China won't let its solar industry die without a fight. After handing billions of dollars to manufacturers, including LDK Solar (NASDAQOTH:LDKYQ), Yingli Green Energy (NYSE:YGE), Suntech Power (NASDAQOTH:STPFQ), to build capacity they are now generating demand domestically to soak up unsold panels.
The latest pop in these stocks was caused when China's State Council posted a statement that said the country will build more than 35 GW of solar by 2015. That's over 10 GW per year, more than any country has ever installed.
What we learned today
The reason this jump is a bit of a head-scratcher today is that this isn't really news at all. In December, it was widely reported that China would increase its plan to 40 GW (more than the announced 35 GW) in 2015. Deutsche Bank cited multiple government sources in reporting the figure, although the government didn't officially announce a number until now. I've also written about the 40 GW figure in the past, assuming China will subsidize its industry demand so manufacturers don't fall apart.
Of more concern is that the announcement comes after negotiations with Europe over solar tariffs apparently have hit a standstill. For a while it appeared that a deal between the two regions was imminent, but there are only 22 days until tariffs go up to as much as 67%, effectively killing demand for Chinese panels in Europe.
Is this good for Chinese solar?
While it's good that China is increasing demand, it would be worse if European tariffs go through as planned. For investors, the problem is that Chinese solar companies are relying more and more on China, for both financing and demand. LDK, Yingli, and Suntech are particularly indebted and without Europe, a major source of demand dries up.
JinkoSolar (NYSE:JKS) and Canadian Solar (NASDAQ:CSIQ) have slightly better balance sheets and they're focusing on expanding into systems, which will smooth out demand. JinkoSolar has a $1 billion financing deal with the China Development Bank to build projects, not just manufacturing capacity, which will help demand. Canadian Solar has built a huge systems business in Canada, including a $310 million, 130 MW project last month, and signed 18 MW of deals in South Carolina last week. The systems business generates stable demand and allows companies to compete more than on price alone, which helps margins.
On a short-term basis, the market can be very capricious about solar stocks, popping or dropping on even the slightest news. Long term, we need to find companies who will make a profit, and betting on government support isn't the way to find long-term winners. The U.S. has supported its solar industry, but uncompetitive companies eventually failed, something we don't see happening in China. That has me worried, until someone emerges with revenue growth and profit on the bottom line -- something we're a long way from right now.