(JA Solar, Solarfun story updated for Wednesday market close)
Zhabei, China (
upped its shipment guidance for the first quarter on Wednesday morning and solar shares roared ahead, in the latest "here we go again" solar rally.
Will this solar rally last? Or is it just the first of many signs to come of the pull-in demand in Germany exceeding already bullish expectations ahead of the feed-in tariff cuts in the second half of 2010, yet a pricing cliff for solar still further out on the horizon?
JA Solar said that its first quarter shipments would exceed 265 megawatts, versus a previous high-end guidance of 225 MW, provided on Feb. 11.
JA Solar said in a statement that streamlining in its existing solar-cell manufacturing facility allowed it to achieve higher than expected production, in particular, production headed for European customers who have been expected to outsource more of their solar business to low-cost Chinese producers. JA Solar is considered the lowest-cost cell maker in the world.
The revised first quarter numbers sent JA Solar shares up 9.7% on Wednesday, with a whopping daily trading volume of more than 40 million shares. JA Solar's average daily volume is 8.3 million shares traded.
The better-than-expected first quarter shipment levels are a short-term positive, and a near-term catalyst for JA solar and the solar sector more generally. Still, analysts were divided on whether the first quarter surprise was a good indicator for the full year solar story.
"It's a net positive and from everything we are hearing the industry is strong on volumes," said Jeff Bencik, analyst at Kaufman Brothers.
Five solar companies had returns on Wednesday of at least 6% or greater, led by JA Solar and followed by
JA Solar's upwards revision on shipments seemed to give renewed strength to the old Street thesis that the low-cost Chinese providers would be the biggest beneficiaries of lower feed-in tariffs in Europe. Though high-cost Chinese player Suntech's big day also leads one to the conclusion that it wasn't just about the low-cost argument, but a general optimism on short-term solar demand that was gaining an edge over the recent deterioration in solar shares.
The trading in all of these Chinese solar stocks was at least double, and in some cases quadruple, average daily trading levels. The solar gamblers' mood was a double down, and then some, after a refusal to even bring cards to the table in recent months.
Not all solar watcher were willing to call the victory for solar on Wednesday, though. Another solar analyst pointed out that with severe winter weather improving and the demand pull-in expected to be strongest in the first quarter, this type of positive should not be a surprise. "The weather is clearing and a backlog has been built up because of the winter, and as we all know with the German situation, there is a limited amount of time to make a big amount of money," the analyst said.
The Kaufman analyst was more positive on the overall impact of the JA Solar revision. Nonetheless, Bencik conceded, "While more solar companies may report better-than-expected numbers in first half, it's a positive based on what was already expected to be a good first half of the year. If some solar company can up overall annual guidance, that's more meaningful," Bencik added.
Macquarie Securities analyst Amy Yong wrote in a flash note on Wednesday morning, "Guidance increased on robust demand, just as we expected.... The new guidance is 18-23% higher than its prior 215-225 MW expectation and compares to our estimates of 220 MW and 915 MW for 1Q10 and the full year, respectively.... We believe there's likely more to come."
Fellow Macquarie Securities analyst Kelly Dougherty predicted that the market will see incrementally more JA Solar-like announcements for next six months. "I was in China last week, and I was favoring Chinese companies in the solar sector before traveling to China. I was not a raging bull, and I didn't come back that way either, but I certainly heard far more bullish forecasts from Chinese solar companies than what I expected," Dougherty said.
Credit Suisse was recently out with the most bullish call on solar guidance so far in 2010, predicting 12.7 gigawatts of solar capacity installed for the full year.
Bencik said that while some solar shares should rally on the news because they have been arguably undervalued as sentiment has stayed negative on solar for much of 2010, analysts are still waiting to see how everything plays out. The Kaufman analyst is cautiously optimistic, saying that the solar industry has rapidly moved from one geography to another in the past, and so the expected feed-in tariff reductions in Germany are not a fait accompli in bringing down solar, and as much depends on the mix of geographies in the solar demand second half 2010 story.
A solar analyst who is in between coverage and could not be quoted by name said the JA Solar positive news development doesn't change the fact that improvements in volume alone do not merit a sustained rally in solar.
"There is still the pricing issue on the horizon and so it is hard to make the case for strong gains in valuation," the analyst said. The analyst added that the biggest game changer in the full year story would be if Germany drags its heels any longer on the feed-in tariff reductions, thereby allowing solar demand and pricing to remain stronger in Germany beyond the second quarter.
The analyst noted that on its last earnings conference call
said pricing in the second half would still allow for rates of return on German solar projects of 8%.
While that level of return has been "good enough to move the German market in the past," the analyst said with current volume guidance from solar companies at a level unlike it has ever been before, stimulating a market might require further price reductions to make more attractive excess rates of return. "Solar companies may have to drive excess returns to soak up the volumes," the analyst explained.
Macquarie's Dougherty said that Suntech's premium pricing has to come down in 2010. Suntech already told Macquarie that they can sell at five to ten cent ASP premium to the rest of the Chinese companies, which is already a concession of their pricing erosion.
Suntech was up 6.3% on Wednesday and traded at twice its average daily volume.
At a larger level, the Chinese solar companies as a whole are talking about pricing north of $1.50/kwh in the fourth quarter of 2010, and there are Western companies that can not even produce at that price, the Macquarie analyst said. "They don't have to lower prices that much more to spur demand because they will be taking more market share in 2010," Dougherty said.
The Macquarie analyst conceded that the Chinese solar companies don't have full visibility on pricing at this point, but nonetheless, demand indications have them confident.
Bencik still expects something of a shake-out in solar by year-end. The solar companies that demonstrate that they can cut costs more than average sales price reductions and generate better than expected profits should be obvious by year-end.
JA Solar said that the first quarter performance provided better visibility for the full year, however, the Chinese solar company remained vague on full year guidance, saying it would update its number with first-quarter earnings in mid-May.
Two solar analysts said on Wednesday that the Solarfun action was an example of a solar stock that has been undervalued -- if not completely lost in the shuffle -- and so it made sense that it would rally as a valuation play on the strong guidance from JA Solar. Solarfun had the second-best returns on the day, up 8% on twice its average daily volume of trading.
Solarfun has been in the background, or directly overshadowed by Suntech,
Yingli Green Energy
and Trina, analysts said. However, Solarfun has been working the conference circuit hard this year and talking up its aggressive cost reduction strategy and, in particular, return on equity, which is a rarity among Chinese solar companies.
"Chinese solar companies have been more concerned about taking market share than return on capital or equity," said a solar analyst. "Solarfun has a low cost structure and has highlighted its cost structure, while also providing a reasonable outlook," one analyst who does not currently cover Solarfun shares said.
Macquarie Securities' Dougherty said that as solar companies incrementally move guidance up in the next few quarters, sentiment on solar should improve. Still, acknowledging the volatility in the sector, the analyst couched her confidence by saying that sentiment on solar should improve "for now."
And the Macquarie analyst was cognizant that even if the pricing pressure in solar doesn't play out to the extent previously expected in 2010, it happens in 2011. "You can't be a raging bull on Chinese solar names indefinitely, but for the next few quarters, there should be strong fundamentals, and guidance and Street estimates will have to come up."
-- Reported by Eric Rosenbaum in New York.
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