Solar stocks get second wind; this one may be sustainable

A re-appraisal of the global market for solar PV modules – predictions of higher growth and a rebound in margins – is underpinning massive gains in the stock prices of global manufacturing firms. And some analysts suggest it might be sustainable.

Share values of some publicly listed PV companies fell dramatically earlier this year – to the point where some were in danger of being de-listed – because of continuing concerns about a global glut of modules, and the collapse of Suntech Power, which had once been the market leader.

But what has followed has been a strong rally, underpinned by a gradual return of margins for the major manufacturers, a thinning out of second and third tier manufacturers, and a strong boost in demand projections.

Overnight, stocks rallied again, boosted by a strong report by Canadian Solar, which said its revenues were ahead of expectations but, ore importantly, its margins had also returns. The rally has come despite continued concerns about the impact of “trade wars” between China and the US, and growing threats of the same between China and the EU.

Japan, is the key on the demand side. In a report released on Tuesday, Deustche Bank suggested that he Japanese market, underpinned by generous feed-in-tariffs, could reach an annual “run rate” (a rolling 12 month measurement rather than a calendar year one) of 7GW to 9GW. That would make it the largest in the world, and 10 times the size of the Australian market.

Deutsche Bank said its “base case” forecast for  global solar PV demand in 2013 was now 40GW – almost one quarter above most forecasts made at the start of the year. Even the prospect of EU import tariffs would only lower this forecast down to around 35GW.  It said demand should also improve.

Leading solar stocks have more than three fold in 2013. These include the two biggest US stocks, First Solar and SunPower, which have both risen around 270 per cent since the start of the year.It should be noted, however, that most stocks are still trading well below their peaks of 2009 or earlier, as these two graphs of Sunpower show. The first is for the last 12 months, the second for the last 5 years.

Chinese stocks such as Yingli, Trina and Canadian Solar have posted smaller rises, although both Trina and Canadian jumped sharply overnight. Canadian’s 10 per cent  overnight gain was underpinned by a 20 per cent rise in forecast shipments – underpinned by the surging Japanese market, which now accounts for 25 per cent of sales – and a near doubing in gross margins to 9.7 per cent.

“Despite the strong year-to-date performance, we believe solar rally has legs,” the Deutsche Bank analysts wrote. “Demand outlook is improving due to strong demand from Japan, China, US and other emerging markets. Supply situation is also a lot better in our view – Chinese tier 2 (and tier) 3 supply cuts have accelerated over the past 18 months and supply from large Chinese companies such as STP, LDK has decreased sharply, particularly in markets outside of China.”

The analysts said a positive outcome on the tariff war and gradual profit improvement could act as the next set of catalysts for solar stocks. It cited US solar stocks (WFR, SPWR, FSLR) along with TSL could continue to see positive momentum, in our view.  Supply has already declined as several lower tier Chinese module makers go into bankruptcy and others unable to add capacity.