The chart above tells a particularly interesting story. Back in November of 2011, having been bearish on solar for some months, we argued that the market was finally beginning to see a process of rebalancing in the solar sector. A key component of this of course related to a number of announcements from Chinese solar players that they would bring a halt to new plans to expand capacity - at least until the end of 2012.
This factor, alongside the prospects for demand growth outside of Europe, led us to see the potential for a healthier market for solar as 2012 progresses. Nevertheless, it remains obvious that a powerful process of creative destruction remains in place, with low cost module suppliers likely to push out the weaker players.
As a result, our main call was for an outperformance and recovery of a basket of low cost tier one Chinese solar stocks - Suntech Power (STP), Yingli Green Energy (YGE) and Trina Solar (TSL). The chart above shows the performance of these stocks versus the solar ETF TAN - from the closing prices on Friday November 25th, ahead of the publication of our recommendation to go long on the following Monday.
Clearly the trade has worked well with all three stocks having performed strongly. STP, YGE and TSL are up 36%, 24% and 29% respectively. Moreover, what is most interesting is not just the recovery in the solar sector as a whole but the significant outperformance of these tier one Chinese solar players - must as anticipated. Whilst the the tier one Chinese solar players have seen a very strong performance, the overall solar ETF TAN is only up 5% - a reasonable recovery from the bottom but nothing to match the performance of China's low cost suppliers.
Of course, it is too early to suggest that this is a new trend. However, in many ways it does make sense and perhaps the market is beginning to pick winners and losers in solar's war of attrition as both costs and average selling prices continue to fall.
TAN v STP, YGE and TSL - 1 Year View
The second chart above also underlines the fact that this appears to be a new development. During the difficult period for solar over the past year, tier one Chinese solar stocks have, in broad terms, tended to follow the overall market - with Tan down -64%, Yingli doing slightly better at down -56%, and STP and TSL both under performing at down -66% and down -69% respectively. Against this past performance, the recent outperformance of tier one Chinese solar players looks like it may be a new development well worth following.
In terms of where we go from here, it's seems worth repeating our previous analysis pointing to a healthy rebalancing in the sector as a whole:
- On the demand side, the rest of the world has been making up for slack demand out of Europe. In particular, the latest data points to blistering demand in the US - more detail here
- Likewise, China and Asia are showing extremely strong demand growth - see our article on the issue here
- And most importantly, on the supply side, the major Chinese players have drawn a halt to their excessively aggressive capacity expansion plans - more detail here.
Finally, survey-based data from SolarBuzz also points to an ongoing consolidation in the industry. You can read a fuller discussion of this data here. In summary, the SolarBuzz survey conducted in Q2 of the current year, pointed to manufacturers' shipping plans of just over 8 GW of modules in Q3 of this year and almost 9 GW in Q4. The somewhat obvious result was oversupply, a continued inventory build and falling module prices.
However, in the latest SolarBuzz survey, conducted at the end of Q3, those numbers have fallen to just over 6 GW for Q3 and a tad over 5 GW for the final quarter of the year. This level of adjustment is precisely what is required to finally bring the industry back towards balance during the course of 2012.
All of the data above of course simply highlights this new realism on the production and capacity side of the equation. Taken together, these factors should allow the supply-demand imbalance currently facing the industry to be eroded as 2012 progresses.
Moreover, as consolidation in the industry progresses, the low cost tier one Chinese players should continue to outperform. We continue to recommend being long a basket of SunPower, Yingl and Trina Solar. Separately, we also recommended being long First Solar and would continue with that trade.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.