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Pay Attention When Wall Street's Biggest Solar Bear Gets Nervous

"Our checks this morning w/ a large German distributor suggest the German residential market has continued to exhibit strength in Jan. '12, despite the massive demand pull-in experienced in Dec. '11 prior to the 15% FiT cut 1/1/12: While our long-term thesis on STP, & the solar industry in general, remains unchanged, & our analysis implying structural overcapacity remains...the massive level of installations in C4Q11 in Germany has nearly depleted the entirety of inventory in the fact, one large German distribution vendor informed us that the residential market is now supply constrained (yes, you heard that right)."

Johnson added: "When considering (a.) German officials will likely begin discussing policy changes in the coming weeks (to include a possible cap), & (b.)solar stocks have historically rallied between the period when government officials begin official discussions around FiT cuts & when the official decision on FiT changes was announced, we see a relatively high likelihood that solar stocks stabilize or move higher in the near term as German regulators begin to discuss FiT policy changes, thus causing a pull-in effect on demand...we now expect a stabilization for the majority of 'Tier 1' solar vendors, as positive data points likely rear their head."

Polysilicon prices suddenly went up in the past week, a positive change that Johnson noted in a pricing report on Wednesday morning before revising coverage of all solar stocks. While solar cell, wafer and module pricing remained lower, it's the polysilicon price at the most upstream part of the solar supply chain that holds the industry beholden to its direction.

When polysilicon was at $300/kg a few years ago, First Solar and its thin film approach requiring no polysilicon had an untouchable cost equation. When polysilicon cratered to the high $20s in recent months, First Solar's module business was left for dead. Stabilization in poly prices can be read as the first sign of stabilization in the solar supply chain.

Yingli, Trina and Suntech each rallied between 20% and 30% on Wednesday.

Trina Solar, Suntech and Yingli are the largest Chinese module makers. During solar boom times, Trina and Yingli were generating gross margins above 30%. However, those gross margins fell to the break-even point in 2011 as excessive capacity in solar and lessening demand in Europe caused the profitability of the sector to be wiped out.

Trina Solar, Suntech and Yingli are likely to be long-term survivors on the Chinese solar landscape, the critical question being at what level of profitability and in what corporate structure.

Yingli, for example, has its own polysilicon plant, unlike Trina, and that's a link in the solar supply that could makes a case for it as a survivor. But Trina has a strong balance sheet relative to Chinese solar peers. Suntech, as the capacity leader in China and most well-known global solar brand among Chinese companies, is also likely to survive, even given its balance sheet weakness.

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