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Did Chinese Solar Just Get Home-Field Advantage?

19 July 2013 in Trading Ideas

It’s been a pretty good run for Chinese solar stocks: The home country announced a plan to boost national solar power capacity, and the sector, by some measures, jumped by more than 20%.

And that was just this week.

While the path for most Chinese solar stocks has been anything but a straight line this year, many investors who have hung in with the sector for all of 2013 have been rewarded. The Chinese Solar motif, for example, is up 75.4% in 2013. The S&P 500 has gained 15.8% in that same period.

chinese solar motif Of course, it was only about four months ago that traders’ perception of the Chinese solar industry couldn’t have been more pessimistic. The Chinese Solar motif was down more than 30% for the year at one point, as investors became increasingly antsy about China’s own slowing growth, as well as the impact of tariffs instituted by foreign trade partners.

Not all of those worries have necessarily abated. As Reuters reported this week, Chinese economic growth “slipped” to 7.5% in this year’s second quarter, making it nine of the last 10 quarters that have witnessed a slowdown.1 Although that figure wasn’t as low as some had expected, it did induce both Goldman Sachs and JPMorgan to officially project that China would post 7.4% growth in 2013. That would mark the lowest increase since 1990.

However, tell that to investors who have been bidding up the prices of solar stocks since earlier this spring. As we noted at the time, the entire sector seemed to get a boost in early April from a rumor that a unit of Warren Buffett’s Berkshire Hathaway was mulling the purchase of assets of a then-newly-bankrupt Chinese solar-panel maker. That possible development, whether or not it was true, seemed to be taken as a signal to the entire investment community that perhaps the sector’s selloff was overdone.

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Since then, it’s been blue skies (shining on Chinese solar panels, presumably).

What’s now intriguing is that Chinese solar bulls have possibly just been handed some fresh justification for their optimism. Last weekend, China’s government said it planned to add 10 gigawatts of solar power a year for the next three years. That would increase the country’s solar capacity fivefold by 2015.2

As a result, Chinese bulls in the solar industry took the cue to become even more bullish. The Chinese Solar motif jumped 21.6% in the past week, though the broader Chinese Shanghai Composite Index (“SSE”) rose just 1.54% during that time.

It may be inevitable that this volatile industry will continue to post wild swings for the rest of 2013 and beyond. That ride may not be everyone’s cup of tea — those investors with a longer-term outlook may be better served by focusing on how much the fundamental business prospects for Chinese solar companies are changing.

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1Aileen Wang and Kevin Yao, “China’s second-quarter growth slows, likely to spur reform effort,” Reuters.com, July 15, 2013, http://preview.reuters.com/2013/7/15/china-q2-gdp-up-75-pct-year-on-year.

2“China’s Solar Stocks Gain on Capacity Plan: Hong Kong Mover,” Bloomberg.com, July 15, 2013, http://www.bloomberg.com/news/2013-07-16/china-s-solar-stocks-gain-on-capacity-plan-hong-kong-mover.html.