Chinese Solar Stocks Offer Huge Gain Potential: 3 Week Report Card

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 |  Includes: DD, LDK, SOL, YGE
by: StockMatusow

On January 20th, 2012, I wrote an article entitled, "Chinese Solar Stocks Offer Huge Gain Potential." I felt then and still feel these stocks are grossly undervalued. Let's see how my 3 recommended buys here are working out. I will give myself an honest grade on the calls and offer more thoughts on this topic.

LDK Solar (NYSE:LDK) Jan. 20th PPS: $4.95. 52 week rage: 2.55 - 14.97. Avg. Volume: 2,264,920. Market Cap: 650 Million.

LDK 2/13/12 data: pps: $6.32. Market Cap:827.92M

Grade A+ Rather big gain in 3 weeks here, over 20%!

And for the good news, I expect at least another 15-20% gain to come.

China's government aims to double solar installations this year and has set preferential power tariffs designed to encourage manufacturers and developers to move into cleaner energy sources.

On Feb 9th, 2012, Eric Rosenbaum commented in his article for The Street about the latest Chinese solar rally:

Talk to many solar analysts and balance sheet risks still weigh heavily on shares of Suntech and LDK, while the need for consolidation among Chinese solar manufacturers makes it difficult to make a long-term call on any of these companies.

Either these analysts are not all that sharp, or they are caught short, because the view espoused above is rather senseless in my opinion.

First off, many of these analysts are weary of the high debt some of these companies have incurred. Do they forget that communist China, a still fast growing economic power, subsidizes these companies? Right now, the world, especially the EU Zone, needs China to potentially buy up their debt in their on-going bond auctions. Therefore, who will call in these solar company's debt? China, who already basically owns these companies, and who may be in the future, holding depreciated PIIGS bonds with a forced 50% haircut or higher? The PIIGS, although they may need China to buy up their bad debt? I do not think the PIIGS need their chickens coming home to roost anymore than they already have been.

These analysts seem to perhaps be forgetting these factors in their analysis.

Furthermore, solar stocks in general are cyclical, as the demand for solar products are almost always higher in Q1 and Q2 of each year, before the hotter summer months kick in. Why are these analysts even attempting to gage the long term prospects of these companies? I wonder if they ever heard the old stock market Halloween indicator, "sell in May and go away, stay away till Halloween." It is my strong opinion these analysts are whiffing out in their opinions of Chinese solar companies.

Let's take a look at the current LDK balance sheet and see if these solar analyst's opinions on the LDK balance sheet holds water;

Financial Highlights
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Fiscal Year
Fiscal Year Ends: Dec 31
Most Recent Quarter (mrq): Sep 30, 2011
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Profitability
Profit Margin (TTM): 2.95%
Operating Margin : 14.11%
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Management Effectiveness
Return on Assets : 3.80%
Return on Equity : 8.45%
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Income Statement
Revenue : 2.66B
Revenue Per Share : 20.29
Qtrly Revenue Growth (yoy): -30.20%
Gross Profit : 557.84M
EBITDA : 543.27M
Net Income Avl to Common : 78.47M
Diluted EPS : 0.75
Qtrly Earnings Growth (yoy): N/A
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Balance Sheet
Total Cash (mrq): 262.55M
Total Cash Per Share (mrq): 2.00
Total Debt (mrq): 3.62B
Total Debt/Equity (mrq): 257.05
Current Ratio (mrq): 0.69
Book Value Per Share (mrq): 9.13
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Market Cap (intraday): 827.92M
Enterprise Value (Feb 14, 2012): 4.18B
Trailing P/E (ttm, intraday): 8.45
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As anyone can clearly see, their opinion in fact holds no water, except where it comes to debt, and I already covered that one. Note the market cap for LDK, coming in at 828 million. The stock is selling for $6.32, with a trailing PE of 8.45. Note the Q3 negative growth; typical as I stated prior about these stocks being cyclical. Losing some European subsidies certainly did not help to make things better.

ReneSola (NYSE:SOL) PPS: $2.35. 52 week range: 1.45 - 13.25. Avg volume: 1,620,490. Market Cap: 204 Million.

