The decision by the European Central Bank to expand monetary fiscal stimulus couldn’t have come at a better time for Chinese solar producers and their investors.
Amid the on-again, off-again volatility that defines investing in Chinese solar stocks, the mood had been decidedly off- again. As Barron’s recently pointed out, Chinese solar stocks have disappointed investors, losing anywhere from 25% to 50% in the past three months.1
The Chinese Solar motif has fallen 39% in the past 12 months. In that same period, the S&P 500 has gained 17%.
Two factors have been at play, Barron’s said. 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.
But Barron’s argued that the selloff was overdone because oil and solar are not substitutes. While oil mostly fuels transportation, solar generates electricity. In China, solar production is dictated by tariffs paid by state-owned power grids. As long as Beijing subsidizes solar, oil can dip to $20 per barrel and solar can boom, Barron’s said.
Over the past four years, solar shares have never rallied against falling oil prices, but they have against flat oil prices, noted CLSA analyst Charles Yonts.
The sector’s decline set the stage for the recent rally sparked by the ECB. Its pledge to pump at least $1.3 trillion into Europe’s financial system will help increase import demand, benefiting Chinese companies that sell to Europe, according to a story on marketsemerging.com citing UBS Wealth Management and Greenwood Capital Associates LLC.2
The Chinese Solar motif has increased 18% in the past month. In that same time frame, the S&P 500 has gained 3.9%.
Demand for Chinese products in Europe, the country’s biggest export market, has waned as a debt crisis weighed on the region’s growth.
“China and Europe are big trading partners, and what essentially helps the European economy will be positive to China,” Walter Todd, chief investor of Greenwood Capital Associates, told marketsemerging.com.
That’s not to say the bubbling enthusiasm for solar is limited to Chinese makers. As Reuters reported last week, a deal by Apple to buy nearly $1 billion of power from a First Solar plant could be the first of a stampede of contracts driven by the looming change in a solar tax incentive that makes such projects particularly attractive.3
Apple said last week it would spend $848 million over 25 years to buy 130 megawatts of electricity from a 280-megawatt plant – the solar industry’s largest-ever corporate power purchase agreement.
Apple’s major financial commitment gives solar a level of mainstream credibility that should entice other new customers, Reuters said, noting that a critical federal tax credit for solar projects drops to 10% from 30% in 2017.
Reuters suggested the Apple-First Solar deal could serve as a template for other big companies like Google and Facebook to use large-scale solar plants to bypass utilities when they need to power their operations.
(First Solar’s stock has a 6.7% weighting in the Cleantech Everywhere motif, which is up 16.5% in the past month, and down 13.9% over the past 12 months.)
Analysts are taking note that future commitments by other big-name customers could also translate into more upside for Chinese solar companies.
1Shuli Ren, “Why China’s Solar Industry Will Shine,” barrons.com, Jan. 24, 2015.
2Mena Callahan, “What’s Lifting Chinese solar stocks?” marketsemerging.com, Jan. 26, 2015, http://www.marketsemerging.com/whats-lifting-chinese-solar-stocks-jinkosolar-holding-co-ltd-jks-trina-solar-limited-adr-tsl-ja-solar-holdings-co-ltd-adr-jaso-renesola-ltd-adr-sol/1718383/, (accessed Feb. 16, 2015).
3Nichola Groom, “Apple deal, tax change could spark corporate solar stampede,” reuters.com, Feb. 11, 2015, http://www.reuters.com/article/2015/02/12/us-solar-corporate-idUSKBN0LG01F20150212, (accessed Feb. 16, 2015).