Beware Of Chinese Solar Stocks
Chinese solar stocks soared at the end of last week on exciting news. On Friday, JinkoSolar (JKS) announced it won a $1 billion financing deal from China Development Bank Corp.
The deal is seen as a major sign the Chinese government is serious about propping up its ailing solar manufacturers.
As a result, several Chinese solar stocks registered huge one-day gains. Jinko jumped more than 13% to close at a nearly seven month high of $4.68. Trina Solar (TSL) gained 9.9% to end the day at $3.10. And, LDK Solar (LDK) added more than 11% to climb back to $1.00 per share.
It was a rare, happy day for a sector that has endured a massive amount of pain over the past few years. In case you missed it, most Chinese solar stocks have lost 80% to 90% of their value since 2010.
It’s been one of the worst sector bloodbaths in market history.
But are solar stock fortunes about to change?
Last week’s rally and some recent events have infused a new dose of optimism into the sector. More than a few investors are starting to wonder if now’s the time to get back into these beaten down stocks.
There’s no question Chinese solar stocks are trading at bargain basement prices on a historical basis. So, if the business is truly poised to make a turn for the better, these stocks could generate huge profits for early investors.
Unfortunately, I don’t think the industry is quite out of the woods just yet.
Chinese solar companies posted sharp drops in revenue and earnings for the third quarter of 2012. And it’s not the first time that’s happened. It’s a disturbing trend that’s been in place since the fourth quarter of 2010.
The main problem is plunging solar panel prices. According to Bloomberg, “overcapacity and a global supply glut have driven down prices 21% in the past year, leading to losses at almost every manufacturer.”
And over the past four years, panel prices have fallen 75% due to weak demand in Europe.
But that’s not all…
Chinese solar companies are also facing huge new hurdles in their largest overseas markets. The US recently imposed stiff tariffs on Chinese-made solar panels that could hike prices by as much as 36%. And Europe is prepared to impose similar tariffs very soon.
The measures are sure to hurt demand and take a bite out of revenues and earnings going forward.
As a result, Chinese solar companies are looking to increase sales at home. But it’s far from clear that China will be able to sufficiently offset the lost overseas sales.
The upshot…
We may very well see a short-term rally in Chinese solar stocks from grossly oversold levels. But given the downward pressure on prices and further weakening in demand overseas, I don’t see a meaningful turnaround happening in this sector anytime soon.
Profitably Yours,
Robert Morris
Category: Foreign Markets, Stocks
