How Solar Energy Stocks Will Look to "Light" Up 2014; Solar Industry Looks to Benefit From Chinese Government Tax Subsidies, Widespread Residential & Commercial Installations
In the first of a series of articles showcasing our top investment trends for 2014,this article will highlight how the solar energy industry will benefit from recent developments ranging from the manufacturing of solar panels to the development of downstream solar power solutions (energy supply & delivery).
On September 29, China's Ministry of Finance announced a tax break of 50 percent of the value-added tax (VAT), which will be refunded to producers of solar power for each kilowatt-hour (kwh) sold to the grid from Oct. 1, 2013 to Dec. 31, 2015. Vishal Shah, a Deutsche Bank analyst, noted that with most solar power development projects in China coming out of the development phase, this subsidy along with increased demand are a few components behind the significant growth of the solar power sector going into 2014.
The VAT refund policy will benefit the current owners of solar power plants most, with a secondary yet significant effect on solar power component manufacturers. Moreover, it shows that a new trend is emerging that will signify the next step for solar power companies; engaging in both the design and manufacturing of components and from selling energy produced from their projects.
Stable Solar- Why 2014 Will Be Pivotal For the Solar Power Industry
The announcement regarding Chinese government subsidies towards the solar power industry is one of the developments that has sent shares of solar power companies soaring this year. Shares of SolarCity (SCTY) have skyrocketed as many important developments have emerged from the company recently. SolarCity, which has Tesla CEO Elon Musk as its largest shareholder, announced the acquisition of Zep Solar for about $158 million in stock to ensure supplies of racking systems that reduced installation times by half. Zep is one of the largest suppliers of rooftop mounting equipment and holds patents for designs that help lower installation costs, according to a statement made by SolarCity.
"Without Zep it would take us two to three days to install a typical rooftop," SolarCity CEO Lincoln Rive commented. "With it we're down to a single day and it looks better on the roof."
SolarCity will also install solar panels at BJ Wholesaler's North Brunswick, New Jersey, location at little to no cost in an arrangement where BJ's will pay for the solar electricity produced at a discount to current energy rates. The North Brunswick location is the first location to benefit from this new collaboration, which looks to provide solar electricity directly to businesses, which will make it possible for businesses to reduce energy costs.
SolarCity also plans to deploy 475 megawatts to 525 megawatts of photovoltaic projects in 2014, up from an estimated 278 megawatts in 2013. The stock rose 23 percent to close at $47.18 on October 11, the biggest gain since May 17, with over 17 million shares traded, versus an average of 3.8 million.
The growth of the energy leasing business is another key development that has driven solar energy stocks upward. SunPower (SPWR) also deploys projects and lease energy in the same manner as SolarCity. SunPower, which is 66% owned by energy giant Total (TOT) also announced key developments that may drive the stock higher.
SunPower announced the installation of 69 megawatts (MW) of its high efficiency E20/327 solar panels to Shimizu Corp. for installation at the Eurus Energy mega solar power plant project in the village of Rokkasho, Aomori, Japan, which is Japan's largest solar installation. SunPower will also supply 27.4 MW of its E20/327 solar panels to Obayashi Corp. for installation at the mega solar power plant project in Toyokoro, Hokkaido, Japan, which is also owned by a subsidiary of Eurus Energy Group and is scheduled for commercial operation in 2015.
SunPower's annual panel manufacturing capacity currently stands at around 1.3 gigawatts. During Q2 2013, the company ran all its manufacturing facilities at full capacity and is expected to continue to do so over the next several quarters due to strong demand. The emerging trends of greater utilization rates will enable companies to better absorb their fixed costs and allow for economies of scale.
SunPower is currently the only vertically integrated leader in the solar sector. SunPower panels are rated the highest efficiency at 24% whereas the typical panel efficiency is around 15%. SunPower is also the sector leader in the rooftop solar panel business. The rooftop solar panel industry has been growing over 40% year over year.
Shares of SunPower closed at $29.00 on October 11, up nearly 5% on volume of over 3.8 million shares, higher than the average of 2.79 million shares.
Why Projects of Scale Matter
The Chinese government tax subsidy helps make solar power projects more attractive and exerts a pull on developing an economy of scale around solar projects. But more importantly, it highlights that further consolidation and divestures within the industry will still take place before the dust settles.
SunEdison (SUNE) announced the spin off of 20% of its semiconductor business back in August. The company already reports its earnings results under two separate business lines: semiconductor and solar. The spinoff will create a bigger separation between the two businesses, allowing SunEdison to focus its efforts on building up its pipeline of solar power plants projects including the largest in Latin America. SunEdison currently has nearly 3 gigawatts of solar farm projects in its development pipeline.
SunEdison ranks among a growing number of solar companies that have shifted their focus and capital towards the development of solar power projects, away from the low margin business of making solar panels, which continue to fall in price.
SUNE will be coming to market with the IPO of the Micro-Chip Division in early 2014, with Deutsche Bank and Goldman Sachs acting as lead underwriters. Since the announcement, the stock price has reacted positively. The stock is up over 20% since the beginning of September, closing at $8.94 on October 11, trading 7.37 million shares versus an average of 6.8 million shares.
Solar power companies are also making a push towards the residential solar power market. Canadian Solar (CSIQ) started a financing program offering a financing program for U.S. homeowners to build rooftop power plants with its panels. Customers may borrow as much as $40,000 for residential projects, the Guelph, Ontario-based solar company said in a statement. The financing is provided by Boston-based Admirals Bank.
The financing program allows homeowners to qualify for tax credits and incentives offered to system owners, according to Canadian Solar CEO Shawn Qu. Canadian Solar also recently sold a number of solar farm plants, two to TransCanada and two others to Black Rock.
Canadian Solar shares are up over 50% since the beginning of September and up over 500% since the beginning of 2013. Canadian Solar recently reiterated its goal of becoming profitable for all of 2013. China has also recently pledged to strictly limit construction of new panel plants and the aim of reducing bloated, unprofitable infrastructure. Canadian Solar closed at $19.85 on October 11, with a volume of 3.88 million shares, above its three-month average of 3.11 million shares.
If the current trends continue we could see Canadian Solar become the first of the major players to return to profitability in its upcoming third-quarter report, with other major players gradually returning to the black over the next few quarters, making 2014 a very important year for the solar power industry.
Demand for solar power infrastructure has eased since the global financial crisis, forcing governments worldwide to slash solar power subsidies. To help prop up the solar industry, the Chinese government plans to quadruple its solar power generating capacity to 35 gigawatts by 2015, to utilize some of the huge domestic panel glut.
According to figures from the Solar Energy Industries Association (SEIA) and GTM Research, the solar power market is expected to see compounded annual growth of 24% between 2012 and 2016. Meanwhile, the industry is expected to see investment of $800 billion to $1.2 trillion over the next decade, according to Enerdata.
Companies such as SolarCity, SunPower, SunEdison and Canadian Solar stand to outperform peers in the solar power industry, especially given the positive overall tone in the developments coming from each respective company regarding profitability and future growth.
With these types of numbers, it is no surprise that "The Focused Stock Trader" sees solar power companies being among one of the most popular sectors of the market in 2014, and that significant returns will be realized among companies in the space.
Additional disclosure: I was assisted by Anthony Orbanic in prepairing this article.