Over the past decade and half, the Middle Kingdom has fulfilled its potential -- many Western companies from Caterpillar to Yum! Brands have made fortunes in China as Chinese GDP per capita increased six-fold.
Domestic Chinese companies haven't done bad themselves. Chinese Internet companies Tencent and Alibaba are as big as any of the West's leading Internet companies. Likewise, the Chinese solar industry has done well. Chinese solar companies now produce the lion's share of the world's solar panels.
But Chinese solar stocks such as JinkoSolar (JKS 0.85%), Trina Solar (NYSE: TSL), and Canadian Solar (CSIQ -0.57%) have suffered lately as the U.S. Commerce Department has levied tariffs on imported Chinese solar panels. The tariffs have caused a dip in Chinese solar share prices, which have lagged their U.S. counterparts.
Despite the dip, here are three reasons why Chinese solar companies are still worth buying.
A huge market
China has a pollution problem. The nation depends too much on dirty coal and it is stifling the environment. As a response, the Chinese government has declared war on pollution. China's war on pollution will undoubtedly help solar. Chinese solar demand should be higher than American solar demand because China does not have the luxury of cheap unconventional natural gas.
More domestic demand should translate to more revenue and profit for Chinese solar companies.
Innovation in China
China has the image of being a low-cost commodity producer. This image is a fair one given that China has produced many low value added products over the past decade. But like South Korea and Japan before it, China is climbing the value chain as it builds up tacit knowledge and core competencies. Like Chinese Internet companies, Chinese solar companies may one day operate along the technological frontier and add their own innovation.
If this happens, leading Chinese solar companies may see their bottom lines grow significantly.
Unofficial government winners
In the West, it is the market that decides whether a company becomes a winner. It is, specifically, the consumer who decides whether to buy a company's product and it is the investor who decides whether to invest in a company. If one or the other is lacking, a company will most likely not be a winner.
In China, the government unofficially selects the winners by granting them generous state bank credit lines. The credit lines provide the winners with cheap growth capital that other companies don't have. The credit lines are also a competitive advantage in that the Chinese government's stamp of approval allows those winners to win more business from consumers.
By buying the Chinese government's chosen winners, investors have a better chance of picking the right winners.
The bottom line
After the Chinese reserve takeover scandals of 2011, many investors are understandably skeptical of Chinese companies. Their caution is warranted. Conservative investors should not invest in Chinese solar companies at all.
But for investors with an appetite for risk, shares of Chinese solar companies do represent a great opportunity. China is a huge market with an urgent need. Solar is in the early innings and there will undoubtedly be several Chinese solar winners.