3 Chinese Solar Stocks That Are Heating Up

The low-cost Chinese solar stocks are getting set to cap the solar earnings season. Here are 3 worth watching in the coming quarter.
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(Chinese solar stock story updated with Yingli Green Energy earnings results)NEW YORK (TheStreet) -- Is there a new king on the Chinese solar module maker block?

Jinko Solar

(JKS) - Get Report

stock experienced its biggest trading volume day ever on Wednesday, just missing the one million share mark, and leading all gainers on the tape at the close on Wednesday.

It was the biggest day of trading for the newest entrant among publicly traded Chinese module makers since its debut back in May, and this week has marked the arrival of Jinko on the radar screen of investors.

Jinko Solar shares have rallied by close to 25% in the past two days, beginning the week trading at just under $20 and finishing Wednesday's action near the $24.50 mark.

Jinko Solar doesn't have the track record in module production history, capacity or trading volume to crown it as Chinese solar module making royalty. Jinko Solar is arguably not even in the same club as

Trina Solar

(STL) - Get Report

,

Suntech Power

(STP)

or

Yingli Green Energy

(YGE)

.

Nevertheless, Jinko Solar had never experienced two consecutive days of trading over 500,000 shares until the past two days. Additionally, with its Wednesday volume practically doubling its Tuesday volume, at 985,000 shares, Jinko Solar is the solar darling of the moment.

Barclays was out with a big bullish call on solar for 2011, and in particular for Trina Solar and wafer maker

ReneSola

(SOL) - Get Report

. While Trina was up close to 5% on Wednesday, its gains still weren't anywhere near the rise in Jinko Solar shares, at 13%.

>>Barclays Gets More Bullish on Solar

Jinko Solar hit its highest stock price yet on Wednesday. Indeed, the rapid rise for Jinko Solar suggests that it's a stock to watch, and its recent gains a good opportunity to reflect on earnings season for the Chinese solar module stocks.

Jinko Solar's IPO was priced at $11 back in May, and Jinko Solar shares slipped below $10 in June, during the worst of the solar sector euro-triggered selloff. Was Jinko just an underpriced IPO that caught bad timing right after its debut?

Not exactly -- and Jinko Solar has plenty left to prove. There are some issues for the investor community that Jinko Solar won't be able to answer immediately. One is trading volume. While retail investors may be willing to gamble relatively small amounts on Jinko Solar, any institutional investor looking to Jinko Solar as an option is going to pause before investing in a stock that has never traded more than one million shares in a day. At least the 985,000 shares traded on Wednesday is a starting point.

With an average daily volume of shares traded that is under 200,000 shares, it could take an institution a month to move its position in Jinko Solar. For a sector like solar, where investors like to be in and out on a regular basis, liquidity issues can be a non-starter and keep a stock from attracting more attention. "Investors have been stressed about the liquidity in Jinko Solar," said Mark Bachman, analyst at Auriga Securities. Therefore, Jinko Solar still needs to move up the market cap food chain to gain a foothold among a larger investor set.

One group that is not waiting for more proof from Jinko Solar is the handful of analysts who cover the newest Chinese solar module maker. In fact, this week every analyst who covers Jinko Solar has upped its earnings forecast for 2010 and 2011.

Post-second quarter earnings, Street consensus on Jinko Solar 2010 earnings has risen from $2.25 to $3.47. Jinko Solar 2011 earnings consensus has risen this week to $3.67, up from $2.67.

The earnings consensus raise has resulted in a trading multiple for Jinko Solar -- between 7x and 8x earnings -- that is pretty cheap compared to other Chinese solar module plays, and particularly against a Chinese solar stock like Suntech, which trades at a premium to the group. Granted, Suntech just raised its solar module capacity guidance for the year to 1.8 gigawatts. Jinko Solar expects third quarter module shipments of 100 MW to 110 MW, so on that huge gap alone, it's not fair to make a direct comparison.

>>Solar Winners & Losers: Suntech Power

Investors, thus, are still trying to come to terms with Jinko Solar. One reason for investor reluctance is the lack of a competitive advantage. Jinko Solar makes the same mono- and multi-crystalline modules as the rest of the Chinese solar module pack, and it's not the lowest-cost producer. Total non-silicon costs of 83 cents in the second quarter put Jinko Solar in range of the Chinese module cost leaders.

There is reason for investor to be wary in the short-term, though. Any time a solar stock rises by double-digits -- in Jinko's case, 25% in the past two days alone -- there should be fears that a secondary offering may be on the horizon. There is no doubt that Jinko needs cash as it continues to raise its capacity. Jinko Solar management has not said anything about heading back to the markets to raise more capital, but it's a risk that investors should keep in mind.

Mark Bachman at Auriga Securities estimated that the pain might not be too bad from a secondary offering. If, for example, Jinko Solar were to offer 2 million shares, the Chinese solar company could raise roughly $40 million, and share dilution would be roughly 10%. Investors who bought into Jinko Solar shares at the IPO price have seen their share value double already. "It's still an overhang on the stock, and investors that bought into the IPO have sizable gains, but there has still be an overabundance of buying of Jinko shares in the past few days," the Auriga analyst noted.

So is Trina Solar about to blow away the quarterly Street consensus when it reports on August 24?

Consider this: noted solar bear Gordon Johnson of Axiom Capital thinks Trina is going to make the Street consensus look as conservative as a Tea Party voter, and that as far as short-term trades in solar, trading ahead of the Trina earnings is an idea investors can't ignore. Given his bearish stance on solar longer-term, Johnson still doesn't like the prospects for a steady rise in Trina's share price, but he thinks Trina's share price is going up sooner, if not also later. Even if the solar bear thinks Trina is ultimately headed back down to $21, he thinks Trina shares will hit the $25 to $26 range on strong quarterly earnings.

The current consensus on Trina Solar is earnings of 49 cents per share. Axiom Capital thinks Trina will report earnings almost twice that consensus level, at 83 cents per share. That kind of outperformance from Trina would force Street estimates for the future Trina earnings up, and rally shares of Trina Solar.

For once, the solar bears and bulls are aligned. Barclays was out with a bullish call for the solar sector on Wednesday, and an upgrade of Trina Solar to buy, one of only two solar stocks that were raised from a hold rating.

Here's the tale of the tape on Trina Solar:

Consensus EPS Estimate:

49 cents per share

Range of EPS Estimates:

37 cents to 71 cents

First Quarter 2010 EPS:

66 cents (outperformed Street consensus of 61 cents)

Consensus Revenue:

$334 million

50-Day Moving Average:

$21.79

Share Price Gain or Loss on Day of Last Earnings:

$1(gain; though the gain was erased on next trading day)

Lowest Share Price Since Last Earnings:

$15.68 (June 8)

Highest Share Price Since Last Earnings:

$24.25 (July 26)

Yingli Green Energy outperformed the Street in its earnings on Thursday morning, but investors were not ready to spearhead an earnings rally for Yingli.

Yingli beat the Street consensus of 19 cents, generating 21 cents per share earnings in the second quarter. Yingli revenue of $398 million was ahead of the Street expectation of $371million.

Yingli outperformance of the Street came after a double-digit growth increase quarter over quarter in shipments, and a higher average sales price on those shipments. Bullish analysts had noted ahead of the earnings that due to its in-house wafer production eliminating exposure to the tight pricing of wafers on the open market Yingli had the potential to outperform.

Arguably the best number in the Yingli second quarter earnings was that it managed to squeeze a little more out of its gross margin, which had been at a record level in the first quarter, and set another record in the second quarter, at 33.5%.

Yingli upped its gross margin guidance for the full year, to a range of 28% to 30%, from its previous guidance of 27% to 29%. It was a raise, though it's probably important to note that the raise is based on the record margins achieved in the second quarter. Due to Yingli's ramping up of its polysilicon production plant and another 400MW of modules in the second half of the year, gross margin in the second half will actually decrease quarter over quarter to the 28% to 30% level.

With expectations for earnings from Trina and Yingli roundly expected to be good, Yingli may have needed a blowout to propel its shares much higher in the short-term, having already rallied off its June low point, up 21% since early June. It didn't get one.

Yingli says that gross margin confidence comes from a variety of reasons: 400 MW new capacity put into initial operation in July, an expected average selling price of modules remaining strong, and exchange rates becoming favorable again.

Yet investors weren't so sure about ASPs and margins, especially with Yingli saying that gross margins would be lower in the second half of the year, and costs, instead of continuing down, actually rise a little due to the polysilicon plant ramp and 400 MW of module production coming online. Yingli says it will be back to its cost-cutting, higher margin ways come the turn of the new year, but the reaction to the earnings was not showing 100% confidence.

>>Solar Winners & Losers: Canadian Solar, Yingli Green Energy

As solar players look to show their geographic diversification, a statement by Yingli in the earnings release that deserves more investigation was Yingli saying it has become "the leading supplier of PV modules in New Jersey and California." At least one analyst, Christine Hersey at Webush Securities, who watches the California market closely, said she could not find a metric for California in which Yingli would come out on top. Sunpower and Suntech have been the undisputed leaders for years, and Suntech the Chinese module maker that has grown the fastest.

Liansheng Miao, Yingli Green Energy CEO, won't quiet 2011 bears, either, with his earnings statement comments, saying, "we are confident in our prospects for a strong second half of the year."

Yingli gave a more bullish signal about 2011 when asked by an analyst on the earnings conference call about demand next year, saying that customer demand is more than twice what Yingli can produce and pricing declines are only expected to be high single digits. Yet analysts expressed concern about double-orders that will eventually be canceled by customers, and Yingli didn't provide 100% assurance that double orders might not make its statement seem overly aggressive come 2011.

Here's the tale of the tape on Yingli Green Energy:

Consensus EPS Estimate:

19 cents per share

Range of EPS Estimates:

9 cents to 37 centsP/>

Actual Second Quarter 2010 EPS:

21 cents

First Quarter 2010 EPS:

18 cents (underperformed Street consensus of 22 cents)

Consensus Revenue:

$371 million

Actual Second Quarter Revenue:

$398 million

50-Day Moving Average:

$11.36

Share Price Gain or Loss on Day of Last Earnings:

45 cent (loss)

Lowest Share Price Since Last Earnings:

$8.61 (day after Q1 earnings)

Highest Share Price Since Last Earnings:

$12.59 (July 26; same day as last Trina high)

Gain/loss on Thursday:

3% (loss, at midday)

Short Interest as % of Float:

4.9 million shares (as of July 30, 149 million shares total outstanding)

The outlook from Trina and Yingli on cost control will be one key to the earnings reaction distinct from the headline numbers -- even if outlook on 2001 demand may have to wait until later in the year.

There is only so much room that the low-cost leaders among the Chinese module makers have left to chip away at non-silicon costs. Trina Solar's gross margin peaked in the fourth quarter of 2009, and came down slightly in the first quarter of this year. Yingli gross margin peaked in the first quarter results.

Polysilicon prices have been moving higher, and while ASP stability and cost reductions may have more than offset that trend in the past few quarters, investors will be heightening attention to how the low-cost Chinese module leaders continue to drive down non-silicon costs.

Yingli took its non-silicon processing costs down by another penny in the second quarter, to 74 cents from 75 cents last time it reported, but the cost efficiencies have been declining. One analyst estimated that with the figure provided by Yingli for non-silicon processing costs, Jinko Solar may have passed Yingli in terms of the lower costs model in the second quarter.

-- Written by Eric Rosenbaum from New York.

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>>Barclays Gets More Bullish on Solar

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