Check on China: Surging solar
China’s solar energy industry is growing, but not everyone will profit. In fact, there will be many losers, most likely the late entrants and smaller players.
For sure, the country’s photovoltaic (PV) sector is booming, with the industry now the world’s third largest producer of solar-energy technology. Production capacity of the PV cells – the plates that absorb the sun’s rays and convert them to electricity – in 2005 rose almost 375%, to 250 MW, from 52.8 MW in 2004, while production capacity of modules—the panels comprised of the PV cells—grew 350%, to 400 MW, from 88.8 MW.
International demand for the clean-energy technology, fueled in large part by higher gasoline prices, has resulted in annual growth of around 15%. Some analysts predict that the sector could generate global revenues of up to $40 billion by 2010. China, with its low-cost manufacturing advantages, could seize up to one-forth of the bounty and become the world’s number one producer by the end of the decade. The country itself is projected to increase its install PV-electricity production capacity up to 0.3 GW in 2010 and 1.8 GW in 2020.
Such bright prospects have led to an investment frenzy on Chinese solar stocks. The leader of the pack is Suntech Power Holdings Co. Ltd. (NYSE: STP), the country’s largest PV manufacturer whose IPO listing on the New York Stock Exchange in December 2005 was the largest for the year for a technology company. Smaller cap companies include Trina Solar Limited (NYSE: TSL), Canadian Solar Inc. (Nasdaq: CSIQ) Solarfun Power Holdings Co. Ltd. (Nasdaq: SOLF), and China Sunergy Co. Ltd. (Nasdaq: CSUN). The newest to join the crowd is LDK Solar Co. Ltd. (NYSE: LDK), which had its IPO on June 1.
But clouding the outlook for Chinese solar companies are several factors.
First, Chinese firms must rely on imported silicon, the key material in the production of the PV cells. Prices for the resource have jumped ten-fold, to $300 per kilogram, since 2003, with the Chinese usually paying a premium of as much as 100% more than their global competitors. This increased expense often negates the lower manufacturing cost advantages.
Second, 90% of the Chinese production is being exported to Europe and the United States. This means that Chinese firms are in fierce competition against their European, American and Japanese rivals. Moreover, the Chinese firms face the risks that the international governments, which heavily subsidizes their own respective solar industries, may at some point insist that PV cells and modules be “home grown.” In fact, Germany – the largest PV market – is currently discussing such protective measures.
Third is that the industry is a victim of its own success. The growth has led to boom of new Chinese players. There are at least 150 PV producers in China, which is not only driving up silicon prices, but also creating concerns of over-capacity.
It is for these reasons that the profits and share prices of the Chinese solar companies have recently begun to drop. Solarfun shares plunged more than 20% after it reported a first-quarter net loss of $328,000 on May 30. The firm blamed "delayed solar subsidy legislation in Spain and Italy." On Monday Solarfun set a new 52-week low at $8.45. Solarfun’s earnings followed news of Suntech Power’s first-quarter margin decline to 19.9% from 30.1% in the same quarter a year earlier. The result - the firm’s share price dropped by 2% the day after the announcement. Share-price devaluations also occurred for China Sunergy and Trina Solar, which both reported that their first-quarter margins had shrunk. The two firms fell 8.5% and 1%, respectively, immediately after they reported their first-quarter results.
The plummets do not mean that China’s solar industry is heading to imminent disaster. The industry will definitely continue to grow once China’s own domestic demand picks up. However, only a few firms will profit in the face of such constraints. Unfortunately for new entrants into the field, the environment favors companies that have a lot of cash and market capital because big money is needed to stay competitive. With everyone scrounging for silicon, only firms that can pay market premiums and at large quantities will be able lock in stable supplies.
Another key factor is the diversification of the firm’s sales and distribution channels. This favors the bigger players who can entice buyers by selling at lower margins and at higher quantities. The most important factor is the ability of the firm to invest in research and development. To compete in the solar industry, firms must constantly increase the efficiency of their cells to convert sunlight into electricity, which currently stands around 15%. That no doubt requires big money.
Such conditions favor Chinese firms such as Suntech, which has a market cap of over $5 billion. Small cap investors could try their luck on smaller Chinese firms, particularly those that claim to have secured stable silicon supplies. But don’t say you weren't warned.
About the Author
Contributing author Ray Cheung has more than 10 years of extensive first-hand experience monitoring and analyzing social, political, economic and business developments in China.
Read More
(click a star)
Enter comment: