We all know China is still growing, but its GDP for 2008 was 9% in 2008 Q3, down from its previous double digit growth, citing impact from the global economy slowdown. Over the weekend, the Bank of China cut the GDP growth rate in 2009 to 8-9%, a further deduction from previous its prediction of 9.3%. The government announced a $580B stimulus package for the next two years; however, investors are still skeptical how helpful this will be when the global economy is stepping into a certain recession and China's exports will be largely wiped out if overseas demand diminishes in the coming years. It is true that this package will boost business of domestic state-run companies, such as local steel makers and construction companies, but may do little to help the world economy. Overall, China's economy is only 1/4 of the US's.
What disappointed investors is that the stimulus package does not mention any renewable energy policy, which was widely expected. Companies like Suntech Power (STP), Yingli Green (YGE), JA Solar (JASO), Trina Solar (TSL), and LDK Solar (LDK) are largely expecting a domestic boost from the government while European demand is weakening, and the weakening Euro also cuts into profit margins of these companies. STP has been under pressure recently because the company has most of its sales from Europe, and the coming Q3 earnings are expected to be very weak.
A warning from Sunpower (SPWRA) last week is a sign that big solar companies are in trouble. US solar demand will not catch up in 2 years, even with solar tax credits in place. Overall, the solar sector may have some weakness in the short term, though I remain bullish long term.
However two companies that may deserve early attention in the coming weeks are First Solar (FSLR) and Solarfun (SOLF).
First Solar is the leader in the industry. The company is making money and projects are self funded - in other words, no external funds are needed to pay for new projects, which is not the case for most other companies. When Sunpower Corp warned of a possible loss from the forex exchange, First Solar didn't issue a warning because the company is well hedged against the Euro. Based on many predictions, the Euro may continue to slide below parity versus the Dollar. In this case, companies with good hedge strategies will win.
Another name with a good hedge against the Euro is Solarfun Power. The company talked about its strategy in hedging against the Euro in the Q2 earning conference. So forex loss is not a concern for investors. Furthermore, SOLF has consistently beat estimates with a big surprise in the last few quarters. SOLF reported 3rd quarter 2007 earnings of CNY 1.24 per share on 11/29/07. This beat the consensus of CNY 0.345 by CNY 0.90, a surprise of 260%. The management team apparently did a great job. This Q3 earning will likely surprise investors again.
I wouldn't bet on Suntech and Yingli to report a good quarter because of the forex, but Solarfun is definitely worth your attention.
Stock position: Long FSLR, STP.
