Chinese Solar Companies Have Taken An Unwarranted Beating

by: Lucas Krupinski

The other day, the thought sprang on me to take a look at the solar energy sector. I think that bad news has a habit of punishing good companies, and with the solar industry, it’s been bad news aplenty recently, with the recent demises of Evergreen Solar, Solyndra (private company), and even the revelation of pollution at Jinko Solar’s (JKS) factory in China.

The first company I looked at was one of the big names, First Solar (FSLR). It's been on a downhill trajectory for some time now, but still trades at a P/E of just over 14. Nothing to write home about, so I moved on to another name I'd already heard of, Sunpower. It has two distinct ticker symbols (SPWRA and SPWRB). I don't know what differentiates the share classes, but they trade at earnings multiples of 41 and 37, respectively. Not exactly the bargains that I was hoping to find.

Thinking I was missing something, I broadened my search by simply typing "solar" into Yahoo's symbol lookup and jotting down the tickers on the ensuing list, including:

  • YGE - Yingli Green Energy
  • TSL - Trina Solar
  • JASO - JA Solar Holdings

These, I'm told, are the Chinese manufacturers that have commoditized the business. And this is where things get interesting.

First off, they trade at price to earning ratios in the range of 1.6 to 2.48. I discussed this with a friend of mine who suspected that perhaps all Chinese companies trade at such discounted values, owing to our suspicion of Chinese accounting practices and financial regulation. A quick visit to the Shanghai Stock Exchanges website shows that's not the case, as the exchange states right on its homepage that the average P/E ratio of their listed companies is 14.9.

But besides trading at such tiny multiples to their earnings, each of these companies now sells for a fraction of book value.

The recent charts and price declines (I’m not a chartist or technician) look like those of companies that are about to go out of business. But given that these companies remain profitable, this just doesn't seem to be the case. There is discussion that they're cutting prices so rapidly that they're destroying the margins and the market, but given their current wide margins, it seems like prices would have to decline quite a bit more from here for these valuations to be palatable.

First Solar and the Guggenheim ETF (TAN) have been marching downwards this year. But then, 20% of TAN is FSLR (a $7 billion dollar company and 13% is GCL Poly Energy Holdings (trades on the Hong Kong exchange at a valuation of $40 billion - if Yahoo is misreporting this number, please let me know) and really, only a third of the ETF contains the Chinese commodity plays.

So what do I think is going on? These are all very small companies (none of the market caps is over a billion dollars as of today), so there's just not much institutional ownership. That means the pricing is driven by the mood swings of the investing public. They've been hearing that the Chinese economy is at risk of overheating, they just saw our government almost gridlock itself into default, and they saw two high profile names in the solar industry go belly up - and have therefore quickened the pace of their selling.

Let's be clear - Evergreen and Solyndra were not commodity photovoltaic (PV) producers. Each was a very R&D centric company trying to come up with products that were more efficient than what's being pumped out by the low-cost suppliers in China. And their bankruptcies are being played up more for political points than anything else, I think. The Chinese companies I listed barely do any R&D and instead just flood the market with cheap PV cells.

So you had Evergreen and Solyndra competing with the no-names on the basis that they were trying to create superior products, and they failed in that endeavor. As a result, people in their panic to get out of anything bearing the name "solar" have sold off the winners of the battle, since the losers are already gone.

The market has not been terribly efficient over the last few years. When you see price swings of 400 points in either direction day after day, that's not a market efficiently pricing its assets, it's one where panic and greed are having a mighty game of tug-of-war. A few years ago, the market offered up amazing prices across the board, especially in the financial sector (WFC, USB, PNC, JPM - heck even BAC and C are trading at significant multiples above their 2008-2009 lows). And it wasn't just a phenomenon that was centered in the financial industry - AAPL, too, was a baby thrown out with the bathwater.

Action Taken:
Today, I opened the following positions with these weightings:

25% - Yengli Green Energy
25% - Trina Solar Ltd
25% - JA Solar Holdings Co
25% - Canadian Solar, Inc (NASDAQ:CSIQ)

Along with an almost offsetting short position of:

-75% - Guggenheim Solar ETF

The trades were done around 11:30, so just off their lows for the day. This is not a long-term position, as I simply have no idea who the eventual winner(s) will be in the ongoing price war among PV manufacturers. I do feel, though, that the market just coughed up some short-term bargains and that as time passes and the panics die down, the prices should stabilize and even rise back upwards.

I'm very interested to hear what other Seeking Alpha readers have to say about this, so please chime in.


Shanghai Stock Exchange

Guggenheim TAN ETF information and holdings

Disclosure: I am long TSL, JASO, YGE, CSIQ. I also opened a short position in TAN at the same time as when the above positions were opened. I am also short FXI.

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