Chinese Solar Stocks Present Compelling Value 38 comments
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I believe many Chinese Solar companies like Trina Solar (TSL), Yingli (YGE), and LDK (LDK), are good buys after the recent sell off. A few trading days ago, (July 3), Trina traded as low as $26.40, Yingli as low as $13.57, and LDK as low as $29.72. Currently, I am buying at or close to these price levels. I am confident that all of these stocks will be higher in the coming months and years. I am also reminding myself that anyone who sold these stocks in prior sell offs around these prices, didn't have to wait long before regretting it, as they went much higher in a very short time.
In the past two weeks, a small perfect storm has forced solar shares much lower. There have been analyst downgrades and concerns over secondary offerings, speculation that Spain might cut subsidies, and in general, a steep sell off in Chinese and US equity markets. These stocks seem to be highly susceptible to fear, greed, analyst remarks, and speculation. One recent concern has been secondary offerings. If banks that are losing billions can raise additional capital, (even when trading in the single digits) I think it is likely that these fast growing and profitable companies can too, so secondary offerings are to be kept in perspective. As far as downgrades or other speculation goes, if you owned one of these fast growing and profitable companies outright, would you sell it for about half of what it was fairly valued at 3 weeks ago because some outsider/analyst said so? (And quite possibly to the very same outsider or firm who told you to sell your company/shares cheap?)
I think all of the above concerns are mere speed bumps for these companies to roll right over in the coming months. The fundamentals for solar are so positive, and the sales growth is so rapid that I believe any of these problems will be short lived.
I think oil will come down at some point and that may affect solar however, I think solar will continue to grow rapidly as solar prices come down and concern over the environment and energy independence (from foreign oil) continue to gain importance. A few years ago, a Toyota Prius was not a "mainstream" car but today it is. I think solar will go mainstream in the US over the next several years.
For some perspective on what potential Trina Solar or these other stocks might have I looked at the chart of MEMC Electronic Material, Inc. (WFR) which traded around $7 per share between 2004-2005, and as high as $96.08 in the past 52 weeks. WFR has a current market cap of about $12.5 Billion and posted revenues of about $1.1 billion in 2005, $1.54 billion in 2006, 1.92 billion in 2007 and according to Yahoo Finance, has an average estimate of $2.36 billion for 2008.
If you analyze these numbers you can see that WFR had about $1.1 billion in revenue 2005 which is close but slightly less than the 2009 estimate for Trina Solar which is estimated at $1.24 billion. You can also see that WFR had an increase in share price from a low of about $7 to as high as $96.08 between 2004-2008 which is more than a ten fold increase. I see no reason why Trina Solar (or some others, like YGE or LDK) cannot potentially enjoy similar revenue growth rates and a market cap increase over the next 3-4 years that WFR has experienced.
Trina Solar has a current market cap of (only) about $725 million. It seems reasonable to me that TSL, in the next few years, could post similar revenues and profits as WFR will this year (WFR revenue estimated at $2.36 billion for 2008) and when it does, why wouldn't TSL have a market cap much closer to the current $12.5 billion market cap WFR currently has, rather than the $725 million TSL has now? (I realize that WFR and TSL are not perfect matches, as they have different management and gross margins, etc.)
Over the last few years, WFR experienced stock price corrections, analyst downgrades and other concerns, only to overcome and climb higher. If you owned WFR and sold out when the share price or stock market corrected, or when an analyst downgraded it you may have avoided any additional downside but you would have missed the huge gains it has registered since. WFR reached a market cap of about $20 billion when shares traded at $96. The current market caps of TSL, YGE and LDK leave significant profit potential if they reach even half that one day.
These stocks appear to have very good fundamentals, positive earnings, and low PE ratios. Sure, there are risks and company specific challenges as with all companies and stocks, but I don't think solar or these companies have seen their finest day yet, and I want to have some of my money invested in them when they do....These stocks could get even cheaper if the market or other forces impact them in the short term, but I think any downside will be short lived as revenue growth drives these higher.
