November 19, 2010 (Chinavestor) There is a lot of frustration out there for Chinese solars not getting the love they deserve. Most prominent Chinese PV manufacturers reported quarterly earnings with more than fine results.Take a look at Canadian Solar (NASADAQ:CSIQ) or Yingli Green Energy (NYSE:YGE) that reported within the last 24 hours. Both companies reported sound top and bottom line growth, firm margins and robust growth. But institutional investors seem to see the glass half empty rather than half full. Suntech Power (NYSE:STP) didn't meet expectations - but those expectations were very high on the first place. So the whole sector got punished earlier the week and don't seem to have the muscle to get off the ground.Trina Solar (NYSE:TSL) and JA Solar (NASDAQ:JASO) all continue to suffer.
Why is that? Besides the obvious reason for such weakness, we're going to see some other factors that contribute to the softness in the sector.The obvious one is that Credit Suisse downgraded the sector based on industry-wide oversupply. But other factors contribute to the slide as well.
For one, some think this is not a sell off but the heavy naked short that is on Chinese solar stocks. This is done by the market makers (hedge funds) who manipulate the price down using rumours and analysts to spread news of doom. Example for this is LDK Solar (NYSE:LDK) that has over 23% short of the float.
For two, high oil prices suggest there is more room to the downside from $85/barrel than to the upside. When price of oil comes down so is the financial attractiveness of solar. By large, solar makers make money when oil is above $60/barrel. While we're far from that mark, falling oil is certainly a possibility hurting short term outlook for solar makers.
For three, currenies come top play as well. A stronger euro means weak greenback and high oil prices. But when Europe's problems seem more persistent that that of the good ol' USA, changes are high that the Euro is up for more trouble. The common currency has more downside risk than the dollar at this point.
Another angle to the Euro is that Europe is the largest export market for Chinese solar firms. So when the Euro softens, sales made in Europe convert to less revenues in Yuan thus hurting top line growth. The following two chart tell it all. Europe made up 77% of all sales for Canadian Solar (NASDAQ:CSIQ) in the latest quarter. While this is less than 87.6% a year ago, the lion share of sales is still coming from the Euro zone. So the correlation between currency risk and top line growth is real.
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Sales by Market, 2010 Q3 Canadian Solar (NASDAQ:CSIQ) |
Sales by Market, 2009 Q3 Canadian Solar (NASDAQ:CSIQ) |
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So much of the bad news. But Chinese solars have a lot of good news to highlight as well. For one, while Europe remains the largest market, its share has been on a steady decline with Asia making up for the losses. Asia accounted for 6.4% of sales for Canadian Solar (NASDAQ:CSIQ) a year ago but grew to 16.2% by now while America remained virtually unchanged. This suggest sames in China are on the rise, kicking currency risk in the butt.
Another positive development is that the industry seem to have hit the bottom of the price war. This is implied by improving margins all over the board. Canadian Solar (NASDAQ:CSIQ) reported gross margins of 17.3% for current quarter but sees 17%-18% going to the next and 18%-19% for 2011. This is perfectly in line with outlook provided by Yingli Green Energy (NYSE:YGE) this morning. YGE raised its gross margin target to 32.0%-32.5% from the recently raised range of 31%-32% for 2010.
Another positive development is that Chinse solars have planety of cash. Suntech Power (NYSE:STP) reported cash and cash equivalents of $946.2 million at the end of Q3, up from $765.6 million from previous quarter. Or take a look at Trina Solar (NYSE:TSL), another prominent Chinese solar maker. The company had cash and cash equivalents of $640 million in the past quarter, more than total debt of $627 million.
Based on financial perofrmence Canadian Solar (NASDAQ:CSIQ) deserves better as the follwoing chart suggests. The company has reported constant revenue and earnigns growth yet its stock price has been basically flat.
An old joke comes to mind while trying to find the closing lines for this article. In that joke an arrogant man, caught on cheating his wife, is confronted by his wife:
-What are you doing in here? Are you cheating on me?
-Oh no, this is just what the situation implies. But how come you trust your own eye more than me?
I am going to trust my own eyes more than Credit Suisse and their industry downgrade. How about you?
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