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Did a Warren Buffett Rumor Save Chinese Solar Stocks?

6 May 2013 in Trading Ideas

There was the assorted collection of Chinese stocks – just plodding along at best, with many of the individual names down more than 25% in the past 12 months.

Then, in early April, a rumor that lit a fire under the entire sector: MidAmerican Energy, a Des Moines, Iowa-based unit in the Warren Buffett-led Berkshire Hathaway empire was interested in buying Suntech Power, a Chinese company that had been forced into bankruptcy after defaulting on a mountain of debt.1

MidAmerican offered no comment on the speculation, but the story’s legs made its impact. Suntech shares jumped as much as 28% and lifted other names in the sector.

For investors in Chinese solar stocks, this was a welcome change after seeing their holdings suffer in the wake of a supply glut and cuts in alternative-energy subsidies in Europe. Indeed, Bloomberg noted on April 8 that Suntech, LDK Solar and Yingli Green had been among the worst 10 performers this year in the Bloomberg China-US Equity Index of the most-traded Chinese companies in the US.

chinese solar motifNotably, those three stocks make up 40% of the stocks that make up the Chinese Solar motif, which has understandably had a similar revival in the past few weeks. The motif is down 37.2% in the past 12 months, but has surged 38.2% since April 4.

While nothing has developed regarding Suntech’s sale to MidAmerican or anybody else, the rally from the depths in Chinese solar stocks has, for now, held up.

Part of that may be due to other positive developments in the sector. First Solar, based in Tempe, Ariz., announced in April that its earnings and revenue for the year would beat analysts’ expectations.

In addition, as Jane Edmonson, a former institutional investment analyst, pointed out in an article for Seeking Alpha, some evidence suggesting the environment is improving for solar stocks.2 According to IHS, global solar installations are expected to grow at a rate of 12% in 2013, while panel and related product prices are declining – and becoming more attractive.

However, the specific outlook for Chinese solar stocks isn’t as clear. Edmonson says that Chinese government subsidies are shrinking for companies there, and they continue to be at the mercy of steep tariffs being imposed by the US.

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As a result, the high debt levels attached to many of the largest Chinese solar manufacturers could be more problematic in the future. Edmonson quotes one economics professor saying “the lending boom in China that took place over the last few years was actually fiscal spending in disguise, and now the bill is coming due.”

Speaking of problematic, that may wind up being the word for expectations of a sustained long-term rally in Chinese solar stocks.

1Belinda Cao, “Suntech Jumps On Buffett Buyout Report: China Overnight”, Bloomberg.com, April 8, 2013, http://www.bloomberg.com/news/2013-04-08/suntech-jumps-on-buffett-buyout-report-china-overnight.html, (accessed April 30, 2013).

2Jane Edmonson, “Is The Future Getting Brighter for Solar Stocks?” SeekingAlpha.com, April 14, 2013, http://seekingalpha.com/article/1340331-is-the-future-getting-brighter-for-solar-stocks, (accessed April 30, 2013).