Despite near-term profitability headwinds, Chinese solar stocks will rise tremendously over the medium- to long-term for several reasons. Some of which include the proliferation of solar energy around the world, easing of supply pressures, stabilization of prices and two negative catalysts that investors are worried about failing to materialize.
The valuation of large Chinese solar stocks JinkoSolar Holding Co., Ltd. (NYSE:JKS), Canadian Solar Inc. (NASDAQ:CSIQ) and JA Solar Holdings Co., Ltd. (ADR) (NASDAQ:JASO) remains at bargain basement levels, making them extremely attractive for investors willing to wait six months to a year for a rebound.
There is no doubt that solar energy is still growing rapidly, as regions from Southeast Asia to India and, yes, China, rapidly add more solar power. Reflecting this trend, the revenues of JK Solar, Canadian Solar and JA Solar all rose last quarter versus the same period a year earlier.
Profitability was another story, with the gross margins and profits of JKS, CSIQ and JASO falling as the prices of their modules fell sharply. But a number of factors should enable the companies’ profitability to rebound going forward. Supply pressures should ease as smaller Chinese solar energy players and solar energy companies outside of China go out of business or declare bankruptcy due to the falling prices.
Meanwhile, demand should continue to grow and the price of polysilicon, a key raw material for solar modules, is expected to stabilize or drop.
Additionally, a couple of negative catalysts that investors appear to be worried about probably won’t materialize. Specifically, Chinese government programs will prevent demand for solar energy from plunging there in the second half of the year after solar subsidies decline. And President Trump probably won’t impose a price floor on solar imports in response to a petition by Suniva, since doing so will, as Axiom analyst Grodon Johnson told Bloomberg, eliminate thousands of U.S. jobs.
Although Chinese solar stocks are having some profitability issues and they may continue to experience some volatility in the near-term, their medium-term outlook doesn’t look too bad. Moreover, given the continued price drops of solar energy and its rapid proliferation around the globe, along with the continued anemic valuations of Chinese solar stocks, the sector’s long-term outlook remains very bright.
With that as a backdrop, here’s more information about these Chinese solar stocks to buy.
Chinese Solar Stocks to Buy: JinkoSolar (JKS)
Last quarter, JinkoSolar’s total solar module shipments jumped 29.3% year-over-year and its revenue rose 9.4% year-over-year. However, its gross margin fell to 11.2% from 20.5% and its income from operations declined to RMB56.8 million from RMB529.1.
However, the company said that polysilicon prices are “stabilizing,” which, combined with capacity increases, will give its gross margin “room to improve” for the rest of the year. Moreover, JKS believes that programs initiated by the Chinese government “will provide strong support” for the solar industry in the second half of this year.
Furthermore, “demand from India and (other) emerging markets continued to grow rapidly,” the company stated.
Last month ,there was a development which I believe makes JKS especially intriguing. The company announced that its chairman had held “a strategic meeting” with Saudi Arabia’s deputy minister for Electricity Affairs, who is also the chairman of the Saudi Electric company. According to the press release, the Saudi official was “ impressed by JinkoSolar’s development history, deep experience, solid financing capabilities, and strong project development track record.”
Since the meeting, JinkoSolar’s stock has significantly outperformed the shares of CSIQ and JASO. Although I don’t believe that China would ever let a foreign entity acquire JinkoSolar, I think it’s possible that the Saudis are considering making a sizable investment in JKS. This move would significantly boost the shares of JKS and would have a positive effect on investor sentiment towards the entire sector.
JKS is trading at a trailing-twelve-month-price-to-sales-ratio of just 0.18.
Chinese Solar Stocks to Buy: Canadian Solar (CSIQ)
Even though its called “Canadian Solar,” CSIQ gets a majority or near-majority of its revenue from China. In fact, “[i]n Q1, sales to Asia represented 58.2% of revenue, primarily driven by solid demand in China.” The company is widely considered a Chinese company and most of its top executives are Chinese — for these reasons, I’m including it on the list of Chinese solar stocks to buy.
With that explanation out of the way, let’s get to the nitty-gritty of CSIQ.
Last quarter, Canadian Solar’s net revenue jumped to $721.4 million, versus $677 million in the same period last year. Its gross margin slipped only slightly, to 13.5% from 15.6%, and its gross profit came in at $91.4 million, versus $112.5 million in the year-ago period.
CSIQ expects its margins to rebound in Q2, driven by lower polysilicon and cell prices, as well as “improving (selling) prices.” Selling prices will “probably”continue to improve into Q3, the company predicts.
CSIQ stock is trading at a price-to-sales ratio of 0.26.
Chinese Solar Stocks to Buy: JA Solar (JASO)
JA Solar’s total shipments jumped 32.5% year-over-year, and its revenue rose 6.4% year-over-year. The company’s earnings-per-share, however, tumbled to 3 cents from 40 cents as its gross margins dropped 4.9 percentage points year-over-year.
The company did say that it was “cautious” about its outlook for the second half of 2017, due to limited certainty about demand and competitive price competition.
But on a positive note, JASO said it was seeing “solid” demand from India, which accounted for 31% of its shipments, up from 7.7% in the previous quarter. And although the company expects Chinese demand to slow in the second half of the year, it continues to expect China to account for 40% to 45% of its shipments this year, suggesting that it does not expect the Chinese slowdown to be steep.
Additionally, it sees both India and the U.S. as growth engines in the medium-term.
JA Solar admitted that it was worried that selling prices could drop significantly in India and South America in the second half of the year. However, JASO said it did not expect prices to decline significantly in China or Europe in the second half of this year.
JASO trades at an anemic price-to-sales ratio of 0.14, and it has received a takeover offer of $6.80 per share from its chairman versus today’s stock price of $6.57.
As of this writing, Larry Ramer currently held a position in all three of the aforementioned stock picks.