China has a pollution problem. Beijing, eager to diversify from coal, has issued one policy after another to develop clean energy. But Chinese solar stocks have disappointed investors, losing anywhere from 25% to 50% in the past three months.
Two factors are at play. First, solar names, along with other renewable-energy firms, were sold off with oil. Second, as 2014 drew to a close, investors realized Chinese solar companies wouldn’t meet the ambitious installation targets set by Beijing.
However, Beijing has mostly fixed its policies, and Chinese solar companies can be big winners this year, especially if oil prices are near their bottom.
The selloff may be overdone because oil and solar are not substitutes. One (oil) mostly fuels transportation, while the other (solar) generates electricity. In China, solar production is dictated by tariffs paid by state-owned power grids. So long as Beijing subsidizes solar, oil can dip to $20 per barrel and solar can boom. Over the past four years, solar shares have never rallied against falling oil prices, but they have against flat oil prices, notes CLSA’s Charles Yonts.
LAST YEAR, CHINESE SOLAR COMPANIES generated 11 gigawatts of electricity, down from 13 gigawatts in 2013, and short of Beijing’s 14-gigawatt target. Beijing mostly stuck to its guns in pushing solar firms to switch from installing utility-scale projects, such as solar-panel farms in the desert, to rooftop systems. The 14-gigawatt target consisted of eight gigawatts of rooftop systems and six gigawatts of utility-scale projects. Additional utility-scale ventures wouldn’t have gotten subsidies.
Solar companies indeed are edging into rooftop systems. But during the average 20-year project period, end users—often smaller enterprises—often go out of business or move, leaving electricity bills unpaid. Beijing fixed that problem in September by offering to buy rooftop-generated electricity at utility-scale-project prices if end users leave.
Financing was another bottleneck. China’s banks are still apprehensive after some large solar defaults a few years ago. But new money is coming in. Evergrande Real Estate(ticker: 3333.Hong Kong) recently said it planned to invest 90 billion yuan ($14.5 billion) in solar projects that would produce 9.2 gigawatts in China. HSBC’s Gloria Ho reckons that, on average, solar power can now produce about a 20% gross profit.
HSBC likes China Singyes Solar (750.Hong Kong) for its focus on rooftop systems. Singyes, in business for seven years, is an early rooftop developer, and plans to expand in a “controlled manner” without stressing cash flow. As a downstream business, it is buffered from oil-market volatility, adds CLSA’s Yonts. HSBC has a price target of 15.20 Hong Kong dollars ($1.96), implying another 34% upside.
Credit Suisse likes utility-scale JinkoSolar (JKS), which has turned profitable and can use cash flow to fund rooftop installations. JinkoSolar trades at less than 4.5 times the bank’s 2015 earnings estimate and has a 170% upside to its target of $45. Credit Suisse, however, is cautious toward JinkoSolar peers JA Solar (JASO) and Trina Solar (TSL), despite cheap valuations, because the two respectively have 36% and 23% exposure to Japan, which may cut subsidies.
In Asia, solar is all about government directives and stock-picking.