By Sean Geary
Chinese solar outfit Yingli Solar (YGE) surged in Wednesday's trading after the company reported better-than-expected quarterly results.
While Chinese equities listed in Mainland China continue to suffer -- the Shanghai Composite (FXI) hit another low for the year overnight -- firms listed in other markets are not suffering the structural impediments plaguing their mainland counterparts. And while the Chinese solar sector has performed poorly over the past year, there appear to be initial signs of a possible turnaround for these beleaguered stocks.
The solar has struggled mightily over the past few years as the result of secular changes in the industry; Yingli Solar is down a whopping 93% over the past five years. Increased competition amongst photovoltaic cell producers crushed profit margins. However, as weaker players slide toward bankruptcy or have been absorbed by other firms, stronger companies like Yingli Solar and Trina Solar (TSL), are better positioned to take advantage of a rebound. In addition to a strong cash position, "Trina and Yingli appear to be the biggest survivors because they have the lowest costs than some other brands in the industry," Aaron Chew, a senior analyst at Maxim Group LLC, told Bloomberg.
In addition to increased competition, Chinese solar firms such as Yingli Solar were dealt a massive blow as the fiscal situation in Europe devolved. Developed European nations constituted a substantial chunk of demand for the above-mentioned companies. With the advent of austerity programs, countries like Spain cut back on subsidies deemed superfluous in order to improve their balance sheets.
While European demand remains depressed, the increase in domestic Chinese demand could be the reprieve that the sector needs. Bolstered by Chinese solar purchases, Yingli Solar reported net revenue of $355.9 million for the third quarter, above analysts' estimates of $353.9 million. While not a massive beat, top-line growth was welcomed by investors -- even if the company is still losing money on the bottom line.
Although a long-term investment in a small-cap Chinese solar would be quite risky, this reversal could signal a further move higher. With a potential short squeeze in these heavily shorted names and a possible Santa Claus rally, Chinese solar could see further gains in the short term.