find very many ideas in China because I didn't think I wasn't thinking about the energy efficiency aspect. But if you look at a pie chart of like energy uses and emitters by sector in the world, obviously you have electricity and heat and then you have transportation, which is why EVs is so important. And then if you have like industry and, you know, building efficiency, that is a really clear pathway that the world needs to go on to to make it to to the Paris agreements. So, you know, some building materials companies, like construction companies that are learning leaning towards more green materials, there's probably some some optionality within there. And then the last thing I'll mention is green tech. So as you guys know, I love tech, it's my favourite. It's my favourite sector so I can possibly get tech in somewhere. I'd like to do it, but I company we can talk about later is is in phase. It's a company that makes micro inverters for solar panels, so it's not the actual panels. It's a it's a high IP, you know, inverter that gets stuck on the panels and that does the energy efficiency for how the electricity actually goes onto the grid. So some of these more green tech, that's just one example green tech ideas that either facilitate or enable the transition to decarbonisation. I think there's going to be some really interesting ideas there. 

Alec: [00:26:53] Summary There are a number of different ways to invest in in this theme that you've just touched on there, and we'd love to get specific and hear about a couple of ideas that are on your watch list at the moment. So let's move to that. We asked you to come with a couple of stocks that you could tell us about why, why you think they're interesting in fit in this theme? And then you know what the company might look like in the years ahead. I believe one of them is Tesla. 

Mary Manning: [00:27:23] Yes, yes. So when you asked me for three stocks in renewables and off the top of my head, the first three, none of them renewables, they were actually three stocks that are all beneficiaries of decarbonisation, but none of them are renewables. So I guess that would be my first point to your listeners is take a broad view of decarbonisation beneficiaries because it's not just going to be renewables, it's going to be across many, many different sectors. So I picked one that's a consumer discretionary one, that's a technology stock and then one that's actually considered a renewable. 

Alec: [00:27:52] Okay. Well, why don't you give us the three names and then we'll go one by one? 

Mary Manning: [00:27:56] OK. Tesla, Enphase and Vestas. Okay, so let's start with the Tesla. Maybe because it's such a it's such a lightning rod stock. And what I found in a lot of investor meetings is that people love it or hate it. Everybody has an opinion of it, and there's very few people that are in the in the middle. Yeah, so that's fine. It's it's all good for debate. So I guess the reason that I like Tesla is, as we discussed before, if you look at a pie chart of, you know, emitters by sector, transportation is a very, very big slice of the pie. And so you're not going to make it to any of the interim or the longer term targets without a solution in the transportation industry. And unlike some of the other slices of the pie, there is a solution that's actually already available in transportation. And so it's not pie in the sky. A nascent idea like these are actually, you know, the transition to EVs is already significantly underway. So I guess that that's one thing. The second thing is, if you look at market share of EVs in the world right now, it's still under five percent. So it's mid single like low single digit. And then if you look at what is going to be going forward, I mean, that's going to be certain. Companies are already saying that by 2030 2035, 100 percent of their new vehicles are going to be EVs. So from Tesla's perspective, the runway for growth when you have the entire world transitioning to EVs, not to mention the opportunities for growth in countries that are going to leapfrog. So, you know, we've talked about India extensively before, but you know, car penetration in India is extremely low. And what happens if EVs roll out in India and people just skip that whole icy? Stage of development and you go right from nothing to an electric scooter to an electric vehicle. The runway for Tesla in terms of growth is really, really exciting. I guess the second thing which people don't appreciate about Tesla is that it's not just a car company. So Tesla is now really into solar. So that's going to be that's a big part of their business that's growing very fast. And they have parts of the business that are both forward and backward integrated, which facilitate decarbonisation. So they're back really integrating into their own batteries. And the battery supply chain is and the cost of batteries is absolutely critical to the rollout of EVs globally. And then there, obviously how the supercharger stations, as you know, on the flip side, you know, everybody wants an EV, but you need to make sure you have enough charging stations. Otherwise it doesn't. It doesn't work out very well. So the fact that the Tesla, it's not end to end, but it's certainly more integrated than than traditional OEM auto companies. I think that's a big opportunity. One thing about Tesla, which has very little to do with decarbonisation but is an important part of the story, is there is assisted driving and the the push back on Tesla is always about valuation, like, oh my goodness, that's an $800 billion company. And they hardly sell any cars in the market cap per car is ridiculous. And I mean, you know, the you know, the pushback 

Alec: [00:30:47] it's more than the rest of the whole car industry combined. Yes, as a market cap, yes. Yes.