SOL 2/13/12 data: pps: $2.97. Market Cap: 257.84

Grade A

Let's look at The ReneSola balance sheet;

Market Cap (intraday): 257.84M
Enterprise Value (Feb 14, 2012): 671.02M
Trailing P/E (ttm, intraday): 2.87
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Financial Highlights
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Fiscal Year
Fiscal Year Ends: Dec 31
Most Recent Quarter (mrq): Sep 30, 2011
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Profitability
Profit Margin : 8.28%
Operating Margin : 12.18%
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Management Effectiveness
Return on Assets : 5.14%
Return on Equity : 17.14%
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Income Statement
Revenue : 1.18B
Revenue Per Share : 13.64
Qtrly Revenue Growth (yoy): -47.30%
Gross Profit : 347.96M
EBITDA 6: 219.63M
Net Income Avl to Common : 98.07M
Diluted EPS : 1.03
Qtrly Earnings Growth (yoy): N/A
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Balance Sheet
Total Cash (mrq): 408.12M
Total Cash Per Share (mrq): 4.70
Total Debt (mrq): 822.16M
Total Debt/Equity (mrq): 130.27
Current Ratio (mrq): 1.00
Book Value Per Share (mrq): 7.27
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Cash Flow Statement
Operating Cash Flow : 69.24M
Levered Free Cash Flow : -31.67M
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The stock is selling for $2.97. Does the balance sheet above look to you that it should be selling for this low a price?

My fellow Seeking Alpha author Investing Hobo, commented in his article about ReneSola:

Unlike its closest structured U.S. listed Chinese solar peer, LDK Solar, Renesola chose to remain in large degree an upstream silicon wafer supplier whereas LDK and many other peers shifted to a more fully integrated manufacturing model. As described in a previous article, silicon wafer pricing has collapsed since the start of May leaving many single vertical producers little hope of generating enough gross profits to maintain corporate profitability. As inventory liquidation by defunct companies drove spot market average selling prices("asp") for silicon wafers below production cost even for the most efficient producers such as SOL, gross margin collapsed.

It does appear to me however, that Silicon Wafer demand is picking up again, and the pricing should follow suit.

I encourage readers here to read his article as he writes a very informative and in-depth piece about ReneSola. I am not sure I entirely agree with all his analysis, nonetheless, he proves to be a very informed and intelligent writer where Chinese solar companies are concerned.

Yingli Green Energy (NYSE:YGE) Jan, 20th PPS: $4.45. 52 week range: 2.75 - 13.59. Avg volume: 3,349,870. Market Cap: 703 Million.

2/13/12 data: pps: $5.29. Market Cap: 836.85M

Grade A

Yingli has also seen a nice gain since my original call on Jan, 20th.

On Feb. 13th, 2012, YGE agreed to buy $100 million of solar materials from E.I. DuPont de Nemours (NYSE:DD). Under the terms of the agreement, Yingli will purchase photovoltaic materials including DuPont Solamet photovoltaic metallization pastes used in solar modules and protective backsheets for solar modules made with DuPont Tedlar polyvinyl fluoride film.

Business is looking up for DuPont as well as they expect their solar photovoltaic market sales to reach $2 billion by 2014 from about $1.4 billion in 2011. Dupont and China-based Suntech Power Holdings Co., the world's largest solar panel maker, signed a similar agreement on Feb. 1st of this year. Seems to me that the reported demise of the solar industry has been greatly exaggerated when looking at deals such as these 2 above.

Let's look at the latest Yingli fundamentals;

Financial Highlights
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Fiscal Year
Fiscal Year Ends: Dec 31
Most Recent Quarter (mrq): Sep 30, 2011
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Profitability
Profit Margin : 6.71%
Operating Margin : 12.57%
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Management Effectiveness
Return on Assets : 4.92%
Return on Equity : 11.55%
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Income Statement
Revenue : 2.57B
Revenue Per Share : 16.33
Qtrly Revenue Growth (yoy): 29.70%
Gross Profit : 630.19M
EBITDA 6: 419.21M
Net Income Avl to Common : 172.18M
Diluted EPS : 1.07
Qtrly Earnings Growth (yoy): N/A
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Balance Sheet
Total Cash (mrq): 940.08M
Total Cash Per Share (mrq): 5.94
Total Debt (mrq): 2.19B
Total Debt/Equity (mrq): 125.95
Current Ratio (mrq): 1.03
Book Value Per Share (mrq): 9.05
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Cash Flow Statement
Operating Cash Flow : N/A
Levered Free Cash Flow : N/A
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Yingli has more revenue and cash respectively, than their 836 million market cap! Should this stock really be selling for $5.29 a share?

Giving myself a straight A, 3 week report card really was a no brainer here. Chinese solar companies are still grossly undervalued, and have a long ways to go before they are selling at true fair value in my opinion.

Chinese solar stocks are where investors need to be looking much more closely at for huge gains for the first 2 quarters this year. I gave 3 of these stocks for consideration. With careful due diligence, I am sure you will find many more grossly undervalued Chinese solar stocks for massive gains. Consider going long with these until May, sell and go away, and come back after Halloween to pick up the shares on the cheap again; rinse, lather, repeat.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SOL over the next 72 hours.

Disclaimer: This article is intended for informational and entertainment use only and should not be construed as professional investment advice. Always do you own complete due diligence before buying and selling any stock.