Sunday, 18 May 2014 00:00

Not Sold on Solar Demand Collapse in China –Undervalued Situations’ Review Featured

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Not Sold on Solar Demand Collapse in China –Undervalued Situations’ Review Photo- AFP

the general opinion guilelessly sees more capacity being stacked against a perception of lower demand resulting in risks of module glut and lower ASP


I have followed Chinese-solar companies listed in the US for around five years.  One of the first truths I learned was that the fourth quarter tends to have the highest volume for the year. The second factoid was that the fourth quarter was followed by a considerably smaller first quarter. This pattern came from how the largest market at the time, Germany, operated due to winter.

Today, when a lot more countries build solar plants, including those with milder year-round climates, the situation is only somewhat different. Severity of the winter affects the industry with its outdoor installations.  Changes to policies also take place in the first quarter or a first part of the year. China’s FiT policies are still being established, and country private developers at large are holding back for more favorable rules. There is a particular buzz around distributed generation, as its 8GW target is a subject of controversy.

In the first quarter of the year, Chinese US-listed companies shipped to 73 countries, and among them, USA and Japan dominated the volume. China, which had some monstrous objectives for the year, had a limited presence.  While some of the companies expressed surprise how limited was the domestic market despite of already being perceived as slow, nobody showed hesitation when describing full- year targets, including hefty targets at home.

So is China’s demand in trouble?

I do not think so, and more precisely I do not think so for a selective group of companies, including most of the US-listed ones.

The solar industry collapsed before, in seemingly identical conditions. Companies started expanding, and speedy influx of modules eroded prices.  Even today, many believe that China has overcapacity. As an analyst of solar exports, I agree.  I saw 1GW of modules exported during Q1 by companies, that just ship fewer than one or two megawatts, but clustered together, they make up 20% of total exports.  Shipping abroad is only a result of existing demand, and global demand in Q1, was actually the best ever.  Q1 also had relatively good prices for all US-listed. Business was booming to a point that even smallest companies found the global output.  

Yet, the inventory from the same batch of second- and third- and maybe even fourth- tier  companies, in addition to those who cannot export outside of the country, drove the Mainland’s average selling prices down in Q1.

When it comes to China, the paradox here is that US-listed companies are not in the same price bracket, and their prices and even internal policies do not allow for sales at those levels. This, in combination with a lack of quality projects due to a “wait-and- see” approach by developers, is a reason, behind the level of demand in China for them, but in no way this is indicative of a malfunction. The other paradox is that while the industry is expected to integrate, the only methodology to achieve it is to eliminate easy access to credit and curtail opportunity to sell a product.  Under those scenarios, some companies will not be able to provide modules for solar plants or will make fewer of them.  If some of the government targets are not met because of this, does this become inexpedient for the industry? Of course not, and actually this means that the tier-1 hereafter- mentioned companies could benefit.

Another recent pressure on Chinese solar companies is the fear of outcomes in the US tariff investigation on Taiwanese cell, risk of India tariff and Australian study into solar product dumping by the Chinese. 

What is the impact of all tariff investigations?

The Ontario factory owned by Canadian Solar Inc.(NASDAQ:CSIQ) can satisfy all three markets today even after tariffs. JA Solar Holdings Co., Ltd. (ADR)(NASDAQ:JASO) and its partner in South Africa can do the same; JinkoSolar Holding Co., Ltd.(NYSE:JKS) also arranged to assemble modules in South Africa. Hanwha SolarOne Co Ltd(NASDAQ:HSOL) and its sister company Hanwha QCELLS cannot avoid the Indian tariff producing from Malaysia, but the 10MW sent there in Q1, could easily be replaced.  Trina Solar Limited (ADR)(NYSE:TSL) has not disclosed its plans, but it is not hard to believe that they will be able to address this in many ways, as soon as the decision and requirements are known.  Bottom line, those who are caught in some trepidation due to paralyzing tariffs, need to understand that the US has a duty against China already, and TSL, one of largest sellers of modules to the country during Q1, has one of the highest margins in the industry.

In March, I evaluated four companies: JinkoSolar, Canadian Solar, JA Solar and Hanwha SolarOne.  Three of those already reported. Under China’s perceived lack of demand and tariff pressure, all companies have performed poorly on the market; this is a quick look into those results.

Canadian Solar warned about GM and provided a revenue update in the preannouncement to the first quarter. Then, during earnings release, they delivered strong second quarter update, reaffirming guidance for the entire year.

Most of Canadian Solar’s money is made on solar plant sales, and their 15% blended processing cost is considered standard among peers.  Perhaps delivering $0.07 EPS in Q1 was a surprise for many, but the expected $0.70 for Q2, ten times the Q1 EPS, did not make a difference to investors on Friday. Stock was punished for the past performance, with the future ignored, while its potential is still intact. The company confirmed back-end loaded nature of business in China, CEO Qu, still showed a belief in 12 to 14GW domestic market in 2014, but did not show a lot of confidence in distributed generation market this year.