Mary Manning: [00:30:52] So so the way that you can justify or even, you know, get upside for Tesla from here is on the technology angle and that their technology in terms of assisted driving. From a valuation perspective that shouldn't be valued at the same multiple as a car company that should be valued at a multiple of a software company. And software companies, as you know, trade right now, they're at 30 times price to sales. So if you do a sum of the parts of Tesla and you have the auto business and then you have the sort of tech business and then you have the solar business and you have the ancillary services like insurance, you can certainly justify this stock price, if not get more upside. So those are some of the reasons why why I really like Tesla. And I guess the other thing is that again, I hesitate to bring this up because he's so controversial. But Elon Musk is a visionary. He took a sleepy, sleepy old industry that hadn't really changed since the first, you know, model Ford and completely revolutionised it in a very short period of time. And did it with his own manufacturing. So if you listen to the last quarterly call, he's just they've just rolled out the Gigafactory in Texas and the Gigafactory in Berlin is also starting, and he's talking about how hard it is to manufacture cars. So the fact that they've gone from like idea level of electric cars to actual manufacturing to, you know, integrated business model, it's actually quite impressive. 

Alec: [00:32:11] Yeah, there's a quote that Bill Gates gave about Elon Musk back in the day that was like, you wouldn't mistake him for Steve Jobs. And it was seen as an insult because, you know, Gates obviously thought so high of jobs compared to Musk. But I reckon it's now the other way around like what Musk has done in, you know, space and electric vehicles like all these really hard, capital intensive businesses is just unbelievable. 

Mary Manning: [00:32:35] Yeah, it is. And one of your questions was, you know, what is the stock going to look like in 2050? So 2030, it's going to be a lot, even though it's already hundred billion, market cap is going to be a lot bigger by by 2030, but 2050. I don't know because I was thinking, Well, maybe Musk will be living on Mars. No, they're not going to have a CEO, I don't know. But 2050. For a company like Tesla that has a visionary leader, it's anybody's bet. So again, if anybody looks at earnings leadership and oh, that's the other really interesting thing about Tesla right now. Auto companies around the world are are in a world of pain about about supply chain shortages and Tesla. Somehow, they just came out, not that last weekend with their production numbers and their deliveries, and they are very good. And so Tesla, because of that backward integration, because of that tech focus, they're actually doing a lot better than other auto companies in the immediate term. So from the affinity process, a lot of auto companies are going to miss. Earnings is coming forward by quite a lot and Tesla looks like it's it's going to do well. So yeah, it's a stock 

Bryce: [00:33:35] that just on the traditional automaker pace, if you know, if they're not keeping up with the transition themselves, they're likely to be gone in 10 years time. How do you think about that from a competitive landscape? It feels like you think Tesla are going to continue to be the winner in this space. Yeah, just interested in how you think about that dynamic? 

Mary Manning: [00:33:56] Well, a lot of the year in European auto companies are leaning forward on this, and they realise that this is an existential risk. If you don't get on the board with with EVs, you're right, you're not going to exist in a few years. And so Daimler, I mean, I said sort of before they have the old business in the new business, they are leaning forward quite strongly in terms of the transition towards electric vehicles. So the tricky thing from an investor perspective is not whether they're doing it, but how do you value that in one company where you have a legacy business and a new business, it's much harder. And so a lot of these OEMs, you know, they treat it. You know, seven, eight times PE and you have Tesla at 100 plus. How is that? I mean, how do you reconcile that? And I think that that's what investors are really struggle with because it's I mean, on the surface, that doesn't make sense. But to me, what that is saying is that people just want pure exposure and they're more comfortable paying more for that pure exposure than trying to pay for some sort of hybrid, which is what you're getting a lot of the traditional OEMs in terms of Tesla. I mean, they're not it's not like there's no risks investing in the stock. There's certainly a lot of risks investing in the stock, but the return potential return outweighs the risks, in my view. I think one of the risks is that the Chinese EV companies are taking a lot of share and China we talked about before. You know, they're trying to get to net zero by 2060, and they're still developing and EVs is a huge part of that. So whether those companies get subsidised by the government or whether they kick Tesla out of China or whether they, you know, shut down Gigafactory Shanghai or I don't know. But there's risks in terms of market share that the Chinese and not not unlike what you've seen in mobile phones, so that they figure out how to do a much cheaper EV sooner than Tesla does and that they go, you know, like if you look at at Zhao Mi and Oppo and Vivo, they went into emerging markets way before, you know, Apple and even Samsung. So whether there's an analogy there with with EVs and that Tesla loses out market share in some of the developed markets because Teslas are still too expensive. I think that's certainly a risk to market share also. 

Alec: [00:35:58] Yeah, I was going to ask about NEO because that that gets a lot of buzz in like the retail investor community generally. There's another competitor to Tesla that is trying to get an $80 billion valuation with zero revenue. That's Rivian. Any thoughts on that company? 

Mary Manning: [00:36:16] Yes. So, OK, if you want to feel good about the Tesla valuation, you just need to look at appears. On one hand, you're saying, I think 100 times plus p four for a stock. But you know, it has e so which is way better than everybody else. So I don't have I mean, some of these valuations are just pie in the sky. And I mean at Alphinity that is that is not our style. We are looking for companies that have earnings leadership and that are high quality and that at a reasonable valuation, a valuation that you can justify. And so a lot of those, you know, those stocks like Rivian and even the other two, you know, Zhao Pung in China, the unprofitable EVs like those are just off the table from investment perspective for me because you don't really know what you're buying. So, yeah, if you want to feel good about Tesla, relative valuation works every time. 

Bryce: [00:37:06] Very. Let's move onto the second stock, which is Enphase. For those of our community who haven't heard it before, able to give us a bit of a brief on what they do and why you like them in this space. 

Mary Manning: [00:37:17] Yeah. So Enphase is a US based company and it is part of the solar sort of ecosystem, but it's actually in the technology sector space. And as I was mentioning before, I think that the technological solutions to decarbonisation are a very good place to look for for good ideas. So in the solar industry, as as you know, you know, because a lot of these companies were subsidised initially and then the price of solar went down a lot, the the economics for the actual solar companies are not fantastic because you have a commoditized product and then you were highly subsidised, which made profitability look higher. And then when those subsidies have been removed or if they get removed in the future, the returns on the business just don't look that attractive. But we all know that a top line that that solar penetration is growing really, really strongly. So how do you how do you get involved in that and phase? And there's another company in America called Solar Edge, which does something slightly similar. So they have the IP, which is the it's called micro inverters. So say you have all these solar panels on your house and you have two options you can have, you know, all the electricity going into one inverter, which then tries to maximise the energy that's coming from solar and feeds into the grid. But what Enphase does is they have micro inverters, so they stick a little inverter on every panel. And their theory, and I agree with it, is that you can get much better efficiency by having those micro inverters on each panel because then if one panels in shade, that's fine. There's nothing coming from that panel, but you don't, you know, sort of screw up the feed from from the entire set of panels. So they have micro inverters. And the reason I like it from a stock perspective is that it's a duopoly market in America. There's only solar Edge and Enphase. So unlike solar, where you have all these players globally and you have a really inexpensive Chinese players that are just undercutting the price of polysilicon and solar panels all the time, this is a duopoly market and they do have some pricing power and they have regulatory standards that are behind their technology. So I actually forget what it's called, but it means that you need to have one switch that can turn off all the solar on from your solar panels. So in case there's a problem, you don't want them to catch fire, anything like that, and that's really regulated in America. And so there's. Only that's that's part of the reason why it's a duopoly, so if you take the fact that and as a result of that, they can maintain margins, it's not that they're constantly getting undercut. So if you take a sector that's growing at, you know, 20, 30 percent a year and that can have at least flat margins, there's not some margin expansion. Then you're getting 20, 30 percent, you know, growth going forward. And you know, the stock is trading at around 70 times PE, which is high. But that's not that high on a peg basis, and it's not high given the penetration that they can have going forward. So that's one stock that I really like that sort of plays in the technological aspect of of transition to net zero. 

Alec: [00:40:09] I think that's fascinating and a really good insight into how you found a business that is in this growing space, but is like servicing the industry. And so is can be like a price maker rather than a price taker. Fascinating company. We are running short on time, so we'll move to the third one. And that is Vestas. Based in Denmark. Yes. So for people who haven't heard about the company, can you tell us about it and why you like it? 

