Why Jinko And Canadian Solar Could Benefit From Trina Delisting

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Includes: CSIQ, JASO, JKS, TSL
by: Sneha Shah

Summary

With Trina and JA Solar in the process of delisting from USA stock exchanges, Jinko and Canadian Solar could benefit, as investor dollars are redirected towards their stocks.

Both the companies gave good quarterly performances and a positive outlook for coming years.

Risks are weakness in Chinese stock markets and falling oil concerns.

Trina Solar (NYSE:TSL), Jinko Solar (NYSE:JKS), JA Solar (NASDAQ:JASO) and Canadian Solar (NASDAQ:CSIQ) are the best Chinese solar companies listed on the USA stock exchanges in my view. These companies are vertically integrated and are fast expanding into downstream business. Not only do they have a strong presence in China, but they also have a big footprint globally. These companies are also establishing South Eastern Asian production facilities to support international sales. They have given good returns, even at a time when most energy stocks were battered and have shown strong growth momentum. However, the market has failed to realize their potential and continued giving them depressed valuations because of their Chinese origin. In contrast, other western peers like First Solar (NASDAQ:FSLR) and Sunpower (NASDAQ:SPWR) continue to attract higher valuations.

As a result of this under valuation, management of Trina and JA Solar have separately decided to take these companies private. They hope that a relisting on Asian stock exchanges might give their due credit. After Trina Solar and JA Solar's delisting, Jinko Solar and Canadian Solar will be the best Chinese companies listed on the USA stock exchange. These companies could benefit as investor dollars in Trina and JA Solar could be redirected to their stocks. Given these companies are being valued at such low multiples, their stocks could see higher levels as well.

JKS and CSIQ could shine after TSL and JASO delist

Both JKS and CSIQ are currently trading at more than $20, while Trina and JA Solar are priced at ~$9 respectively. Note JA Solar had received a buyout offer at a price of $9.69 per share, while for Trina Solar it was $11.6 per share. If Trina Solar and JA Solar get delisted from the USA Stock Exchange, Jinko Solar and Canadian Solar will be the only decent mainstream Chinese solar stocks left for investors to benefit from the secular solar growth in China. Note Renesola (NYSE:SOL) is still trying to transform itself into a solar developer, while Daqo (NYSE:DQ) and China Sunenergy (NASDAQ:CSUN) do not have strong fundamentals.

Jinko Solar has been showing good performance in the last couple of years, with a reduced cost of production and increased electricity revenues. The company has been giving double digit gross margin from the last four quarters and also revised its third party shipments upwards. On the downstream side, Jinko connected 846MW of solar projects as of September 30, 2015. Though the debt levels are increasing, they are quite manageable.

Canadian Solar too has a strong pipeline of projects with a wide geographical footprint that will help it further consolidate its position in the industry. The estimated resale value of its project pipeline (2.5GW at the end of Q3'15) stands at more than $5 billion. The company is planning to more than double its wafer capacity and also increased its cell and module capacity in 2016. The company's Q4'15 gross margin guidance is at 13-15% and expects revenue to be in the range of $930-980 million which is well above a consensus of $774 million.

USA solar market is strong and growing

China is the largest market for solar panels currently. The country installed ~18GW of solar in 2015. USA is another large and growing market for solar energy. With the US government extending the investment tax credit, demand is going to increase for solar companies USA and Asia are the biggest markets for CSIQ with USA shipments comprising more than 50% of the total shipments in Q3'15. Jinko Solar is currently amongst the top three module suppliers in USA, as mentioned by the CEO in the last quarter CC. With the ITC now extended, USA is poised to witness more than 40GW cumulative solar capacity, entailing a growth of 25-50% by the end of 2016. This will give ample opportunity for these companies to further expand in USA.

These Chinese solar companies have industry leading manufacturing capacity, which will help in serving the large gigawatt size orders of the industry.

Production Capacity (in GW)

Jinko Solar

Trina Solar

JA Solar

Canadian Solar

Wafers & ingots

3

4.1

1.5

0.4

Cells

2.5

3.4

4

2.5

Modules

4

4.7

4

4.3

Click to enlarge

Decent Stock Performance

While the buyout offers have capped the prices of Trina and JA Solar, they still continue to give good returns. The prices plunged recently owing to a further dip in oil prices. However, the concerns over climate change will push the governments to support solar and I view this as a good opportunity for investors to build more position in these stocks.

Last one year performance of these 4 solar stocks

Click to enlarge

Source: Google Finance

Risks

a) JKS might also want to delist from NYSE - If Trina Solar and JA Solar get relisted on some Asian stock exchange and get good valuations, Jinko Solar might also decide to go the same road. This puts Jinko Solar in a favorable position to wait and watch the fate of its two Chinese peers. Though the buyout offers were made at a premium to their then trading prices, they are actually at a massive discount to what the true valuation could have been. I have always mentioned that these stocks are trading at dirt cheap prices, when compared to their western peers like First Solar and Sunpower.

b) Chinese stock markets have declined sharply - While Chinese solar stocks might command a better valuation, if relisted on the Asian stock exchanges, there is also a fear that the valuations might not be very realistic as was the case with Hanergy (OTC:HNGSF). There were huge losses, when the Hanergy bubble had busted. There is also a concern about the future weakness in the Chinese stock market. A sharp decline in Chinese stock markets affects the stocks prices of Chinese stocks in the USA exchanges.

c) Concerns about slowdown of the Chinese economy - A sharp slowdown in the Chinese economy could lead to low demand for solar products. This could have an adverse effect on these company's' earnings. Continuous falling oil prices will also negatively affect the prices of solar stocks. However, with governments taking the pledge to increase clean investment to save the environment, solar energy stands a solid chance to emerge as a winner amongst other energy sources. USA, Japan and India big solar markets which are growing at a sharp pace. Unlike in the past, the solar industry is not entirely dependent on one or two countries for demand growth.

Conclusion

I see the current fall in solar stock prices as a good time to build position in these Chinese stocks. With Trina and JA Solar in the process of getting delisted from the USA stock exchange, the investors will be left with only Jinko and Canadian Solar to take advantage of the secular growth of solar in China and other major emerging economies. While weakness in the Chinese stock market and falling oil prices are a concern, one must not forget the sunny future of solar energy. The recent Paris summit and ITC extension have further strengthened the world's stance towards solar energy which is set to grow at rapid pace. I remain bullish about this industry and would recommend building a position in quality Chinese stocks to take advantage.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.