Brady J.'s  Instablog

In Q2, pretty much every solar panel manufacturers reported surprisingly better than expected results because increased demand outweighs the decreased ASP's impact on major players' top line and bottom line. Comparing with that situation, results in Q3 is mixed, ASP is still in downtrend, demand still exceeded supply, however, from trading perspective, even though major players' actuals beated wall street expectations, market sentiment has become much more volatile than Q2, stock prices were beaten nontheless after earning beats.

There are yet more to the rich solar story, polysilicon panels is gradually taking away the cost advantages of thin film panels, indicated by First Solar (FSLR)'s dropping gross margin by ~6% over the quarter due to the company's reaction to fierce price competition put up by its polysilicon panel competitors.

Looking forward, rapid ASP reduction is still expected until year end 2009, as SunPower (SPWRA) expected ASP to drop another 10% in Q4, demand will keep going up as a result of dropping ASP makes solar energy more affordable. These two forces will continue to have opposite yet strong impact on the earning power of all players in solar industry.

Since last November, China Shanghai A Share Index (SSEC) has staged a powerful rebound from around 1700 to a recent high of 2650, a 50%+ gain.  There are a couple of investment vehicles available to US investors to get exposure to SSEC, among them, Morgan Stanley China A Share Fund (CAF) is one that dedicated to SSEC most, with 90% exposure to A Share stocks traded on Shanghai Exchange.

The CAF is a closed-end fund that invests in large cap, growth type companies, with 55% exposure to Services (among which, 34% was on Financials), and 45% to Manufacturing.  This asset allocation is on constant change, you may check the latest holding on morningstar.com.

Despite its 90% exposure to stocks traded on Shanghai Stock Exchange, CAF recently dropped heavily, broke its trendline to the downside, while SSEC only dropped slightly and was maintains its up trend, see chart below

Then why the divergence?  The chart below is percentage change of CAF and SSEC in one year time frame.

Since CAF is not an ETF tracking SSEC index, but a fund that invests in component stocks there, naturally CAF is not 100% tracking SSEC.  The truth is CAF follows SSEC directionally, but beta (sensitivity of change in CAF price to the change in SSEC) alternates across 1 over time.  CAF has just went through an over-sensitive period (beta > 1) relative to SSEC from early March to now, it’s now switching to less sensitive mode.

Another reason for this to happen was that even though CAF is almost all about Chinese market, since it’s traded in US, its performance is affected by the US market sentiment.  As S&P 500’s March- May rally ran out of steam, CAF also got affected negatively.

Author holds long position in CAF