Why Solar Stocks Are Popping Today

China has found a solution for it's ailing solar industry. No, it doesn't involve letting companies fail, as I've suggested in the past. The solution is -- drumroll, please -- more subsidies.

China's Xinhua News Agency reported that the Ministry of Finance allocated $1.1 billion to subsidize solar projects, bringing total subsidies for this year to $2 billion. Shanghai Securities News says officials doubled their target for solar installations. And finally, the Ministry of Science and Technology confirmed that it will provide subsidies to 100 solar companies, including Yingli Green Energy (NYSE: YGE  ) and Trina Solar (NYSE: TSL  ) , to build 2.8 GW of capacity.

The varying reports tell us one thing for sure -- China is trying to fix the supply glut in solar by installing more solar and is using subsidies to make sure that happens.

The market goes nuts
The reaction from the market today may make you think that all of the solar industry's problems have been magically solved overnight. Chinese stocks jumped by double digits across the board on simply the possibility of winning some of this business.

Company

Percentage Move Today

Suntech Power (NASDAQOTH: STPFQ  )

+14.4%

Trina Solar

+18.8%

Yingli Green Energy

+21.6%

Jinko Solar (NYSE: JKS  )

+21.4%

ReneSola (NYSE: SOL  )

+14.8%

JA Solar (NASDAQ: JASO  )

+19.9%

Canadian Solar (NASDAQ: CSIQ  )

+14.9%

LDK Solar (NASDAQOTH: LDKSY  )

+21.2%

Hanwha SolarOne (NASDAQ: HSOL  )

+13.8%

The reaction is understandable in the short term. News like this drives stocks on a day-to-day basis and solar stocks are particularly volatile when news of subsidy increases or cuts come out. But it's also important to keep perspective of what this means for the industry. The report of 2.8 GW of projects being subsidized still wouldn't fill the capacity gap from underutilization at the companies I've listed above, and it doesn't do anything to alleviate negative margins, unless China is going to pay up for panels.

So here's the good news and the bad news for today's announcement, along with how you should react.

The good
Any increase in demand for solar panels is good news; let's get that out of the way right away. Whether you're manufacturing in China, Thailand, or the U.S., it's always a welcome sight to see higher demand for the industry. This will fill some of the gap between supply and demand, which has widened as Chinese manufacturers added supply and Europe reduced demand under tighter fiscal conditions.

China is apparently keen on keeping its solar industry alive and is willing to put government money behind it. That's good for the long-term winners, but that's where the challenge begins.

The bad
The bad news is that this does nothing to change the structural oversupply of solar products in the market. You can fill some of the demand gap, but last year there were 27.5 GW of solar installed worldwide, and GTM Research predicts that this year there will be 31 GW of solar installed globally. This compares to 70 GW of panel capacity in the industry, so 2.8 GW is a drop in the bucket of overcapacity, and that is mainly in China.

This move also does nothing to change the downward pressure on margins felt across the industry. Below is a graph of gross margins of a few of the largest manufacturers in China and all are selling their products at close to or below cost, leading to massive net losses and growing debt loads.

YGE Gross Profit Margin Quarterly Chart

YGE Gross Profit Margin Quarterly data by YCharts

What really needs to happen is a rationalization of a large amount of supply in the industry. In other words, China needs to stop subsidizing its manufacturers and let the weakest ones fail, just like Solyndra, Evergreen Solar, and Q.Cells did in the U.S. and Europe. The gap between supply and demand is simply too large to fill by China alone over the next few years, and its government can't save all of the companies it has built with the billions of dollars it handed out in loans.

Around the world we're seeing subsidies stripped away from solar, which is positive for the long-term health of the industry. This eventually will leave the strongest suppliers to compete with traditional energy sources on a cost per kilowatt-hour basis, just the way it should be. But in China the opposite is happening. Chinese subsidies primarily will help Chinese companies, which only skews the market and leaves the industry in worse health than it would otherwise be in.