While I cited Trina Solar in most examples, I am also buying LDK, YGE and the solar ETF (TAN trading around $23) at their current price levels. In summary, I believe the long term fundamentals of these and other solar stocks powerfully outweigh the short term problems that arise in any fast growing business.
Any investment in these or other stocks has risks and you should research them thoroughly to verify if they are suitable for you. Chinese and solar stocks can be very volatile and the ideas above simply represent an opinion, and the beliefs of one person, not specific investment advice. Numbers and statements above are sourced primarily from Yahoo Finance, are not guaranteed, and should be verified for accuracy before any investments are made.
Disclosure: Long YGE, TSL, and LDK stock and options.
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if we'll get growing demand next year for silicon from the semiconductors industry, WFR will probably go balistic while TSL will go down hill.
for this reason alone they can't be compared and there are other reasons which i won't even mention.
i am a solar fan myself, but i am realistic and as long as the markets are bearish there will be negative premium for high growth high risk companies.
Plus, WFR isn't even a pure-play solar company. Much of their revenue comes from supplying other, more traditional semi-conductor needs.
Investors be warned; comparing these two companies as the author does is just wrong.
I was comparing only a very few points between these companies like the revenue levels and potential growth rates and the wide spread between their market caps, NOT their products, margins, management etc....
Please don't read into the mention of WFR too much, as the title states, the main point of this article is about the recent decline in solar stocks, and their long term potential.
Anheuser-Busch just got sold to InBev in Belgium which itself has about the size ofpopulation of Toronto. How did this happen? AB has been a great sports advertiser. I doubt InBev will feel the same need as they have no image to protect. Greed is the answer to that question. Greed is the reason all of these banks are failing now, housing is down, you name it. There' just no other way to look at it. You can disagree, but that's the truth.
People need to get down and dirty, believe in America and back our own companies first again. There is NOTHING wrong with trying to help yourself and your country, like Kennedy proclaimed. Then, maybe with the extra money we have, go make investments overseas. It is improper to be even thinking about investing over there when we are struggling here!
Investing in oversea companies in this time of economic uncertainty is selfish move, not that investing in US-based companies is not, and an insult to all of the people who have been working hard to hang on to our jobs here. Forget about a little pocket change and help our on team for a while, or no one needs to be complaining about anything.
So. FSLR. What do you think about Cramer's recommendation of this American-based solar stock?
if you guys don't know what you are talking about concerning Trina's Poly positioning...I just wouldn't talk about it...So yeah Rana and Vitamin J do some research or just listen to the CC but thinking or doing some research before you talk is always a good idea:)kind regards from Germany CW
PS good article though some tough comparisons to make:)
Long ABX, CSIQ, TSL
Some mostly USA Solar to consider: ENER, FSLR, ASTI, & SPWR.
there is no talk about TSL (which i'm long) poly positioning but what if..
with that said, it seems you don't know how poly contracts work, so you better learn them first and than we can talk about possible scenarios.
My main point wasn't to bash Trina, but to call out what I felt was a fatuous comparison with MEMC in the article.
I think the Chinese solar module manufacturers will outperform on the next bear market rally, probably during this earning season.
Again, no one is stating a direct across the board comparison between any of the companies mentioned, I just picked one company (WFR) to draw very specific and limited similarities out and to show that long term investors in many companies are easily shaken out with downgrades, short term problems, etc. which can be the wrong move. WFR was downgraded a couple years ago which caused some to sell before a huge gain and that was the other point of mentioning WFR.
Dicki, thanks for posting the disclosures on your positions. I encourage everyone to do the same.
By comparing apples to oranges or WFR to TSL, it certainly doesn't create a statement to mean they are the same. The article clearly states they are not perfect comparisons and limits the similarities to a very few specific points.
