The Upside Down Valuations Of The U.S. And China Solar Companies

| About: SunPower Corporation (SPWR)


US solar companies are being valued at premiums to the market and extremes vs. their Chinese competitors.

Chinese solar companies are being valued like a solar/global recession is coming.

Chinese are the low cost producers and will be gobbled up by Cnooc or Sinopec at some point.

In this article I will be taking a deeper look at JinkoSolar (NYSE:JKS), Trina Solar (NYSE:TSL), JA Solar (NASDAQ:JASO), and SunPower (NASDAQ:SPWR)

When I started looking at solar companies years ago it was clear to me that despite subsidies and high prices we would someday realize the potential of low cost clean solar. If you can believe it, polysilicon (the main ingredient in making silicon based solar systems which are the best/most efficient) which currently trades at $21/kg used to be $250/kg. Low cost module makers have pierced $.5/watt (the price Steve Chu though would lead to massive solar adoption) when they used to be $6/watt. As more and more topographies move to grid parity on a non-subsidized basis solar adoption has soared. A glut in capacity which saw over 40 gigawatts built out in a demand of sub 30 has switched to demand of over 45 gigs and may prove to be closer to 50.. The best producers have scrambled to build out capacity further and benefit from economies of scale. As this overcapacity has been burned off, and inefficient producers have been taken offline via bankruptcy and consolidation, some leaner and stronger companies have emerged. As with many cycles, interesting winners and losers emerge. However, in this case something truly spectacular has happened.

As if pulled directly from Ayn Rands' Atlas shrugged, the worst have been rewarded the most handsomely and the best and most capable are marginalized and ostracized. Some of the smaller and weaker companies have become leaders while some of the best and strongest massive laggards. US and European producers who either couldn't control costs or couldn't raise efficiencies enough to compete have flourished while their Chinese competitors who were doing a better job at both have struggled in the eyes of Mr. Market and largely the result of punitive US and European tariffs. I believe that it is only a matter of time before the world is no longer standing on its head.

SunPower, First Solar (NASDAQ:FSLR), and SolarWorld (SWV.GR) were some of the biggest beneficiaries of punishing the Chinese for their alleged dumping by the institution of a tariff regime. Given the recent success of SPWR and FSLR is hard to remember that as recently as 2012 most believed all three were zombie companies. SunPower, despite their higher efficiency panels, struggled because their cost structure was not competitive with the Chinese counterparts. SolarWorld had the double whammy of higher costs and lacked the SunPower efficiency advantage. The mighty First Solar because of their inability to materially raise (despite many years of promising to do so) the efficiencies of their panels. First Solar had the per watt cost advantage in those early years but as the poly based producers, and poly itself came down drastically in price, they were no longer as competitive. I find it interesting that despite continued promises of thin film panel efficiency improvements, sworn to by new management, that they went out and acquired a defunct Japanese poly based technology/producer. Why, if your technology is competitive and will become the standard moving forward would you do that?

How does the market value SunPower? Currently SunPower trades at 29x 2014 and 21x 2015. It trades at 4.15x 2014 book and 3.67x 2015 book. SPWR claims that their panels are competitive with the Chinese on an efficiency adjusted basis. If that were true and given their good balance sheet and unlimited access to capital via their business partner Total (NYSE:TOT), why are they not one of the top producers of modules? After all, if their products are the most competitive, have the best efficiencies, and have an artificial advantage due to the US and European tariff regime, why are they not the number one producer or slated to be such via planned capacity additions? This is not a negative SPWR piece as I think it is growing and could continue to but it does beg the question. Could it be the yieldco business of SunPower is the reason for the valuation discrepency? After all Sunedison (SUNE) gets a $5 billion + valuation despite not expecting to be profitable until 2016 (.14). Most believe that Sunedison, formerly MEMC (WFR) and known previously for poly production, has transitioned to a more Solarcity (NASDAQ:SCTY) model of selling and developing solar power projects and effectively spun out the value of the its yeildco (NASDAQ:TERP). JinkoSolar, Trina, and Jaso all have yieldco businesses so I can't believe it is that. But we will come back to the issue of yieldco businesses.

Let's look at a few Chinese companies now. JinkoSolar currently trades at 8x consensus estimates for 2014 and 5x 2015. It trades at 1.43x 2014 book and 1.09x 2015 book. Granted Jinko has more debt but has, for all intents and purposes, unlimited access to capital via the Chinese government and a significant cashflow to service its debt. So why the huge discount in valuations? They have a yieldco business they have slated to spin out early in 2015 (completed over 200 mw of projects and expected to complete another 400 by year end). Terraform power TERP (SUNE's recent yieldco ipo) trades with an ev of $3.8 billion on nameplate capacity of 807 megawatts. That translates into $4.7 million per watt valuation. Jinko has said they expect their downstream business to be about 600+ megawatts this yr. That equates to $2.82 billion dollar valuation for their yieldco business. That equates to more than the current ev of Jinko currently. Did I mention Jinko is the global low cost producer at $.47/watt? Yahoo finance has the ev of JKS as being $1.6 billion. That means you are getting the yieldco business at a discount and the rest of the company for free.

