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Summary

  • China's National Energy Administration now expects 2014 installations to come in at 10GW compared to prior estimates of 14GW.
  • Worst hit is the DG market where the forecast was chopped 50% from 8GW to 4GW.
  • This is not good news for Chinese cell manufacturers and polysilicon manufacturers.

The last week has been eventful in the solar industry with several major news stories. The biggest story to hit the wires in terms of excitement was SolarCity's (NASDAQ:SCTY) acquisition of Silevo. However, we believe this acquisition is largely inconsequential in the short term to anyone other than SolarCity and its suppliers.

The bigger story from last week that did not receive much press was the downgrade of projections for 2014 China solar deployment. As you can see from new story here, the China's National Energy Administration is now talking about projected total installation target of 10GW compared to prior expectations of 14GW.

According to Wu Xing-Xiong, the head of NEA, the official expectations for the utility scale solar market in China have stayed at the 6GW level but the expectation for the distribution generated (DG) market plummeted from 8GW to 4 GW. If true, this would constitute a drop of approximately 8% of estimated total worldwide 2014 demand of 48MW. There have been concerns about the DG market in the past and part of the downgrade is already built into many of the Chinese solar companies.

Contrary to what NEA says about deployment expectations, we believe that China will do everything in its power to drive installations to help the domestic players mitigate the effects of the US Commerce tariffs. Given the logistical challenges in rapidly ramping the DG market, what this could mean is that the Chinese government is likely to step up the installation of Utility scale systems. The likely beneficiaries of any such action are likely to be utility system focused players and solar companies with strong balance sheets. The three names that fit this description include JinkoSolar (NYSE:JKS), Trina Solar (NYSE:TSL) and JA Solar (NASDAQ:JASO).

While we are optimistic that total Chinese deployments for 2014 will exceed 10GW for the year, we believe it is prudent for conservative investors to take this DG downgrade into account for planning purposes.

This installation downgrade has several major implications:

- The companies counting on a strong DG sales in the second half of 2014 are likely to be negatively impacted. While all the players in the industry have been counting on strong DG sales, we believe some of the companies have been counting on the DG space more than the others. These companies include ReneSola (NYSE:SOL), JA Solar, and Yingli Green Energy (NYSE:YGE). The negative impact on companies with utility scale deployment focus, such as JinkoSolar, is likely to be somewhat less compared to the DG players.

- With softening installation demand, it is likely that polysilicon prices will start coming down sooner than expected. We expect this dynamic to have the most impact on high cost poly players. In the universe of stocks that we follow, we expect to see the lower pricing as a small negative for DAQO New Energy (NYSE:DQ) but a much bigger negative for ReneSola.

- Chinese cells are already at a disadvantage in the market due to the Commerce finding and US tariffs. Reduction in Chinese deployment can erode the demand for China solar cells further. On average, there could be as much as 20% additional overcapacity in H2 2014 at Chinese solar cell makers from the Commerce finding and China downgrade. As a result, it is likely that Chinese cell producers will see continued downward pressure in pricing in Q3 and Q4. The companies that are most directly affected from the downgrade are Chinese cell producers who need to sell their solar cells to third parties. The manufacturers who use their cell manufacturing capacity for internally produced modules may not see much impact as long as they have outlets for their modules. In the solar stocks that we follow, we believe JA Solar, Trina Solar, and Yingli Green Energy are likely to more negatively impacted than their peers.

- A perverse side effect of the dropping Chinese solar cell prices is that the second/third tier solar cell suppliers may find it economical to ship some of their product into the US in spite of tariffs. In other words, the drop in ASPs may undercut the price increase from tariffs and could make these cells competitive in the US.

In spite of these short term negatives, we believe the China DG downgrade is a teething problem and limited to 2014. We expect 2015 to be a very strong year for DG in China.

Regardless, the risks of pretty much all the Chinese solars have gone up with the downgrade. We believe staying with companies with low cost structures and good project pipelines is likely to protect investors from downward risk. JinkoSolar and DAQO remain our favorite names in these times of uncertainty.

Source: Solar Segment Update: Implications Of China Solar Estimate Cut