There’s a new Chinese solar stock in town, with Nanjing-based China Sunergy (CSUN – Last trade $13.71) rising 51% on its first trading day on May 17. And there is more to come: China-based LDK Solar and Yingli Green Energy will also make their debuts on the New York Stock Exchange during the next few weeks.
Investing in a Chinese solar company allows you to kill two birds with one stone: you can ride the clean-tech wave and access the growth in China’s economy. But if you want to buy a Chinese solar company, brace yourself for the Chinese asset bubble.
After the People’s Bank of China hiked rates and widened the yuan trading band on Friday, U.S.-listed Chinese solar shares tumbled:
– JA Solar (JASO – Last trade $22.92) fell 5.0%
– SolarFun (SOLF – Last trade $12.09) fell 4.4%
– Trina Solar (TSL – last trade $52.08) fell 6.4%
– SunTech (STP – Last trade $34.13) fell 2.9%
The emerging consensus seems to be that solar is a commodity and that the only thing that matters is cost per watt. Many feel that solar will ultimately be based in China for all the same reasons that cellphones and computers are made there. But Chinese solar stocks are sensitive to movements on Chinese stock markets, and investors could be burnt badly if the Chinese asset bubble has to pop. Chinese stocks can’t continue to defy gravity forever.
Alan Greenspan raised a few eyebrows when he said on May 23 that Chinese stocks will face a "dramatic correction." If this has to occur, the damage will likely be limited to China if it’s simply a stock market event, as the Shanghai market is not a good gauge of the prospects for China’s economy.
The Shanghai composite A index — open only to local Chinese investors — is up 245% since the end of 2005 and up 50% so far this year. Chinese stocks continue to defy gravity, and more fund inflows from overseas investors could push shares even higher. China will increase its quota for the qualified foreign institutional investor (QFII) program to US$30B from the current US$10B. QFII is a program that allows foreign institutions to invest in the A-share market.
When is the Chinese stock bubble going to pop? Should investors worry about the impact on Chinese solar plays?
It’s a difficult call, but I’m going to stick with the herd (and "the maestro") and say that a correction is coming sooner rather than later. There is a school of thought that feels it is unlikely that the Chinese stock market will crash before the 2008 Olympics. It is understandable that the Chinese don’t want any drama before their big showpiece. Optimists feel that the recent Chinese rate hike should be seen as a proactive move that reduces the chances of a hard landing in China.
Before the People’s Bank of China hiked interest rates on Friday, the one year deposit rate of 2.79% was below the inflation rate at 3.0%. In other words, money invested by Chinese investors would lose value due to inflation (this is known as negative real rates). It makes more sense for Chinese investors to move money out of savings accounts and into the stock market. Chinese retail investors opened almost 4.8 million retail accounts in April – 835,500 more than in the past two years combined – and that is why I’m convinced the bubble is going to pop sooner than later.
Retail investors hold more than 60% of the market value in China’s two bourses, and the simple (scary) truth is that Chinese investors don’t know what they’re doing. ChinaHR.com, a Web-based job placing firm, said that of the 2,500 responses this month to a survey, more than 90% said friends or relatives had invested in the market and 46% said they had opened their own trading accounts. But just 10% said they had a firm grasp of the market, while 56% said they were learning as they went. No margin of error was given and it wasn’t clear whether the company had verified each response as unique.
If you are investing into a Chinese solar company, know that you will get hurt if the Shanghai bubble pops. But if we had to see a sell-off in Chinese solar companies on the back of a Chinese stock correction, some of these stocks will be cheap. The fate of China-based PV companies is not directly tied to the economic future of China. As recently pointed out by CIBC, the bulk of sales of China-based PV manufacturers (>80%) are to the U.S. and Europe.
Piper Jaffray’s analyst Jesse Pichel recently noted that investors viewed STP’s initial success as a bellwether for the overall Chinese solar industry. He added that some of the Chinese solar newcomers might not be as well positioned to deal with current industry dynamics. Mr. Pichel feels that the market hasn’t yet seperated the winners and losers in the Chinese solar market, and my gut feeling is that this will be the status quo until rationality returns to the Chinese stock markets.
Disclaimer: I do not own any stocks mentioned above. I do not own a solar panel.