JA had done an excellent job on GM and on the number of shipments. In fact, JA and Canadian, exceeded their own volume predictions for Q1, beating the cyclical pattern. JA achieved its second consecutive quarter of positive earnings. JA Solar confirmed all its volume targets but frightened some with lower GM in Q2 as a result of an increase in domestic sales.  The company stated that Q2 drop in Chinese ASP could come back, when demand in China escalates, in the second half of the year. JA is planning shipment to ground-mounted projects mostly with less focus on DG.  

Contrary to JA, Canadian’s GM is coming back to levels of 19% and revenue level is expected to reach $590M in Q2.  There is a significant disparity leaning to the good, between Q1 result and potential of Q2 result in case of Canadian.

Hanwha Solar is the only company that was a disappointment in my view. First, the margin was below guidance, and second, the shipment was not the same as Q4.  While the company made operational profit, it lost more money than in Q4.  The company decided to expand to 2GW of modules, in line with others. Canadian added capacity to a total of 3GW of module. JA also added module capacity of 1GW and expanded existing cell lines by 300GW. Hanwha’s view on China has echoed the cyclical nature of the industry and desire of the developers to wait for a more favorable time to start projects, in order to gain more from state incentives.

In times of prosperity expansions are signal of growth. The current stock market does not agree those times are here. In my view, the general opinion guilelessly sees more capacity being stacked against a perception of lower demand resulting in risks of module glut and lower ASP. What is ridiculous is that, without capacity expansions, companies’ targets cannot be met. Furthermore, companies signal that a banking support is being offered at the level of each company and not industry. This means not everyone can expand, and those who expand see growing demand, not to be shared by all.

When thinking about Jinko’s result, no matter what that is, I suspect that the market will be not happy unless the company beats the gross margin or give better earnings. I do not believe this is possible.

I believe Jinko sold some 40% of its guided, and now confirmed volume, to China. I see that globally the company made a particularly large delivery to the US. Yet global ASP average, in my opinion, will be reduced compared to the last quarter of 2013. I also realize that 40% of the volume into China, in combination with global prices for the company in Q1, will reduce combined average ASP even more.

Jinko has FIT payments and retainage sales off the balance sheet. The second part essentially adds dollars to revenue, with no COGS. I suspect that despite those benefits Jinko could have a lower margin, and due to lower volume, markedly lower EPS than Q4. Due to poly pricing, costs for all the participants had gone up.  I do not see this situation to be different for Jinko. It happens that all three companies reporting to date are also buyers of wafer, which has gone up by some 2 cents per watt in Q1. Jinko, using its own wafers, remains relatively protected, at least for now, until GCL’s supply will be added after expanding its module and cell facilities later this year.

In my view, nothing has changed in the Jinko investment thesis for the 2014. The nature of the volatility JinkoSolar has experienced is probably being driven by the significant exposure to China, which now the market considers as a low-volume region. Secondly, distributed generation, which company described as 400MW pipeline during Q4, the market may perceive as risk, all despite the company’s guidance confirmation.

The market behavior sanctions a lack of trust, or most likely, exploitation of a potential doubt in standpoints given by companies.  The choice investors are making is one of the despair, which in my view is disengaged with industry’s business dynamic.

Lastly, I hope for Trina Solar to show worthwhile results this coming week.  The company lowered is volume guidance, but made it clear that gross margins will be in the range of 18 to 20%. In the size of net income, Nomura gave the company objective of $27M, and I think anything above $20M will be perfect while my own target is $0.33 per share. This will make Trina a #2 company for GM and EPS, after Jinko, but it is hard to know what the market will do with it.  Logic says that TSL will reconfirm the same yearly expectations once again and explain at least as favourable ASP for Q2 as it was for Q1. Any concerns on ASP could have abysmal consequences on the market. I would like to see more detail on solar plant construction in the EU since 23MW was added in the UK, to the already recognized 14MW in Greece, and 2MW, in Italy. Within 500MW of solar projects announced by Trina, 150MW are planned to be built globally.  Probably the best solution for the market’s jitters would be to focus on global plants and maintain the Chinese portfolio. Trina placed the delivery of its solar plants to the second part of the year, no different than Canadian Solar. Both companies have limited want to take part in the distributed generation sector, for Trina this is 10 to 15%, and I am not concerned if, but only when ground-mounted projects will be executed by every company reviewed here.

When I published my first articles on undervalued situations, Trina traded in the area of $15 to $16, being more in line of the value measured by price to earnings ratio experienced by the peer group. Today at $10.60, the company qualifies for the undervalued position with greater confidence than Hanwha SolarOne.  Trina’s efficiency ambitions illustrated by some $230M capital expenditures for 2014 and return to profitability is being offered at much of the discount and in line with three other undervalued situations.   

 

Read 3614 times Last modified on Saturday, 24 May 2014 08:16
Robert Dydo

Robert is the founder and CEO of SolarPVInvestor and SPVInvestor Research, Inc. His career spans more than 20 years in supply chain, managing and planning operations for distribution centers. An ardent private investor, Robert found his niche in contesting misinformation about solar in general, and the Chinese solar industry in particular, while using his finance education matched with a lifelong ardor for the stock market

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