Outside EU, solar stocks still on a hot streak

30 July 2013

Solar stocks have been riding high and the recent deal between the EU and China has further bolstered a recovering sector, but analysts warn that a bull market, spurred by speculation, can be a fragile thing.

In New York this July, solar equities continued to ride relatively high on a bull market -- even before news broke on July 28 that China and the European Union had reached a solar trade agreement. Indeed, since the start of 2013, solar stocks have climbed out of a deep hole to experience a modest recovery.

In a conversation earlier in the month with pv magazine, Pavel Molchanov, senior vice president and equity research analyst at Raymond James & Associates in Houston, said the stocks were doing well, based more on the wisdom that all boats lift in a rising tide than on any solid value. "In a bull market, highly levered, high beta and speculative stocks tend to outperform, and in the case of solar, this is a trifecta."

Even Chinese manufacturers such as Trina Solar (TSL), Yingli Green Energy (YGE) and JinkoSolar (JKS), which had zero or negative margins at year-end 2012, were buoyed by the wave of optimistic buying. As of July 26, Trina's stock had increased in value by 25.2% over the past month; Yingli's by 23.8%; and JinkoSolar's by 42.6%.

Telephone diplomacy

But all that changed in one phone call, during which, the China Post reports, the People’s Republic’s Minister of Commerce Gao Hucheng and European Union Trade Commissioner Karel De Gucht agreed on a minimum price for panels of €0.56 per watt (US$0.74 per watt).

In addition, under the terms of what De Gucht characterized as an "amicable solution," China will be permitted to export crystalline photovoltaic solar modules, cells and wafers to Europe without being subject to a tariff. That amount represents about half of the EU’s cumulative solar panel of 15 GW demand in 2012.

That deal still may not satisfy EU solar manufacturers, many of whom say that the proposed price of €0.56 per watt constitutes little more than dumping, but in the past, China has sold solar panels for as little as €0.38 (US$0.50) per watt in Europe, according to the European Commission.

U.S. investors were cheered by the news that America's two largest trading partners, which had faced each other less-than-productively over the bargaining table for more than six weeks, had stopped short of escalating hostilities. In New York trading on Monday, July 29, Trina Solar was up 2.1% over Friday; Yingli Green Energy, up 3.1%; and JinkoSolar up 9.5%.

There was little doubt that the agreement was preferable to what could very well have been the end game. Had the trade complaint been allowed to continue through Aug. 6, the preliminary anti-dumping tariff of 11.8% imposed on China’s goods by the EU on June 6 would have nearly quadrupled to 48% through the end of the year, when a final determination was scheduled to be made.

Gordon Johnson, managing director at New York City-based Axiom Capital, told pv magazine, "The Chinese modules were significantly below the price of the EU products, so they could easily absorb the [11.8%] tariff. If the duty had been increased to 48%, then it would have become significant."

Too little, too late

While many EU manufacturers -- including the instigator of the trade complaint, SolarWorld (SRWF) -- are crying foul, there is no question that the deal with China represented too little, too late, for two major downstream German companies. Gerhlicher Solar AG and Conergy AG filed for insolvency in Munich and in Hamburg, respectively, this past month.

Gerhlinger, a solar industry pioneer, blamed its fall from financial grace directly on the dispute with China. "Anti-dumping tariffs on modules do not help anyone, not even those who request them, because they destroy jobs throughout the whole PV value chain," stated Richard von Hehn, the company’s chief operating officer.

For the Chinese, the cap on trade also may mean far too little in terms of trade numbers. According to Raymond James & Associates’ Molchanov, "By definition the Chinese manufacturers will have a limit on what they can sell into the European Union, the world’s largest solar market."

If the Chinese industry is forced to turn to domestic sales, he predicts that its downstream producers almost certainly will be out of pocket. "The reason that China’s manufacturers want to avoid domestic sales is because export pricing is inherently higher," explained Molchanov. "Typical pricing in China is 10% to 15% lower than abroad -- closer to €0.60 a watt."

He added, "This is certainly not going to be the worst-case scenario for the Chinese, but the situation won’t be as good as what they’ve been used to because their exports will be limited and they will be forced to sell more and more into the lower-priced domestic market."

"When you install in China you are doing so at a loss," Axiom’s Johnson agreed. "Financing is exorbitantly expensive and product prices are low. So the idea that China is going to come in and save its industry is ridiculous."

The one Chinese company that seems to have succeeded in its strategy to go global -- selling in Japan and Canada as well as in the EU and at home -- is Canadian Solar (CSIQ), which was up 25.8% for the month on NASDAQ and up 1.2% again after news of the deal, on July 29. The company shipped 1.54 GW in 2012 and expects to ship 1.6 GW to1.8 GW in 2013.

Like First Solar -- the leading U.S. manufacturer, which has turned to project development to bolster its bottom line -- Canadian Solar plans to earn more than 50% of its revenues from engineering, procurement and construction, as well as project development and total solutions. In the first quarter of 2013, the company's stock hit a 22-month high because high demand for solar panels in Japan boosted quarterly shipments beyond expectations.

'American Pie'

Meanwhile, America's piece of the pie remains fairly attractive. First Solar (FSLR) was up 5.9% for the month; Solar City (SCTY) up 11.4%; SunEdison (SUNE), up 19.5%; and SunPower (SPWR), up 26.6%.

In mid-July, First Solar applied for a permit to build a photovoltaic power plant worth approximately US$370 million (€279 million) in the Atacama Desert, in northern Chile. Comprising 1.7 million solar panels, the project has the capacity to produce 480,000 gigawatt hours (GWh) of electricity on an annual basis. The share price jumped 5.5% over the next day’s trading on the news of the deal.

For its part, Solar City announced the opening of a new operations center in Stockton, California, which moved the needle up 2.8% the following day.

Of the move by First Solar into an emerging market, Molchanov comments, "Chile is conceptually an appealing market. It offers high power prices and its insolation patterns are very favorable. The opportunity is real, but the Chilean industry is in infancy. It’s just way too early to speculate on project economics."

Of the Solar City expansion, Johnson remarks, "It's an Elon Musk trade," referring to the charismatic co-founder of luxury electric vehicle manufacturer Tesla Motors, and chairman of Solar City. He explained, "There were some issues on Tesla’s performance and, in general, Solar City has benefited from the stratospheric trading heights of Tesla. Share pricing wasn’t fundamentally driven by anything Solar City did this month."

However, Johnson is bearish on both Musk brands. "My prediction is that in less than two years, both of those stocks will be 50% lower," he stated, adding, "They are bubble stocks. People don’t really know anything about them. It’s going to be ugly."

Molchanov is only slightly more optimistic. "Solar City’s six-month lockup period since its IPO expired in June. Since then, there has been some selling, which is only to be expected. Is Solar City on a bubble? The jury is out as to what’s a bubble and what’s not. That’s in the eye of the beholder."