The Trouble with Chinese Solar Companies
Chinese solar companies are beset with undervaluation and undecipherable volatility in spite of amazing growth in sales, net income and future contract commitments. It even seems irrational to many amateur investors, who can't determine the logic for comparative valuation to stocks like First Solar (FSLR) and SunPower (SPWR). The overwhelming theme of most submissions to Seeking Alpha is, "what's up - why the movement?" Even professional analysts appear confused with conflicting assessments and frequent reversals.
The obvious answer is: It is irrational. But it's also predictably irrational. Much like oil futures. Demand decreases, production increases, yet prices increase on rumor, while the same rumor one week later produces no effect. For example, both are cited as being driven by value of the dollar. Did the dollar go up 6% yesterday? That doesn't account for the sell off levels.
Are European solar subsidies teetering on collapse? Not likely. Will the trend toward solar subsidies increase world wide in spite of a given country's rumored pull back from subsidy levels? Of course, it's a macro-trend. More solar support is inevitable, especially by 2010. Perhaps even the US Congress will finally pass a bill by then.
So why are the Chinese solar companies undervalued compared to American companies like FSLR? Why are they so volatile in spite of consistent earning and sales improvement? Again, it's similar to oil, in my opinion. Many investors do not quite understand the near term dynamics of the situation, so they trade on rumor and momentum, even though the long term has a seeming inevitable outcome. Is China a reliable economic and political environment for business? Or will they somehow nationalize or confiscate the ownership of these businesses? (Answer; No, China's never looking back again from this economic success. They have taken the lesson of the Shanghai experiment and the absorption of Hong Kong to heart and it has shown the path. China will broaden theses effects throughout the country.) Even Cramer has irrational bias against China for this fear and lack of understanding of this historical trend.
Admittedly, financial disclosure in reading Chinese ADRs is more opaque by American standards, without GAAP reporting and SEC filings. Any China investor has to take a little bit of a leap of faith that the numbers are real. (I recently explained to a friend that I don't consider this as big a problem as he does because the penalty hanging over the head of a publicly held Chinese company CEO or Board of Directors is most likely more onerous than anything the SEC is likely to do to malfeasant American CEOs and Boards of Directors. It's unlikely that you'll see any ENRONs in China. In the United States, a CEO is more likely to get a "golden parachute" than go to jail for gross negligence or fraudulent insider activity. The penalty in China is likely a bit more draconian, after all.)
Will inflation kill the golden goose in China? Possibly, but how can analysts constantly predict the China slow down and simultaneously tout inflation as the biggest threat? China's problem is similar to ours; as oil explodes up, so does inflation; if it's pulling back, at least for awhile, then we and China will also feel relief on most of the COLI indices, along with the rest of the world. In the United States, we don't quite believe the solar revolution is going to happen, even though Europe is already in the throws of it. After all, Congress has had the renewables bill blocked or defeated 8 times this year; one candidate keeps talking about a nuclear reactor in every back yard, and our current energy policy is the product of an oil company's CEO's meeting in the back room.
Therefore, there is yet an element of unreality to solar in this country. (Incidentally, because of this, I consider the best current play to be Evergreen Solar (ESLR), constantly beat down for lack of net earnings, yet increasing 2008 sales by a factor of ten and manufacturing infrastructure to go with it. ESLR has the one advantage that no Chinese solar company has - it's American, and any likely renewables bill will undoubtedly favor American companies over Chinese. Ergo, the value play and the future momentum play is in this stock.)
Finally, volatility begets volatility. Burned once, you'll be very careful in the future, prepared to pull the trigger on any hint of implosion. When the stock seems to be moving in either direction, you don't want to be left behind. It may be trading for undecipherable reasons, but the direction is clear. All this means is, trust the fundamentals and your own analysis. If LDK Solar (LDK) has beat estimates by 200%, increased earnings outlook, never failed to surprise upside, has planned and completed vertical integration, manufacturing capacity and secured raw material, then it will be a winner in the end. (So trust your own analysis.)
