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There is an incredible double standard in how the market values American solar companies vs. Chinese solar companies. I believe the market is making a big mistake by drastically undervaluing the solar companies based in China. This type of undervaluation has existed before, most notably with Baidu (NASDAQ:BIDU).
When I first bought BIDU shares years ago for about $6.70 per share the shares traded at a relatively low PE ratio and the shares were knocked around severely by analysts for every concern one could imagine, especially after they reported earnings. Meanwhile Google (NASDAQ:GOOG) shares were favored by analysts and for awhile, BIDU shares did not get the respect they deserved. That has all changed now, and BIDU shares have exploded upward, now trading for over 50 times earnings while GOOG shares trade for less than 20 times earnings.
To be fair, some American solar companies like First Solar (NASDAQ:FSLR) have unique technology which deserves some consideration. However, Chinese companies like LDK Solar (NYSE:LDK) have the inherent advantage of lower cost labor, (as well as other lower expenses) which can be equally important. The double standard is not just in terms of standard metrics such as PE ratios, book value, etc. There is also a double standard in how Chinese solar stocks react to potentially negative news compared to the American solars. If there is talk of subsidy cuts in some part of the world, you might see a China based solar stock down 5 to 8% while the American solars may go nearly unchanged for the day.
These China-based solar shares have ridiculously low PE ratios when compared to their American counterparts. In some cases, the Chinese solars stocks trade for not much over book value. I believe that in time, this disparity will be reduced in favor of the Chinese solar stocks. Below, I have listed a few Chinese solar stocks as well as some American solar stocks, which will show the incredible double standard in solar stock valuations. You can see some of these Chinese solar companies selling near book value, for PE ratios around 4, while the American solar stocks trade for much more. Here is the data:
LDK Solar (LDK) is trading at about $12.57. The 50 day moving average is $12.44 and the 200 day moving average is $9.43. LDK has very strong earnings and based on guidance from the company, it appears they could earn over $3 per share in 2011. This puts the PE ratio at about 4 which is extremely low for one of the leading solar companies. Recently, the shares have received multiple buy ratings including one from Kaufman Bros. which has a $24 price target for these shares. Shares of LDK are not far off from hitting a new 52 week high, and I believe the breakout over $15 per share to new highs is only a matter of time. Book value is listed at $7.80 per share.
ReneSola, Ltd. (NYSE:SOL) shares have pulled back recently, to close at $9.26. The relative strength index is about 36 which indicates the stock is at oversold levels. Today, the company reported excellent 4th quarter earnings of 69 cents per share and for the full year, $1.93 earnings per share. Despite this, the shares fell about 17% as the company said the first quarter revenues would be $310 to $330 million which fell slightly short of analyst expectations of around $340 million. The 50 day moving average is $10.46 and the 200 day moving average is $9.33. SOL is estimated to earn about $2 per share in 2011. This puts the PE ratio at just over 4 which is extremely undervalued for one of the leading low cost solar companies. Book value is listed at $5.91 per share.
Trina Solar, Ltd. (NYSE:TSL) has pulled back to about $27.11. The relative strength index is about 46. Several days ago, the company reported blowout 4th quarter earnings of $1.87 per share which beat analyst estimates of about $1.09. Despite this, the shares have dropped since reporting earnings and very positive guidance for 2011. The 50 day moving average is $26.72 and the 200 day moving average is $24.38. TSL is estimated to earn over $4 per share in 2011. This puts the PE ratio at about 6. Multiple analysts have price targets of about $40 per share for TSL. Book value is listed at $16.73 per share.
JA Solar Company, Ltd. (NASDAQ:JASO) has also pulled back sharply, to about $7.09. The relative strength index is about 42. These shares have fallen, from a 52 week high of $10.24. The 50 day moving average is $7.36 and the 200 day moving average is $6.92, so these shares are trading near support levels. JASO has earnings estimates of about $1.40 per share for 2011. This puts the PE ratio at about 5. Book value is listed at $6.22 per share.
Jinkosolar Holding Co., Ltd. (NYSE:JKS) has pulled back to about $25.54. The relative strength index is about 40. These shares have fallen from a 52 week high of $41.75. The 50 day moving average is $26.36. JKS recently reported earnings of $2.36 per share for the 4th quarter, which also blew away the estimates. JKS has earnings estimates of about $5.42 per share for 2011. This puts the PE ratio at about 5. The shares have received multiple buy ratings with price targets of about $40 for these shares. Book value is listed at $17.05 per share.
Yingli Green Energy Holding Co., Ltd. (NYSE:YGE) closed at $11.25 yesterday. The relative strength index is about 42. These shares have a 52 week high of $14.29. The 50 day moving average is $11.39 and the 200 day moving average is $11.22 so the shares are trading close to support levels. Estimates for YGE are about $1.61 per share in 2011. This puts the PE ratio at about 7 which is higher than the other Chinese names above but still a huge discount to the stock market average. Book value is listed at $8.17 per share.
Now let's look at the American solar stocks and compare the PE ratios to the Chinese ones above:
First Solar Inc. (FSLR) shares trade for $146.57. The 50 day moving average is $148.66 and the 200 day moving average is $135.18. FSLR has earnings estimates of about $9.52 per share for 2011. This puts the PE ratio at about 16. Book value is listed at $40.25 per share.
MEMC Electronic Materials, Inc. (WFR) shares trade for $12.95. The 50 day moving average is $12.41 and the 200 day moving average is $11.62. WFR has earnings estimates of about $1.17 per share for 2011. This puts the PE ratio at about 12. Book value is listed at $9.88 per share.
GT Solar International Inc. (SOLR) shares trade for about $11. The 50 day moving average is $10.62 and the 200 day moving average is $8.15. SOLR has earnings estimates of about $1.18 per share for 2011. This puts the PE ratio at about 10. Book value is listed at $1.13 per share.
To compare some of the low priced solar stocks, we can see that American companies like SOLR have earnings estimates of only about $1.18 per share in 2011, yet China based SOL will earn almost double- about $2 and yet SOLR shares are priced about 20% higher (about $11 for SOLR vs. about $9 for SOL). I would rather buy SOL for $9 and see $2 per share in earnings over SOLR any day.
Now, let's compare (American) WFR shares at $12.95 with earnings estimates of only $1.17 vs. LDK (Chinese) shares at only $12.57 which have earnings estimates as high as over $3 per share for 2011. I can buy LDK shares for less than WFR shares and incredibly, the LDK shares will earn more than double, maybe even triple what WFR earnings per share.
As time passes, I believe investors will give these Chinese solar stocks much higher valuations through PE multiple expansion. Just as Baidu saw its PE multiple soar past Google's, these Chinese solar companies might even receive higher valuations than American solar companies one day, due to their low cost competitive edge, and the huge future growth in Asian economies.
The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made.



Disclosure: I am long LDK, TSL, SOL.

Source: Why the Double Standard in Chinese vs. American Solar Stock Valuations?