I think YGE, LDK, and STP are enticing, but you can buy ESLR and SPWR, each of which have better technology, a similar valuation (ESLR to YGE and SPWR to STP) and should have the weak $US at their backs for some time to come.
In the end it's a technology business and a margin business and the Chinese solars have niether.
Good luck
The U.S. will become a much better market for solar and wind, as the politics of energy improves. The amount of dis-information about energy is astounding. Basicall, we are being told that alternatives can't do the job, which is false. We are told we need to drill offshore and in ANWAR which are smokescreens for business as usuall. When people start listening to people like T Boone Pickens, when he says we can't drill our way out of this mess, there will be a mass revelation, and people won't be happy when they learn how much they have been fooled, for the sake of the oil industry and other established powers that be.
To see what oil is really doing to our economy, go to:
www.setamericafree.org...
And to see what we can do right now to solve the problem, go to:
www.setamericafree.org...
A Blueprint For U.S. Energy Security
To Vitamin J indeed that comparison is a bit far fetched as I stated before...And I was having quiet the poor day and when i read your guys' comments...you know how it goes:)
@Eric Rulmat - I think you are absolutely right if you are looking for value(yes I said value in the same sentence as solar shares)/growth it is the right time to go for it...These companies trading at these ridiculous P/E ratios...
And they (analysts) say it is bad to invest in Solar because of Spain, and its potential introduction of a 250 MW cap....anyone making that assumption is clearly uninformed about Spain....If they do introduce a cap, which I doubt, it will be around 750 MW(Spains solar industry just simply won't let it happen and many other reasons for that matter)....what could happen is that they slash incentives by 20-30% which wouldn't hurt the Spanish market as much as one would expect(at least in Spain due to its perfect placing on the "solar map")....And the next boom market for solar is Italy which will be the next Spain....And Trina's positioning their is absolutely marvelous as you can see in the contracts signed in the past few weeks their...I think Trina and SPWR (due to the acquisition they made last year) have the best position in that rapidly expanding market....
I think it is quiet obvious...that companies that grow 100%(sometimes more, sometimes less) y-o-y need some money in order to finance their rapid expansion...Obviously they burn more money than they take in at the moment...How could you not with ramping of X amount of lines a year and investing in long-term poly contracts...expanding capacity in some cases three or four fold...(sometimes less but certainly not the point)...Alternative energies are there to stay....
The last advanced country that has to make the step is your guys' country(and your little/big brother the UK...depending how you look at it;))...And it is quiet shameful what is happening with renewables in the US....and I certainly love how everybody complains about Gas prices/Oil prices but nobody looks for solutions...the next "great" American plan is to drill in Alaska....that is the solution...is it really?Quiet impressive:)In any case we are not here to talk politics, otherwise I probably wouldn't stop typing in any case;)
To bring this long post to an end...As you stated the main point you were trying to make is that the companies in the solar industries are just hitting speed bumps...and that is certainly the case...Would I sell my shares because of that no way...Each day is another day shopping for solar shares at ridiculous valuations....The more the American public, and the world(besides the EU), gets involved and begins to grasp what Solar can do for us in the long term the greater will be our returns so enjoy because I do not know how many oppurtunities you will get buying shares at these prices(not saying it couldn't go down a bit more in this bear market but I think we are close to bottoming out)....Kind regards from Germany CW
PS @All....I do encourage you to read Jack Jetiv articles about the solar space I have been involved quiet some time...with plenty of different stocks...But both TSL and CSIQ were his picks(well he wrote some articles and I got more informed about them and tend to agree with him in most things)....With one working out quiet well the other one lagging...But IMO he has a great understanding for the industry....But also bigger companies besides the ones Jack mentioned are worth other looks....with SPWR(probably the best managed company in the whole solar space),LDK, STP...Please beware of FSLR everyone.....check out all the facts there are....Cheap doesn't mean good:)(certainly not meaning their valuation,but the cost of their inefficient panels when size of the area is constrained)
Long ABX, CSIQ, TSL (No shorts at the moment but if FSLR hits $300...)
