The Solar Wars: Favor Shifts to U.S. Companies

When the entire solar industry was in a mess this year and most of the companies reported huge losses, there were a chosen few who bucked the trend and proudly boasted of profits in the just-concluded quarter. Among these few were some Chinese companies that took the challenges thrown at them by the industry and came out with flying colors. But recent revelations of waste spillage by one of those who led the charge have sent others from the region into an abyss. Let's take a look.

Before the fall
When almost every company was busy either posting losses or winding up operations, the Chinese players went about happily reporting profits. JinkoSolar (NYSE: JKS), currently at the center of the pollution imbroglio, Yingli Green Energy (NYSE: YGE), and ReneSola (NYSE: SOL) all made merry as their U.S. counterparts were swamped by spiraling costs. Lower cost of labor also helped these companies' cause. They increased shipments, implemented cost-control measures, and swam against the tide to post big profits.

But now, all that doesn't seem to matter as their credibility comes under the microscope.

Always in doubt
There is always an eerie feeling about Chinese companies. The possibility of the books being cooked looms over them. Now, when these environmental issues come up, one may question the way operations are being run. All in all, reputation has plunged deeper, and it seems like it's going to be a long, winding road ahead for the Chinese solar stocks. Investors holding positions in them must brace themselves for a cold holiday season as the aftershocks are likely to continue.

U.S. companies were hit hard in the recent earnings season. They couldn't compete with their low-cost Chinese competitors and posted wide losses. Evergreen Solar and Solyndra had to wind up operations as they failed to contain costs.

But the JinkoSolar Haining incident has turned the tables, and Chinese stocks are in deep distress. It seems investors are placing their faith in well-regulated, top-notch companies in the U.S., which may benefit from the mistakes of their Chinese peers.

Let's take a look at how the waste-spilling incident has affected the Chinese and U.S. players:

Source: S&P Capital IQ. TTM = trailing 12 months.

For the Chinese companies, analysts seem to have factored in the Haining incident while calculating next year's earnings. The possibility of strict regulations being imposed and sales falling due to their unreliable nature must have been weighing on the analysts' minds while calculating forward P/E, which has almost tripled. On the other hand, the U.S. solar companies have shown a remarkable improvement when moving from the trailing figure to the forward figure. This is possibly because they stand to profit from the failings of their Chinese peers, gaining an upper hand on international projects, since none would like to have a poorly regulated company building solar panels on their land. The reliable and well-regulated nature of U.S. solar companies such as First Solar and SunPower will certainly help them in their growth when compared to the Chinese companies.

The Foolish bottom line
The manner in which the Haining incident affects the balance of power in the solar industry will unfold with time. Will the Chinese companies spit fire again and reclaim their glory? For now, it seems that U.S. solar companies will have their time under the sun, but they need to ramp up their operations if they wish to capitalize on this window of opportunity.

• Click here to add JinkoSolar to your Watchlist.
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• Click here to add SunPower to your Watchlist.
• Click here to add First Solar to your Watchlist.
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