Mary Manning: [00:40:42] Yeah. So as we discussed before, you know, wind is needs to be part of the solution to decarbonisation, and Vestas is a manufacturer of wind turbines. So if any of you have been up close with the world with a wind turbine, they're absolutely massive. And Vestas, historically, a lot of the wind has been onshore, and now you're starting to see a big shift towards offshore and and for a number of sort of geological or, you know, weather related reasons, the amount of wind offshore and the consistency of the wind offshore is a big benefit for for wind power generation. And so, yeah, that's just makes the wind turbines. And unlike solar, where there are no barriers to entry, they're actually quite significant barriers to entry in wind turbines just because it's such a capital intensive product and you can't just wake up one day and decide you're going to be a wind turbine manufacturer. So in the world, it's Vestas, GE and Siemens Gamesa, and those are kind of the three big players, and within that Vestas is the highest quality. And at Alphinity, we're always looking for quality stocks. So it's a stock that we held in the sustainable portfolio before and have taken it out right now because of some of the supply chain issues that I mentioned before. It's just very, very difficult for these companies to actually get the, you know, to solve the supply chain issue right now. But it's certainly a stock that we like in the longer term, and we'll probably go back into the portfolio at some time in the future. 

Alec: [00:42:54] There's a lot of interest in nuclear in the Equity Mates community, so I feel like we've got to ask one question just to get your views generally on where nuclear fits into this whole transition and the energy mix both Australia and around the world. 

Mary Manning: [00:43:10] Yeah. So this is another very debated topic. So I had a call actually with the European Bank earlier this week, me and some of my colleagues and he was saying we were asking them sort of about their green credentials and do you lend to nuclear? Is this good or bad? And he was saying we, depending on which country in Europe we're lending to, there are totally different views. Some people are like great nuclear is is fantastic and other countries are like, you know, we don't want to have anything to do with it. So this is my personal view. This is not an alternative view or personally. I think that nuclear is is not going to be a huge part of the energy solution. And maybe it's because I was living in Asia during the Fukushima issue in Japan and you had you had people walking around with umbrellas because they didn't want, you know, the nuclear rain to fall on them and you know, the the risk reward of nuclear, you know that that long tail risk that you have a nuclear disaster from a from an ESG perspective and from a sort of human welfare perspective that that tail risk is quite significant. So my personal view is is like, I don't look at nuclear as an option. As I said, other people in other countries feel differently. But I think that biofuels and some of those other nascent areas are probably going to be more of a solution than nuclear just because it's so controversial.

Bryce: [00:44:27] Well, Mary, it's been an absolute. Pleasure having you on Equity Mates again for the second time. You've really helped us to step through what is going on with the world's energy transition. Help us understand it, but also talk more importantly about the exciting investment opportunities. So thank you very much. If anyone would like more info on what you're doing or affinity, what would be the best place? 

Mary Manning: [00:44:45] Yes, if you go to the Alphinity website, we actually have multiple sustainable funds. One is a domestic sustainable fund. So actually to fund Andrew and Bruce Smith, who are the portfolio managers for that? I know you had some questions about Australia. They're much better placed to answer specific Australia questions than me. And then myself and Geoff Thompson are two of the co-leads for the Sustainable Fund. You can find a lot of information on our website or if you just want to connect with me. Feel free to contact me on LinkedIn and happy to chat. 

Bryce: [00:45:11] Well, we hope by the end of this episode that we've been able to help you understand more about what's going on with the world's energy transition a little more. As we discussed, there are plenty of benefits, and this episode was proudly sponsored by InStyle's Solar, a Clean Energy Council approved retailer with over 20000 installations to date. Not only is solar a clean energy solution, but you can consider it an investment opportunity on average in style. Solar customers get a 20 percent return every year over 25 years from their solar systems. So own don't rent your power. With $0 deposit and zero interest finance options, you can now pay for your system instead of paying a power bill. Head to InStyle solar dot com slash mates to get 10 percent off a new solar system with InStyle Solar. Mary, it's been an absolute pleasure. As always, we appreciate your time and we look forward to catching up again. 

Mary Manning: [00:46:03] Yeah, thanks so much. Look forward to chatting again soon.