Seeking Alpha
Profile| Send Message| ()  

Chinese solar stocks Suntech Power (STP) and Trina Solar (TSL) have shown an upside of approximately 5% after the Chinese government started talks to provide more subsidies for solar companies. In our opinion, the Chinese government will probably approve the subsidies for the time being, but it doesn't have the capacity to inject such large amount for a long period. We will see in response that Europe and the United States will likely further increase the tariffs, as they did before, and make things worse for the Chinese solar companies. Moreover, these companies are encountering many problems and don't have any lucrative projects to restore their high growth levels of the past. Therefore, we recommend investors avoid taking any positions in Suntech Power and Trina Solar.

The Obama win is the reflection of better future prospects for solar energy, as his agenda is to promote alternative renewable forms of energy. But we see his victory as bringing a completely undesirable situation for Chinese solar manufactures. The U.S. has decided to strictly follow a policy to protect domestic solar companies and impose heavy duties on the import of solar panels. For this reason, the U.S. has continuously increased its tariffs and most importantly in response to the increasing Chinese tariffs. The Commerce Department has levied heavy duties ranging between 18.32% and 250% on solar imports from China. Moreover, recently the United States has approved tariffs on Chinese solar companies that will remain in effect for the next five years. In this way, it will diminish the Chinese solar manufacturer's market share in the United States. The Chinese companies are facing similar high tariff problems in the European region as well. In our opinion, if the Chinese government further decides to enhance subsides on the Chinese solar manufacturers to sustain their position in the export market, then every resulting encounter with the U.S. and EU will increase difficulties of Chinese manufacturers.

The Chinese government is aiming at subsidizing 88 cents (5.5 yuan) per watt for general photovoltaic (PV) cells and panels. That will increase up to 18 yuan per watt for residential purposes and 25 yuan per watt for PV power plants. On the other hand, the European Commission has approved an investigation into Chinese manufacturers selling below the fair market value. We believe the start of this anti-subsidy campaign will make Chinese subsidies ineffective to realize which will further decrease the profitability of these companies.

After looking at the industry's unfavorable dynamics, we advise investors to avoid taking any positions in the Chinese solar stocks, particularly Suntech Power and Trina Solar, due to the following reasons:

Trina Solar

Chinese manufacturer Trina Solar has cut down its future profitability forecast after looking at stringent anti-dumping policies by the United States. The company's revenue has decreased by 40% year over year and it has also missed revenue estimates by a considerable amount of $52 million in the Q2. The high level of accumulating inventory is another important determinant for the cut in future guidance. Moreover, the high account receivable of $44 million reflects the company's poor credit policy. The increase in short-term debt by 46% over the last quarter shows that due to poor credit policy it has taken loans to pay off its bills and short-term payables.

Suntech Power

Suntech Power has faced a significant decline in sales volumes due to comparatively high tariffs imposed by the U.S. government. As one of the known PV panels providers at a low cost in the United States, it has become a victim of high tariffs and has lost market share pretty quickly. First Solar (FSLR), SunPower (SPWR), MEMC Electronics (WFR), and Canadian Solar (CSIQ) have stolen the company's market share in the wake of the U.S. anti-dumping policies. Due to this problem, it has cut down its guidance for the coming quarter. The company has posted the revenue of $417 million in the second quarter, and missed analysts' estimate of $473 million.

Stocks Price Movement

Both STP and TSL have shown a significant downside of 63% and 50%, respectively, over the course of last six months. The downward trend has started after the U.S. and European Union imposed high tariffs on Chinese solar imports. These companies are deriving large amount of growth from the U.S. and Europe, and we believe it will take time to restore their profitable positions by creating this need in other parts of the world. In our opinion, these stocks will show a significant downside due to their continuously deteriorating profitability position.

Click to enlarge image.

Source: Google Finance.

Valuation

It looks as if STP and TSL are trading at pretty cheap valuations. Both of the companies are trading at low P/S, P/B, and EV/revenue multiples; however, we think that these valuations are a value trap. To bring growth to revitalize their positions is a matter of concern for these companies. Chinese solar stocks are burning cash at an alarming rate, debt levels are too high, and we don't see any plans from the companies to cope with the current situation. Therefore, it is not advisable for the investors to take any positions in the aforementioned stocks.

Comp. Sheet

Suntech Power

Trina Solar

First Solar

Yingli Green Energy (YGE)

JA Solar (JASO)

P/B

0.22x

0.25x

0.64x

0.37x

0.16x

P/S

0.06x

0.16x

0.75x

0.13x

0.12x

Enterprise Value/Revenue

0.73x

0.56x

0.69x

1x

0.5x

Enterprise Value/EBITDA

-16.8x

-7.94x

4.28x

-20.3x

-19.8x

Source: Yahoo Finance.

Source: Avoid These 2 Solar Stocks Whether China Increases Subsidies Or Not