Dicki: Excellent posting and great to see more of the European perspective. I also have enjoyed Jack Yetiv's articles.
My concern with Eric's thesis is that I believe the solar field in TWO years (not to mention five years) will be so different than it is now that it is very difficult for ME to predict what all the solars' sales and earnings will be. For example, if Nanosolar indeed does what it says it can do, I believe that will have a giant impact on the solar industry. Other companies are also working on disruptive technologies, and without inside information (which I do not have since I am not an insider to the industry), I simply cannot separate the wheat from the chaff.
I can only look out 6-12 months with any level of precision, and I believe the best risk-reward plays today (based on that 6-12 months out look) are SOL, TSL and CSIQ, with a nod to SOL.
Yes, this space offers risks, as we all know, but I think those risks are amply compensated for when you are buying--at a PE of 10-13-- companies that will about double their earnings from 2007 to 2008, and tack on another 50-60% of earnings in 2009.
I think ENER and FSLR are waaay too rich, which is not to say I would short them--the market can stay irrational far longer than we can stay solvent, as the saying goes.
ESLR may do great--or it may bust.
SPWR and STP are not as rich as ENER or FSLR, but don't offer enough of an advantage to induce me to pay their higher PE's in the 20's and 30's.
YGE, JASO and SOLF are fine companies, but at such attractive PE's as SOL, CSIQ and TSL.
Finally, LDK might turn out to be an ass-kicker if its fab starts up fine and makes the projected amounts of poly in 2008 and 2009. But if it misses, LDK will be dead money for at least a couple of quarters. Yes, LDK has executed pretty well previously, but again, I consider SOL, CSIQ and TSL somewhat less risky.
In general, I believe this earnings season will be great, and I believe most of these stocks will go up at least 20-30% in the next month, and one or two of them will rise substantially more (a double out of SOL wouldn't shock me, and a 50% run out of TSL and CSIQ wouldn't either).
As to incentives and such, let me say that the solar "genie" is out of the bottle. Even without any new incentives and even if current incentives were reduced (as Germany's have been by about 8% per year, and as Spain's probably will be), the number of places where solar achieves grid parity will grow substantially over the next few years. The reason is that (a) conventional sources of power (nat gas, coal and even nuclear) have doubled in cost in the past year or two, and (b) once carbon-generation is fully included in the cost of conventional power generation, we will find that UNSUBSIDIZED solar will be cost-competitive with conventional power sources in locales with a good solar resource.
Having said this, I believe that the total amount of solar incentives around the world will GROW (NOT decrease) over the next few years. For the last few years, all we have heard about is Spain and Germany. All of a sudden, we're hearing about Italy, Korea, Australia and most importantly, China itself, as new customers for solar.
I also think the US will come on board, and in a big way. I believe it is a mistake to look only at FEDERAL tax credits in the US (which are up in the air at this time). The states are far ahead of the federal govt, and at last count, 29 states have RPS's (Renewable Portfolio Standards) which require utilities and power generators to generate a certain percentage of their energy from renewable sources. In addition, many states have substantial subsidies for solar PV (Calif, of course, is the leader there) and I believe more states will adopt solar incentives.
In summary, I believe upside potential is substantially greater than downside risk, at least in the next month or so.
Once earnings season is over, I will write another summary article looking at this space and giving my updated thoughts at that time.
Jack Yetiv
Jack
Vitamin J: You may have misunderstood the intent and extent of my comparing TSL and WFR. I am not the only one to make limited comparisons between TSL and WFR:
I am sure some are familiar with the "Solar Stocks Comparison Table" put out by the China Analyst website in which some market cap, revenue, and estimate comparisons are made between TSL and WFR as well other "solar stocks". It is a easy way to keep track of market caps, etc., and can be seen at:
www.cnanalyst.com/sola...