Wall Street's Half-Reports on the Solar Industry's Bright Future, Part 1

by: Clearwave Capital

It is interesting how the Wall Street media and firms give you half the picture.
Ben Sills and Reed Landberg of Bloomberg wrote in their recent article entitled “German Solar Panel Sales Peaked in 2010, Deutsche Bank Report Says” about how Germany will reduce its installations from 7.4 gigawatts in 2010 to 3.5 gigawatts in 2011. (When this report came out, Chinese solar stocks dropped more than the broad market. JA Solar (NASDAQ:JASO) dropped 2.6%. Hanwha beat estimates on its quarterly report, but this didn’t stop other Chinese solar stocks from dropping.)
Here’s another report from Bloomberg about German and Italian subsidy cuts.
The Reuters report shows bar graphs of solar capacity additions for 2011-2015, which is based on data that it sourced from EPIA (European Photovoltaic Industry Association). However, the article shows only a subset of the data from EPIA.
Here is what EPIA has reported. Click here and download “Global Market Outlook for Photovoltaics Until 2015”.
Ray Tiernan of Barron's has repeatedly published reports about Italian solar subsidy cuts, such as:
However, the EPIA report shows that Italy will increase their PV installations from 2,321 gigawatts in 2010 to 3,000-5,000 gigawatts in 2011.
Here are other excerpts from EPIA’s report:

“Over the last decade, PV technology has acquired the potential to become a major source of power generation for the world. That robust and continuous growth is expected to continue in the years ahead.”

“Firstly, renewable energy is no longer considered a curiosity. PV has proven itself to be a reliable and safe energy source in all regions of the world.”

“Secondly, the price decreases that have brought PV close to grid parity in several countries have encouraged new investors.”

“The total installed PV capacity in the world has multiplied by a factor of 27, from 1.5 GW in 2000 to 39.5 GW in 2010 - a yearly growth rate of 40%. That growth has proved to be sustainable, allowing the industry to develop at a stable rate.”

“While growth in the EU in coming years could be low, or even negative, non-EU countries should more than pick up the slack from 2011 and 2012 onwards, ensuring continuous global PV market growth until 2015 and beyond.”

“With between 131 and 196 GW of PV systems likely to be installed in 2015, the forecasts are promising.”

“The future of the PV market remains bright in the EU and the rest of the world. Uncertain times are causing governments everywhere to rethink the future of their energy mix, creating new opportunities for a competitive, safe and reliable electricity source such as PV.”

Here are EPIA’s numbers for past, worldwide, annual installations in gigawatts:
Click to enlarge
Here is EPIA’s forecast for worldwide, annual installations in gigawatts, which includes a reduction in Germany and some European countries, but growth in most of the world:
Click to enlarge
In the conservative “Moderate” scenario, the solar market will decrease by 20% from 2010 to 2011. (Most solar stocks are Chinese, which are currently trading with P/Es of 3 to 4. If earnings for solar companies drop by 20% in 2011 because the solar market drops by 20%, then their P/Es would go to 3.75 to 5. Some critics may argue that earnings may drop twice as much as revenue. If so, then their P/Es would go to 5 to 6.7, which are still cheap even compared to value stocks.)
According to section “3.3.c Forecasts until 2015” of the EPIA report:

“The Policy-Driven scenario proved to be the most accurate one over the past years.”

Therefore, more likely than not, the market in 2011 will continue to grow. Maybe this is why several Chinese solar companies have stated that they expect growth in 2011, despite what Wall Street firms have stated. Examples:
JA Solar’s outlook for 2011 in 2010Q4 report :

“Based on strong customer demand for JA Solar's products and a number of new customer wins, the Company currently expects total cell and module shipments to exceed 2.2GW in 2011, representing an increase of approximately 50% compared to 2010…Sales contracts signed to date for 2011 delivery amount to more than 2GW, representing approximately 90% of the Company's expected shipments for 2011.”

JA Solar’s outlook for 2011 in 2011Q1 report :

“…shipments for full year 2011 remains unchanged at 2.2GW.”

LDK Solar’s outlook for 2011 in 2011Q1 report :

“LDK Solar reiterates its 2011 guidance of revenue in the range of $3.5 to $3.7 billion…” (Revenue for 2010 was $2.5 billion.)

China Sunergy’s outlook for 2011 in 2010Q4 report :

“2011 will be another year of growth”

Even if the revenue for Chinese solar companies is flat for one to two years, then they temporarily become “value” companies instead of “growth” companies. Nevertheless, as value companies, they would still be cheap with a P/E of 3 to 4.
If the market grows in 2011, as EPIA expects, then the Chinese solar stocks become even more ridiculously cheap.
In addition to this growth forecast for the overall market, the Chinese solar companies have been taking market share from manufacturers of other countries. According to the EPIA:

“…Chinese modules, reaching more than 50% of the global PV module production in 2010, against less than 15% in 2006.”

Therefore, the Chinese solar companies are growing even faster than the market and will become even more outrageously cheap. Read more on bubbles and inverse bubbles.
The above EPIA report, which includes a reduction in solar installation in Germany, was published before Germany’s announcement to shut down all of their nuclear power plants by 2022. Therefore, the EPIA report needs to be updated, and it is likely that their next report will show even higher growth.
Ben Sills and Reed Landberg of Bloomberg have reported about over-capacity with solar companies. However, they don’t give the full picture. Here is what EPIA’s report stated about over-capacity:

“All numbers mentioned … are based on announced production capacities. The announced capacity is typically higher than the actual capacity due to non-realised expansion plans or obsolete and non-competitive production lines. In addition, the average capacity utilisation is not of 100% because of downtime (maintenance, insufficient material and component supply), production facilities that are still in the ramp-up phase or simply because of a temporary lack of demand. Finally, contract manufacturing is becoming an important phenomenon in the PV industry, increasing the risk of double counting of the production capacities.

The existing overcapacity offers a kind of built-in flexibility that shields the PV industry from severe fluctuations in the current demand.

Once the demand has stabilised, further consolidation will bring global capacity utilisation to more competitive levels. In a recent report, PricewaterhouseCoopers shows that there were 32% more Mergers & Acquisitions (M&A) in the solar sector in 2010 than in 2009.”

Crime and / or incompetence has been rampant on Wall Street, such as the financial meltdown with CDSs and CDOs, insider trading, Ponzi schemes, front running, quid pro quo, manipulation and agencies giving AAA ratings to homeowners with no job, no income and no assets via CDOs while they would not give AAA ratings to most of the Canadian Banks which were making billions in profits (Read more here.) Some of these were committed by people in the biggest firms, such as Goldman Sachs, with the most power and influence over investors. Next time you read a report from Wall Street or anybody-- including myself for that matter-- ask yourself these questions:
  • Is it possible that the source of the report is not giving the full picture?
  • Is it possible that the source of this report has a bias, such as a long or short position, directly or indirectly?
  • Is it possible that the source of this report is trying to manipulate the stock?
  • Is it possible that the source is putting a spin on the news or giving half-truths?
Chinese solar stocks trading in the U.S. have been beaten down by numerous Wall Street reports over the past year. However, the Chinese solar companies have grown faster than the U.S. solar companies. In fact, they have grown faster than most U.S growth companies.
Revenue growth from 2007 to 2010 (approximately):
JA Solar (JASO): 337%
LDK Solar (NYSE:LDK): 379%
ReneSola (NYSE:SOL): 384%
JinkoSolar Holding (NYSE:JKS): 556%
China Sunergy (NASDAQ:CSUN): 120%
LinkedIn (NYSE:LNKD): 648% (derived from CNBC)
Priceline.com (NASDAQ:PCLN): 119%
Netflix (NASDAQ:NFLX): 79%
Salesforce.com (NYSE:CRM): 121%
Revenue growth from 2009 to 2010 (approximately):
JA Solar : 211%
LDK Solar: 130%
ReneSola: 136%
JinkoSolar Holding: 197%
China Sunergy: 82%
LinkedIn: 102% (derived from CNBC)
Priceline.com : 32%
Netflix : 29%
Salesforce.com: 27%

Revenue in 2010 (approx.):
JA Solar: $1,790 million
LDK Solar: $2,509 million
ReneSola: $1,206 million
JinkoSolar Holding: $709 million
China Sunergy: $517 million
LinkedIn: $243 million
Priceline.com: $3,085 million
Netflix: $2,163 million
Salesforce.com: $1,657 million
And according to the EPIA, solar companies have a bright future into 2015.
Yet, they are unbelievably cheap.
P/E as of approximately mid-day June 3, 2011 (from Yahoo Finance):
JA Solar: 3.17
LDK Solar: 3.02
ReneSola: 2.79
JinkoSolar Holding: 3.04
China Sunergy: 1.95
LinkedIn: 1,163
Priceline.com: 45
Netflix: 78
Salesforce.com: 311
For value or growth investors, Chinese solar stocks are currently selling at bargain prices and should be on their watch-lists, at the very least.

Disclosure: I am long JASO.

Continue to Part 2 >>