Foolish bottom line
More Chinese subsidies have had a huge impact on Chinese solar stocks today but I wouldn't expect the market euphoria to last. These companies are still sitting on huge debt loads from Chinese state-run banks and are losing money hand over fist. Until China begins cutting the subsidies to solar companies, it simply can't build enough projects to fill the immense gap between supply and demand left in the industry.

Today is an incremental positive for solar, but it doesn't mean we should go dumpster diving for stocks. The best companies with the best products and the best balance sheets will still win in the long term.

One of those strong companies is First Solar, one of the few solar manufacturers actually making a profit. If you're looking for our recommendation on how to play First Solar along with continuing updates and guidance on the company whenever news breaks, we've created a brand new report that details every must know side of this stock. To get started, just click here now.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 12, 2012, at 4:00 PM, Jimy11 wrote:

    you are telling and repeating endlessly that ALL chinese PV players are dead and gone and bancrupt forever. Total waste of money of course...

    It's like seeing all these hollywood movies where the incredible brave marines sacrifice their lives for this prosperous cradle of democracy and freedom - sorry forget the three letters of this theoretical nation.

    Thus please investors forget the money these Fools are paid to push american companies, in this case First Solar. The future is in the east and the overcapacity, which is as a matter of fact, a huge problem will only survived by some chinese companies like e.g. YGE and TSL.

    The fools btw cheering the free market forces in this article were 100% supporting when the duties against the chinese solar companies were introduced - hypocritic US BS as usual...

    FSL is thin thilm which is a niche in solar and will always be, because of its yield / cm2.

    To compare it all the time with Polysilicon thickfilm technology just show the incompetence of these FOOLS...

    FSLR may be a good company of this niche in a niche, BUT it's an american company. Thus no future as the rest of this dying former superpower...

    Please take this into account before wasting your money on FOOL's recommondations...

    They never fought - never will - and politics and controlling the media is, fortunately, not enough anymore.

    jmfw,

    Thomas

    (unfortunately born in the US)

  • Report this Comment On December 12, 2012, at 4:26 PM, aromatic wrote:

    You always repeat the same errors

    First solar can't survive :

    - cadmium problems

    - quality problems

    - efficiency 20% lower than c-si products ( FSLR 12.7% c-si modules 15.7%)

    - cost/W 0.64$ not better than most c-si producers

    - ASP in q3 at least 0.90$/W (c-si producers are selling today at an average of 0.65$/w)

    - new orders very low (prices to high for a very low efficiency product)

    - pipeline is shrinking very quickly (published pipeline isn't correct - big projects completed for more than 50% are still in the books for 100%)

    The actual profits of FSLR are the results of older contracts at very high ASP's and are negative for new contracts .

    FSLR as an installer can't compete because they install only their own low quality and to big priced modules.

    The duties imposed to Chinese products can't help FSLR because new c-si capacity will be added outside of China (like Taiwan, Korea,etc..)

    These duties will cause higher overcapacity

  • Report this Comment On December 15, 2012, at 12:45 AM, DudeYes wrote:

    @Jimy11,

    this article doesn't at all mean that TMF is cheering for US companies nor "bashing" Chinese ones. Its merely saying that China should let the markets dictate the true winners and loser, not the Chinese govt.

    The Chinese govt. is making the same mistake the US govt. (read:Solyndra) made in trying to choose winners and losers, only on a much, much larger scale. By announcing these subsidies, they are only delaying the inevitable and are going to make the fall of many companies even more spectacular. this won't end up well, and other countries will benefit from China's short sighted thinking.

    BTW, for someone born here, you sure seem to be more offended by what TMF says about Chinese companies than American ones, and seem to take delight in pronouncing the perceived fall of America:

    "Thus no future as the rest of this dying former superpower."

    Sounds more like something I'd read in Xinhua or Global Times by a member of the 50 cent army....

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2150637, ~/Articles/ArticleHandler.aspx, 8/22/2014 8:42:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement