Chinese Solar Message Is Set: Just Say Shipments Better

NEW YORK (TheStreet) -- The message that Chinese solar companies need for an earnings season rally seems firmly established: highlight the increased shipments in the fourth quarter and hope that is deemed more important than weak margins -- i.e. a profitless shipment increase -- and impairment charges.

Better shipment guidance has been a rally maker as long as weak margins aren't weaker than already expected. But if shipments are down quarter over quarter, the solar trading yo-yo may send shares down.

Last Friday, Suntech Power(STP) was the first Chinese solar company to pre-report earnings, guiding to better shipments in the fourth quarter and margins within its targeted range, a range that means the company isn't making a profit.

Suntech shares rallied strong last Friday and continued up on Tuesday, though it is important to note that a big part of the positive turn in Suntech sentiment was related to an improved balance sheet. The company has one of the worst balance sheets in the sector.

Suntech announced impairment charges, but these were much smaller than the amount of working capital that the company was able to reduce in the fourth quarter and a reduction of net debt to $200 million, a significant debt reduction for Suntech.

After the close on Tuesday, Canadian Solar(CSIQ) announced better-than-expected shipments and margins expected to be in the 5% to 8% range, which were its target.

However, Yingli Green Energy(YGE) guided shipments lower than previously forecast, and said gross margin would come in at 3%, below its target of 10%. While the lower shipments for Yingli come after a third-quarter shipment level that was better than most peers, and the gross margin would have been within its target if not for inventory charges, Yingli shares declined by close to 8% on Wednesday morning while Canadian Solar shares rallied by 8%.

It's somewhat ironic that the Chinese solar companies are in a rush to put out releases about the fourth quarter since they are never in a rush to report earnings: Chinese solar companies tend to report earnings later than any other public companies in the market, and generally at a date when the current quarter is two-thirds over. Suntech, for example, which pre-reported last week, reports its results on March 8.

Yingli will report earnings next Wednesday, though it's not hard to understand the need to front-run earnings by a week when the company is doing the proverbial "kitchen sinking" of bad news.