For Solar, April May Be the Cruelest Month

A report on Thursday surprises the solar sector with Germany moving to cut solar incentives by April, instead of Germany -- and that could spell big trouble for solar revenues and gross margins in 2010.
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BERLIN, Germany (

TheStreet

) -- Germany was widely expected to further reduce its solar feed-in tariffs by July 2010, but a report on

Reuters

Thursday indicated that the German government may move ahead with a 16%-17% reduction in its solar incentive scheme by April.

The move-up to April, if true --

Reuters

only quoted anonymous sources in German industry and government -- could be a bigger problem for solar firms than the percentage level of the German feed-in tariff reduction.

Some solar analysts and investors have been sending solar shares higher -- in particular the Chinese solar module and systems players -- in recent months on bullish outlooks for the first half of 2010. The predictions for a big first half of 2010 have been predicated upon a "front-loading" of earnings to get in as much German solar installation as possible ahead of the feed-in tariff reduction, expected in July.

Germany's failure to move sooner to reduce tariffs has already created a bubble of sorts -- in the form of a big backlog of solar inventory scheduled to be installed over the first half of 2010.

France, notably, moved very quickly to avoid a bubble related to its solar feed-in tariffs on Wednesday. France, having witnessed an increase in applications for solar installation to the level of 3,000 per day in November and December -- versus 5,000 a month during the summer -- announced a solar feed-in tariff reduction of 24%.

While the April move-up date was not confirmed by Germany on Thursday, it could very well be that the government is trying to stem the bubble in solar it has already helped to foment by saying it would reduce tariffs, but allowing people to think it would not occur until July.

There was also a stock market bubble in the solar sector, specifically targeting the Chinese solar stocks like

Trina Solar

(TSL)

and

Yingli Green Energy

(YGE)

, among others. Chinese companies have been aggressive in their road shows, said Gordon Johnson, a solar analyst at

Hapoalim Securities

well known for his bearish outlook on many of the solar stocks. What's more, many sell side analysts have aggressively raised price targets and estimates for Chinese solar stocks, not based on previously reported strong numbers as much as projections for a big first half of 2010.

Collins Stewart

last week raised its price target on Trina Solar from $56 to $75, and said 2010 earnings would be "front-loaded."

While the French reduction did not set off panic in solar, a move up in Germany's scheduled reduction to April could mean that the big first half that many of the Chinese solar firms have been promising won't happen.

With an April date as opposed to a tariff reduction after the first two quarters of 2010, the inventory backlog that was scheduled to be moved over the first and second quarter would have to be run through in about a month. While weather is unpredictable, at least so far the winter in Germany does not look as if it would allow for a high level of solar installations in the early part of the first quarter.

FBR solar analyst Mehdi Hosseini wrote today in a note about the reported German reduction, "The pulling of effective time from July to April is even more significant as most solar manufacturers were saying they had decent visibility for the first half of 2010. We think much of the shipments for 2Q10 will be pushed out to 3Q10 and module glut will come sooner than most on the Street thought. The push out of module orders may even reduce the proposed capacity expansion for some manufacturers."

Hosseini continued with his bottom-lining of the April surprise: "We think the next cycle of module glut will come sooner than the Street thinks and FY10 revenue, gross margin and modules ASPs will have downward pressure."

Not all analysts are in agreement, though. Piper Jaffray put out a note saying that the level of the reduction was as expected, while it actually denied that

Reuters

got the story right. What's more, Piper Jaffray wrote that the move wouldn't impact the long-term health of solar in Germany.

Notably, Piper did not discuss the problems with a move-up to April by Germany, still referring to a July 1 date in its research note about the relatively benign impact of the German feed-in tariff reduction.

Cowen & Co. put out a note saying that solar stocks were being oversold on the news of a reduction still in the range of the expected 15%. However, on the issue of the move to April as reported by

Reuters

, Cowen only stated that it believed such a move would be difficult for Germany to pull off due to the government approval process. Cowen, did not, however, say what could occur if Germany does find a way to reduce tariffs by April.

First Solar has by far the biggest business in Germany. Still, given the run-up in Chinese solar stocks over the past few months, if the more dire predictions about the German feed-in tariff reduction move-up to April are true, Chinese solar stocks should have been hit much worse today than First Solar.

That's exactly what happened, too.

Trina Solar ended Thursday with a loss twice the level of First Solar's loss -- down 11.8% versus First Solar's loss of 5.5%. More than 8 million shares of Trina were traded on Thursday, versus an average daily trading volume of a little over 1 million.

Yingli was down 7%, with more than 11 million shares traded on Thursday, versus an average trading volume of 4.2 million.

No doubt, Thursday has been a day for some significant profit-taking by investor in these Chinese solar stocks, like Trina, that have doubled in price in a matter of months. Some solar investors have

Reuters

to thank for an early profit-taking opportunity in some ascendant Chinese solar stocks, regardless of argument over the accuracy of the report.

Suntech Power Holdings

(STP)

,

JA Solar

(JASO)

and

Canadian Solar

(CSIQ) - Get Report

all ended Thursday down between 8%-9%.

JA Solar, which has been bid up as much as any solar stock of late, saw a whopping 20 million shares traded on Thursday, versus an average daily volume level of 9.5 million shares traded.

"The report is a good excuse to take profits," said one solar analyst who did not want to be quoted, adding, "We expect more of it. The pullback won't be done until the news is confirmed."

Hapoalim's Johnson said any analyst attempting to deny the report, while also not even commenting on the April move-up date for the reduction, is "dead wrong."

Johnson said that if the April date for the feed-in tariff cut turns out to be correct -- and he has sources in Germany saying it is accurate -- it is a huge negative for the first quarter. "There has already been massive snowfall in Germany and no installation going on. Solar companies have been building up inventory ahead of what they thought would be a big second quarter, and if that inventory can't all be consumed, the average sale price in solar falls immediately," Johnson explained.

Trina arguably had the best earning from the third quarter in the solar sector. However, the Hapoalim Securities analyst noted that more recently Trina shares had moved from $30 to a 52-week high over $60 -- hit this week -- without reporting any new numbers. "These stocks are up 5% every day without new numbers, with no fundamentals supporting that rise," Johnson argues.

It was no surprise to Johnson, then, that when

Reuters

reported an April date for the reduction, the profit takers and short sellers kicked into action.

"The Chinese have been the most aggressive at pumping their stocks and people did not expect a middle-of-the-year reduction date from Germany."

If the April date turns out to be right, April may indeed by the cruelest month for the solar industry -- and many of its investors -- in some time.

-- Reported by Eric Rosenbaum in New York.

RELATED STORIES:

>>France Cuts Solar Tariffs, Panic Averted

>>German D-Day for Solar Arrives, Losses Mount

>>Solar Tariffs: 2010 Outlook

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