Back in February, I did a webinar for Covestor and highlighted that renewable energy was my least favorite sector due to the expected reduction in subsidies in Europe. Witin the last couple of weeks, numerous US solar companies have gone bankrupt including the infamous Solyndra that US President Obama visited.
The biggest cause for the bankrupties has been the claim that China subsidizes their solar industry to the detriment of US firms. Considering the previous negativity on the sector, the thought crossed my mind that the collapse of competition and continued high prices of oil and gasoline might make the sector worth another look.
Reasons to Invest in Sector
- Reduction in competition leading to more stable pricing
- Weak environment eliminates new startups
- High costs of items attempting to displace
- Low stock valuations
The sector needs to see the above scenarios come to fruition to provide an attractive investment thesis. The real key that the sector needs is a reduction of competitors into the sector.
If renewable energy remains a sexy arena for investors, then it might have the same fate of the airline industry. Always popular to invest, but never profitbale to own. That remains my biggest fear as the other reasons for investing appear to be lining up.
Recent US Bankrupcies
The US has seen a string of bankrupcies in the solar industry over the last few months:
- Evergreen Solar (ESLR)
- Solar Power Industries
- Solyndra (so much for that $527M federal loan)
The above list is courtesy of the a Robert Castellano article. As I started reading the article, it was intriguing to read more data about pricing pressuse and capacity. The later part of the article left me less intrigued in the sector.
The article provided a great chart outlining the pricing trend. That slope is clearly in a downslope though it has flatlined lately. With most solar companies losing money now, flatlining isn't good enough. The second chart is what concerns us the most. The capacity increases in the sector are rather shocking. JA Solar (JASO) alone is doubling capacity in 2011 from the 2010 production levels. Yikes, the new capacity in 2011 alone will over shadow any lost capacity from firms going out of business. Assuming that capacity even leaves the market.
Review of Chinese Renewables Reporting Earnings
So now that it's apparent industry capacity is going to remain a major issue, lets check some recent results from renewable energy companies in China to see what the actual results and especially forecasts look like. Remember the US claims the Chinese are the problem, so going to the source might help understand the sector dynamics.
LDK Solar (LDK) - Leading vertically integrated manufacturer of photovoltaic products. Reported sales decreased 35% sequentially and nearly 12% YoY. Gross margins saw a dramatic drop sequentially from $241M to $11M leading to a substantial net loss after just reporting a nearly $200M operating profit.
LDK was rocked from policy revisions in Europe that reduced demand for solar products and hence impacted pricing. The company claims that average selling prices (ASP) have stabilized recently.
JA Solar - Manufacturer of high-performance solar cells and solar power products. Reported a 29% increase in shipments YoY and a 11% decrease sequentially. Revenue only increased 12% YoY and decreased 27% sequentially. Gross margins were negative and naturally the operating loss was horribly high at nearly 8% or revenue.
The CEO commented that results were impacted from lower installation levels in Germany and policy changes in Italy and sees signs of market recovery with both orders and volume shipments increasing. Also sees a reduction in raw material costs that will help margins.
China Ming Yang Wind Power (MY) - Leading wind turbine manufacturer in China. Reported 35% increase in commissioned units YoY, but only managed a 7% increase in revenue. Gross margains remained steady at 19%, but just about every expense line saw a dramatic increase leading to lower income.
Clearly demand remains strong, but the customers are getting the better deal currently making this investment unattractive right now. On the conference call, the CEO claims that ASPs have stabilized and are starting to pick up as the industry shifts to quality and efficiency.
Some of the companies going out of business might be helping the recent stability in pricing. The stocks would currently be appealing if enough supply could be removed from the market, but that doesn't even appear to be a remote posibility. Clearly capacity can be added too easily to make any of the stocks good investments at this point.
Robert's article was also eye opening regarding the state of innovation in the sector. It appears that my analogy regarding the airline industry might just apply to the solar industry. Innovation and competition remains strong regardless of return on investment in the sector. Any sector that becomes sexy just won't make invesors money in the long run.