Owning Coal Assets In China Could Propel Solar Industry

by: Kelvin Schulle

We have learned that China's Inner Mongolia province is implementing a new policy to attract renewable energy investment, which allows solar and wind energy investors to own a piece of its coal reserve and profit from it. The strategy has been seriously considered by the local government and it is in the final phase of negotiation with companies such as LDK Solar (NYSE:LDK), Suntech power (NYSE:STP) and Geely Automobile (HK-175). LDK CEO Peng and the Inner Mongolia governor have agreed that it is a win-win situation for both sides. According to a local newspaper OFweek, a solar company could own up to 5B tons of coal reserves by investing $1B on solar energy projects in the province. The total reserve of coal in Inner Mongolia is estimated to be around 723B tons, topping the nation. The company would then be allowed to sell the assets or develop mines with other coal mining companies. China's coal demand is the highest among the developed countries, this will provide a new stream of cash flow for solar companies to invest more in their core business and leave cash concerns behind. Suntech power is also considering investing in Inner Mongolia in exchange for coal assets. It is interesting to notice that China's largest automobile maker Geely Auto is investing RMB$22B in Inner Mongolia and will obtain 10B tons of coal in reserve. The current thermal coal price is around RMB$850/ton according to Shanghai merchandise exchange. This coal asset alone provides LDK Solar a value boost of roughly RMB$850B. It is worth noting that the province does exclude foreign solar investors, which is a good start for the whole industry. Companies such as Simens, General Electric (NYSE:GE), First Solar (NASDAQ:FSLR) and Sunpower (SPWRA) are also eligible for coal assets with minimum investment. Hanwha Solarone (HSOL) has been actively looking for opportunities in Inner Mongolia as the Hanwha Group of Korea is backing its ambitious growth plan financially.

China Heats up on renewable energy While the U.S. is still debating on a renewable energy policy (although demand in solar panels is rising quickly in U.S.), China and Japan have stepped forward to adopt solar energy in their future energy strategies. The rising demand of energy and the pollution of fossil fuel energy has given China an opportunity to promote renewable energy nationwide. Solar energy and other renewable energies are gaining momentum recently with the full support from the central government in its 12th five year strategic plan. A total of RMB2 trillion will be invested in the industry to build solar and wind farms in the western part of the country. China has pledged to shift the nation's dependence on energy away from fossil fuels.

Recently, China's Jingyuntong (CN:601908) had an IPO debut on the Shanghai stock exchange, trading at 50 times earnings of 2011, indicating a high demand of investment in the solar energy sector. This is contrary to what we have seen in the U.S. market. Currently, Asian investors value this company at RMB$13B (US$2.1B), roughly four times LDK Solar's or Suntech Power's market cap. However, its revenue is less than half of LDK Solar. LDK solar and Prax Capital are two major shareholders of the company. LDK is estimated to own a 35% stake. LDK is also planning on a polysilicon IPO later this year, which could be a surprise move for its investors.

China's 12th five year strategic plan kicked off this year. In the next five years, the nation will invest heavily in renewable energy to gradually phase out fossil and nuclear energy. The Inner Mongolia policy move serves as the first step to attract new investment in solar energy. Stay tuned, we believe more new developments on the solar energy front will come sooner rather than later from Asia.

Disclosure: Long LDK STP FSLR GE, and call/put options of LDK FSLR STP