We've known 2017 will be a tough year for solar manufacturers for a while now. Solar panel prices dropped by about one-third last summer, and a move by developers to more efficient panels has left some manufacturers out to dry.
Amid the changes, the industry's biggest and healthiest companies appear to be consolidating power. And after the recent earnings reports from Canadian Solar (NASDAQ:CSIQ), JinkoSolar (NYSE:JKS), Hanwha Q-Cells (NASDAQ:HQCL), and JA Solar (NASDAQ:JASO), we can see where they're standing at the moment. Even a point of strength doesn't mean these companies are on solid footing yet.
Making less with more
The table below shows the growth in shipments at Canadian Solar, JinkoSolar, Hanwha Q-Cells, and JA Solar in the first quarter and the change in revenue and gross margin.
|Company||Change in Shipments (YOY)||Change in Revenue (YOY)||Change in Gross Margin (YOY)|
|Canadian Solar||23.5%||(6.2%)||(210 basis points)|
|JinkoSolar||29.3%||9.4%||(930 basis points)|
|Hanwha Q-Cells||n/a||(16.1%)||(740 basis points)|
|JA Solar||44.1%||6.4%||(490 basis points)|
You can see that growth in shipments didn't necessarily lead to higher revenue, which was due to the drop in solar panel prices. And the resulting decline in gross margin is a trend that will likely continue. Long term, panel prices are going to fall, particularly if China's solar demand drops in the second half of the year as expected. That will make it tough to remain profitable.
The weight hanging over Chinese solar manufacturers
Making less money than a year ago wouldn't be bad if it weren't for the debt loads hanging over these manufacturers. Below is a chart showing total debt and each company's net income over the last 12 months. However, remember that net income over 12 months isn't really current; each company was very near break-even in the first quarter.
Spending billions of dollars on building out world-leading manufacturing capacity is only worthwhile if you can eventually make money on those solar panels. Right now, it's not clear that any of these companies will be able to make enough money to justify their debt loads. JinkoSolar seems like it's in the best spot, with a relatively low debt load, profitable operations (for now), and industry-leading capacity. But that's a tenuous position because the competition is coming after the company's sales by lowering prices.
What we learned this quarter
When you look at all of the data above, I think it's clear that buying Chinese solar stocks is a high-risk bet at the moment. Debt loads are high, and finances are getting worse, which will make it tough for companies to invest in building the next generation of solar technology. Until sustainable profitability shows itself in solar, I wouldn't be buying Chinese solar manufacturers, no matter how fast they're growing capacity.