Yingli Green and Trina's Day in the Sun

I've been a long-time investor in the solar space (circa late 06), and one thing that has really irked me over the years is the complete lack of differentiation. Much like the market as a whole nowadays, it's "all or nothing" in this space.

The one exception has been First Solar (FSLR) - an American "thin film" (different technology than most solar companies) producer. The Chinese names have especially all been thrown together in one pot and when it's time to run up solar, they all go up together (in varying degrees), and when solar is out of favor, they all get pole-axed. Hence. doing any due diligence is really a waste of time.

Yingli Green Energy (YGE) and a company that has cost me many real (and virtual) dollars over the years, Trina Solar (TSL) are 2 of the Chinese solar markets with good size, and the most integrated production models. This should have differentiated them over the years - but as I said above, not in American investors' eyes. We like "big easy to understand, sweeping themes" - i.e. oil up, solar good. And that's as comprehensive as it seems to get.

We are seeing some nice action in both these names on the back of an analyst report which is alluding to the advantages the two companies have. Now that silicon (which is the main cost component on the material side) has swooned after bottlenecks plagued the industry for 3+ years, the other main cost is labor. And you are not going to compete with the Chinese on labor costs...

• Both Trina Solar (TSL) and Yingli Green Energy (YGE) shares are trading higher today following upgrades by Morgan Stanley analyst Sunil Gupta. He thinks both companies are going to take market share in the solar sector from U.S.-based and European rivals. Here are the details
• Trina: Rating to Overweight from Underweight. Target to $37 from $7.30. The reasons for the more bullish stance: an expected industry inflection next year, Trina’s position as a low-cost producer, “and hence its potential to gain market share at the expense of high cost EU and U.S. producers.” He sees TSL driven by “high volume growth, low-to-moderate margins and relatively good working capital management.”
• Yingli: Rating to Equal Weight from Underweight, Target to $16.30 from $3.10. Gupta writes that is new stance on the stock is based on “easier domestic credit and capital market conditions, which have eliminated financial survival risk, opening up of the domestic China market and prospects of a gain in global market share.” He thinks Yingli, like Trina, will take share from the U.S. and European players due to cost advantages. That said, he thinks the stock’s valuation is “reasonable, but not compelling.”

This is a fair analysis, as Trina seemingly always trades at a permanent discount to many peers for reasons I've never understood (granted management has not been the best in terms of communication with the Street) TSL was once our largest position due to that fact, but we still lost buckets of money as the market simply could care less about relative valuations.

All in all, nothing "new" is here in terms of the analysts' reasoning other than the "industry inflection" point thesis - otherwise, these are all the same reasons to buy these 2 companies as we had 3 months, 6 months, 12 months, or 18 months ago. But my main hope is the market begins to weigh winners and losers and not throw every Tom, Dick, and Harry solar stock in the same space as those with competitive advantages. If we reach that point, than I'll know it is not just a few hedge funds and daytraders who dominate this space.

As an aside, if you are not familiar with the dizzying array of companies in the Chinese solar space - Suntech Power (STP) is the largest in the group, and will also be an ultimate survivor in what I expect to be cutthroat competition even as the overall space grows in the years ahead.

Ironically, First Solar is the mutual funds favorite, and at the same time is weakening in quite startling fashion. [May 26, 2009: Analyst - Some Analysts Switching Away from First Solar]

Disclosure: Long Yingli Green Energy in fund and personal account

Comments

[Wisdom vs. ...:]

In the long run, specialized beats integrated in manufacturing. TSL & YGE should have a good run in the meantime b/c their fundametals are good, and industry reputations are good; TSL looks undervalued presently. Change is going to be the most important skill in solar for may years, and the specialized manufacturers like STP and LDK will change more easily and more often. That said, STP's earnings probably will not meet its stock valuation for a long time. FSLR product is cheap crap; cheap may fly right now because of the state and federal quotas, but crap will not in the long run.

Jul 01 08:46 AM

[Alan Young:]

Good article, Mark.

Absolute buffoonery on the part of Morgan Stanley. Gupta sleeps while YGE rises 400%; then wakes up and declares the weeks-ago high as the new "target"! To think that people actually get paid for this kind of "analysis."

Jul 01 11:26 AM

[Kelvin Schulle:]

while YGE and TSL are in spot light now. SOL and JASO are sleeping giants IMO, SOL is now vetical integrration PV maker and wafer provider to companies liek STP. JASO just boosted their presence in Europe and north america by management shuffling. SOL and JASo have more upside form here compared to YGE and TSL. chasing analysts are not fun at all. you need to protect yourself, we have seen analysts rotate stocks in the same sector before. i.e. from STP to SOL. from YGE to JASO, from LDK to SOL, overall, the whole sector will rise together if China decided to go green.

Jul 01 11:39 AM

[Zenfar:]

But if you think integrated is not the way to go there is: LDK and STP. Also technology innovation seems to more common in the US companies, and remember innovation can turn a market on its head very quickly.

Lockstep in the solar sector is starting to end.

Long STP, LDK, ENER, SPWRA

Jul 01 11:41 AM

[Zenfar:]

Great charts and analysis, I would just consider American solar and some non integrated players.

Jul 01 11:46 AM

[Dave Marsh:]

I wonder how low FSLR will go before Cramer eats crow and admits he has NEVER looked at any Chinese solar player on it's own merits. He knows NOTHING (about solar)...

Jul 01 01:33 PM

[rooferguy:]

Nobody buys just a solar cell for $1.25/watt — they buy a complete system for $7/watt (residential) and $5.5/watt (commercial). So the winners will be those manufacturers who figure out how to build their cells into SYSTEMS that are least expensive to install. And you can only get so far if you have cheap cells — the tough part now is BOS and installation labor.

Unisolar was a good idea, but it’s very expensive to install. FirstSolar has cheap cells but their installation costs are about $0.25 to $0.50/watt higher because they have lower efficiency and need more BOS; they still end up being a good solution for large ground mounts. Andalay (Akeena) is a big step forward in terms of integrating the BOS into the panel itself, and thereby cutting labor costs. SunPower has had a great idea with their easy to install flat roof systems. Trina, Yingli, Suntech, BP and just about everyone else all have cheap, commoditized panels — no differentiation other than price.

Because there is so much else that goes into a solar installation, technology and innovation will create winners and losers that even lowest cost cell manufacturing cannot overcome.

Jul 01 02:19 PM

[predictorma...:]

People should take a look at SATC. Makes power invertors required for solar power. Good product, good management, not a whole lot of competition. Has had recent a couple recent pullbacks, so good buying opportunity. dis: I own a lot of shares of it.

Jul 01 02:33 PM

[Graham Jervis:]

According to industry analysts, thin-film solar panels cost around $2.26 per watt of generating capacity. But Yingli Green is now selling its polysilicon panels to power companies around the world for between $2.10 and $2.20 per watt. Polysilicon has finally caught up to thin-film. It's lights out for First Solar.

How can solar grow and be scalable using thin film when its made up of rare materials like cadmium and telluride and expect it to compete against an abundant source of polysilicon which is one of the most abundant materials (sand) and the technology for making it is well established by the semiconductor industry.

Maybe thats why AES is using YGE for solar panels.

Jul 02 10:51 PM

[Ellito:]

Without the Stimulus Fund and tax credit, no way any solar will do well. That's the problem. Those co specialize in residential won't do well either because people move so frequently from house to house.
When the time comes for Stimulus Fund for solar, of course only American co and products should benefit.
That's the purpose, to stimulate local business and jobs.
To think otherwise is foolish and wrong.
Politicians won't dare to "NOT BUY AMERICAN."
Think twice before you invest.

Jul 04 12:40 AM

[HighCotton:]

The first paragraph of this comment is word for word identical to comments from the Investment Advisory Newsletter from Stansberry Research for July, right down to "Lights out...."


On Jul 02 10:51 PM Graham Jervis wrote:

> According to industry analysts, thin-film solar panels cost around
> $2.26 per watt of generating capacity. But Yingli Green is now selling
> its polysilicon panels to power companies around the world for between
> $2.10 and $2.20 per watt. Polysilicon has finally caught up to thin-film.
> It's lights out for First Solar.
>
> How can solar grow and be scalable using thin film when its made
> up of rare materials like cadmium and telluride and expect it to
> compete against an abundant source of polysilicon which is one of
> the most abundant materials (sand) and the technology for making
> it is well established by the semiconductor industry.
>
> Maybe thats why AES is using YGE for solar panels.

Aug 05 03:05 PM