Arguably the smaller companies may dilute holdings to underwrite expansion, but even China Sunergy (CSUN) and ReneSola (SOL) have shown that they can do this without ruining share earnings. Some might notice that, unlike many small, newly minted public American companies, in the first year mode undergoing extreme growth demands and vast new financial wealth after an IPO offering, the Chinese companies will quickly show positive earnings, and reasonable M & A components, and option gifts and insider trading is not a significant line item expense at the end of the year. (Compare that concern with virtually any new American pharmaceutical or hot sector IPO on the OTCBB. Such greedy behavior/malfeasance is not likely to be tolerated in China, and the CEO and CFO are not likely to be building an offshore bank account, unless their family lives in another country and their tolerance for a labor camp is very high.)
Chinese capitalism seems to be an oxymoron, and solar hasn't yet been bought into by many investors. Chinese inflation is a subject of constant speculation and the European market for Chinese wafers is the only tangible measure many analysts can identify. What's left to trade on? Momentum, that's what. I say trust your own analysis, trust the reported numbers, trust in the macro-trend, and (this may be a bit harder to do) trust in the fact that the new China miracle is not going to go retro because of some resurrection of Communist ideology intent on self-emulation. How do I know? How about the biggest two week display of newfound pride and affluence paraded before the world in what was supposed to be the Olympics, but actually turned out to be a Chinese coming-out party. Or did anyone fail to notice that?
Disclosure: Currently long in LDK, CSUN, and ESLR
Related Articles
|
Top Rated Comment Streams:
-
1.Hedged In660
- 2.
-
3.Smarty_Pants386
-
4.cos1000286
-
5.NOWHEREMAN273
- Free E-Newsletters
This article has 15 comments:
-
Cashman
-
6 Comments
Aug 28 07:00 AM-
bzh1111
-
15 Comments
Aug 28 07:50 AM-
gebby
-
186 Comments
My Website
Aug 28 08:11 AM-
rydhenn
-
1 Comment
Aug 28 09:35 AM-
kkin365
-
309 Comments
My Website
Aug 28 10:13 AM-
John Lounsbury
-
612 Comments
My Website
Aug 28 10:36 AM-
Ricard
-
158 Comments
Aug 28 11:41 AMHm...China solar stocks have an inverse correlation to the dollar. As the dollar rises in value, contracts that these companies have in Europe decline in value. Most China solar stocks don't sell to clients in China or America.
I'm sorry to say, you need to do more research before posting an article like this.
-
User 235613
-
6 Comments
Aug 28 12:03 PM-
playtohavefun
-
6 Comments
Aug 28 03:27 PMThe leaders of China and their political propaganda called that a socialist, but even themselves regard that as a lie. Marx must look at it in shock that you called it a communist.
As a matter of fact, USA today, according to Marx's standard, is more communist or socialist than China is.
-
TIRED
-
34 Comments
Aug 28 04:24 PM-
John Cordes
-
56 Comments
Aug 28 05:44 PMI wrote this article Tuesday evening, submitted Wednesday, published Thursday. At the close Tuesday most Chinese Solars were off between 5% to 7% for no apparent reason. However one reason offered was the affect of the strengthening dollar which is a factor in the foreign currency exchange for some of the companies mentioned; From a Reuter's article August 18th regarding TSL and YGE: "Monday quarterly earnings more than doubled on strong demand for solar energy, but its shares fell as results missed. Wall Street estimates due to a foreign exchange loss and the company said it has yet to sign contracts for all of its 2009 output." And: "Results were hurt by a foreign currency exchange loss of 24 cents per share and a loss of 8 cents a share associated with the discontinuance of its Lianyungang polysilicon project."