Trinasolar trades at 10x 2014 and 7.17x 2015 consensus analyst estimates. It trades at .9x 2014 book and .78x 2015. Trina has a healthy balance sheet with much less leverage than Jinko and a significant yieldco business, also expected to be400-500 megawatts in 2014 ($1.88-$2.35 billion of value using TERP) and also less than the current ev of Trina. Did I mention that Trina's new honey product has some of the highest efficiencies with one of the lowest cost structures at .48/watt? With an ev of $1.45 you are getting TSL at a discount to its yieldco business and the rest of the business of making modules for free.

Even the famed bear analyst in Solar Gordon Johnson, has radically shifted course of late. He actually recommended JASO recently putting a $16 target on it! He went from a sell and a $2 target price to a buy and a $16 target price! This despite the fact that JASO is neither the low cost producer or the cheapest Chinese company. Can anyone say Wall street is waking up to the Chinese companies? JASO has a 200 megawatt downstream business ($940 million of value using TERP metrics). Did I mention JASO plans on rolling out a 20%+ efficiency module?

It's one thing to discount the Chinese companies because they are Chinese and it is another to value them all as if they are all frauds. Currently the market is giving the Chinese solar companies no credit despite the fact they are the low cost producers in an increasingly global solar market, have some of the highest efficiency modules, and large yieldco downstream businesses that could easily be spun out to unlock value as JKS intends to do. Years ago Total bought a large piece of Sunpower and then added. I assume they didn't buy the whole company because of political considerations. As solar takes more share of new and existing Chinese and global electricity generation, how long before CNOOC (NYSE:CEO) or Sinopec ( start to do what Total did and buy what would be relatively small companies for them?

The recent US tariffs will be nothing more than a bargaining chip. Several years ago these tariffs were big issues in part because of the importance of the US in the market and in part because they were happening simultaneous to the EU doing the same. Back then, the US and Europe were close to 50% of global solar consumption. With the EU having reached a negotiated agreement with China, and the rest of the world demand having exploded, the US implications to the Chinese producers hurts us a lot more than them. Solar demand this year is expected to be between 45-50 Gigs. Of that roughly 5-7 gigs is expected to be from US demand. Of the 5-7 gigs roughly half is expected to be supplied by China. That means 2.5-3.5 of 45-50 gigs pricing is at stake (notice I say pricing because we couldn't fill the demand with European and US supply). Trina has publicly stated they expect to grow their US business regardless of whether these new tariffs actually go through.

Recently the WTO came out and ruled in favor of China in the US-China solar dispute. The US can drag its heels for a year or two but the writing is on the wall. At some point these tariffs will go away or get reduced in favor of those who favor cheap clean energy. If we can't be the low cost producers in this country then there is only so much we can do about that. All we are doing with these tariffs are raising the costs to go solar in this country. Having cheaper solar is more beneficial to the already 120,000+ and growing job community of installers than it is to protect a couple inefficient producers (one of which is German) and further inflame the Chinese, who we could use the help of given the current geopolitical climate.

I expect weak 2nd quarters from the Chinese solars, due to pricing weakness, temporary financing issues in China (set to alleviate with increased subsidies and easier access in the 2nd half), and uncertainty from the US tariffs. However, I expect a strong second half of 2014 for the Chinese solar companies as the government is hell bent on tackling climate problems and accelerating adoption.

Polysilicon production capacity is set to explode in the coming years and should help the main input cost migrate back down to the $18/kg cost or below. Interest expense from the Chinese producers will also decline as they deleverage with newly found profitability. Better panel efficiencies will also help to drive down costs further. Storage technologies like better/cheaper batteries and hydrogen (see my HYGS article for more) will help drive down overall cost considerations considerably. All told, solar is set to get cheaper and less reliant on subsidies in more and more places globally (India, Mid-East, South America set to become big players shortly). As such the best companies should benefit. The best solar companies are Chinese and each of the tier one players could double and still be cheap to other solar players and other market stocks in general. It is my belief that the large Chinese energy companies will pull a GE here and buy the best players shortly.

Disclosure: The author is long JKS, TSL, JASO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: and plans to trade them actively as price dictates