Thus one of the several explanations for Chinese Solars failing to reflect their large quarter to quarter and year to year sales and profit improvements in share price has been thus offered on the arguement that a stronger dollar and weaker Chinese Renminbi might be a key factor. Hence my comment that the 6% drop on Chinese Solars Tuesday cannot be accounted for by this alone or even in significant fraction. Keeping most investors guessing why the Chinese solars lost 5% to 7% across the board on Tuesday.l Therefore one is left with speculation from these reports, that share price should be discounted due to the affect of the pricing of contracts, silicon supplies and energy on the dollar. However each Chinese Solar company is different and it is difficult to ascertain how sales contracts are written at each and every company. Despite this fact, all of the Chinese Solars remain extraordinarily volatile and undervalued relative to their earnings performances, and all of the solars took an average 6% percent loss Tuesday, and erstwhile a substantial gain today. So I ask you, not withstanding the article above, do you have a better explanation for this than the one I proposed? Or do you have more thorough research you'ld like to offer?
-
John Cordes
-
56 Comments
Aug 28 08:27 PMI have recently tripled my holdings in ESLR because it is a value play insofar as it is valued very low in relation to future sales, i.e. 3.1Billion in new sales in the first half of the year. Also, ESLR should directly benefit from the eventual passage of a renewables energy bill, as their business lends itself to retail installations from residential to large commercial scale, which will be precisely targeted by legislation as tax credits to end users and supplemental support to local incentive programs. In addition, ESLR has remained quite cheap for the good reason that it has not shown a positive quarter in some time, but having tripled it's manufacuring capacity to meet the newly booked sales, further capital expense items will have already been expensed and priced into the stock. You can expect that the first quarter that shows a profit will send the stock off on a run. That, however may or may not be the upcoming 3rd quarter report due out Oct. 27th, but should occur at least by the next. Meanwhile you can count on legislation to improve enterprise value of the stock until then. If the Democrats do well in Congress this is guaranteed, regardless of the Presidential outcome.
-
Danno
-
28 Comments
Aug 28 08:47 PMIt seems to me that Q-Cells is quickly losing it's technological edge and will have to compete more directly with it's Chinese peers, and that Evergreen has licensed away a good deal of the upside of this market. What can you see in the Chinese and Taiwanese PV companies that is anything that supports a strong 3-5 year outlook (i'm not talking about these short-term trading chumps, but for investors)? I certainly don't see the R&D and innovation to suggest that they will be able to compete on any basis except prices which scares the bejesus outta me.
-
John Cordes
-
56 Comments
Aug 29 09:06 AMIn short your widget doesn't have to be terribly unique to be successful, you just have to have your widgets well postitioned at the right time and place with plenty of widget raw material available, a brand new widget manufacturing plant, and the growing popular belief that owning your widget or one like yours is the new way to go and might even save the planet. It also helps if the government will offer to pay part of the cost of owning your widget.
As to the Chinese PV group, yes there is similarity, however some or more established, have better balance sheets, more or less likely to create additional convertable senior debt, have greater production capacity in place, have more or less booked business, and have more or less manufacturing efficiencies. These are the reasons I prefer LDK over several others, and for smaller cap more speculative prefer SOL and CSUN. However I have to admit selling out half my position of LDK after the first 14.5pt run last week. I may have been premature it seems. Good luck.
-
Danny/The Digger
-
22 Comments
Aug 30 09:04 PMThe name of the game is making a profit, and exploit human resources and all other resources as necessary in the process.
The hell with the future, I want to make mine NOW! China is talking the same language we have been talking for years. And they are "walking the walk". We have our oligarchs that run the show (after the voting is over), and I'm sure the same happens (after they vote in their villages).
What interests me most is whether the US dollar drives the price of oil on the international market. And what would happen if Muslim oil exporting nations (which use the gold dinar to trade among themselves) decide its time the rest of the world uses gold dinars to pay for oil? Where will the US dollar be then?
Solar and wind are going to have to come-on gangbusters to have any effect upon that potentially devasting scenario.