Pre Grid Parity, Darkness Before the Dawn
It’s half year report time for those fancy public companies, also time to give updated annual outlook after half year shuffling. Again the topic is brought up that some Chinese public companies are fairly undervalued by western stock market. As the most vigorous and sizeable market for the last decade, enormous number of Chinese companies have got to IPO to share the great exuberance with capitalists. In case of PV industry, many Chinese producers got listed, in both domestic and the U.S. stock market, around 2006-2011 when solar energy first time got to mass production. However, there’s been speculation that PV industry is probably the circle giving almost no room to evade bitterness from fastidious wall street investors. That said, most top producers at middle position (wafer, cell and module) are Chinese companies, and listed in U.S. stock market (JKS, JASO, CSIQ, and the fallen ones TSL, STP, YGE, LDK, etc. ). Many have increased both capacity and revenue by 10 to 15 folds in past five years, but their stock price and valuation remains even fraction of IPO price back to 2010. What’s worse, the 2011 downturn has likely burned tentative hands of stock investors and built impression the first place that solar is tough business and riddled with pitfalls. The sentiment permeated investment society that not only Chinese PV companies, but also, the broader solar companies were squeezed ever since. As result, we are seeing sort of absurd scene in PV industry where some U.S. listed Chinese PV producers have got ridiculous low valuation that no investment dogma cold explain. For example, No. 1 panel maker JKS got $3bn revenue, 8-10% worldwide market share in 2016, while market value is only meager $500ml-1bn and P/E 2-5. In comparison, some peers listed in China domestic stock market have reached $3.5-4.0bn valuation and P/E around 20, while revenue only half of those listed in U.S.. Even those tier two producers, widely recognized as weak players, have mostly reached >$1bn being listed in China. Also notably, Chinese PV companies listed in U.S. and HK have widely become target of attack from short investors. Top makers like JKS and CSIQ have got 20-30% of floating stocks shorted, all the time.
What’s behind this irrational low valuation of PV companies and the twisted comparison between stock markets?
I am basically a sales and marketing person, not an investment professional. But working in two public PV companies (one listed in China domestic one in S. Korea) I did learn various knowledge in regard of finance and investment. And I know sentiments among investors, or industrial people themselves, are something complicated and far beyond simple finance analysis and market research. Gazing at delicate part of this sentiment, politics, culture, business style, and the like, is beyond my capacity. However I can take a look into PV itself as a pure business sector, and what’s around those PV producers when it comes to investment perspective.
I think there will be few denying solar manufacture has the following features, in orderly fashion
1, Always low GM and net income ratio. As noted countless times, solar panel has become a commodity production. This will last as long as c-Si technology stands as mainstream in PV circle With lower and lower entry barrier, the race of expansion have never eased since 2010. Most public PV companies reported lose, many demised, until 2014. With deliberate practice some companies could get middle teens GM and single digit net.
2, Not only low GM and net income rate, prices across whole supply chain are also at fast decline. Panel price dropped by almost 90% since 2010, and same pace as most other components. This is wonderful for end user and demand growth, but nightmare for producers and investors.
3, Not only low GM and new income, and fast declining prices, but that PV producers could wake up every morning finding their factories and process become obsolete. This industry has been in suffocating race of technique evolving and cost cut for the past years, and surely will be for years to come.
4, Not only low GM and new income, fast declining prices, and rapid evolving, but all producers are in desperate chase of capital to grow capacity and upgrade technology, or they would fall off from front line and what’s worse, all old facilities (mostly 2-3 years though) would go bust when they lose their edge of efficiency and cost. Cash flow running low or negative is routine activity as CAPEX always running high, this is especially bad feature for investors.
5, Mounting debts. Struggling to stay in the league of “world biggest maker of this product” or “high efficiency maker”, borrowing becomes daily work for all PV producers. Bank loan, VC, convertible bond, private placement, whatever manner they can get hands on. Growing huge as these companies are, becoming fragile are they under attack of downturn.
6, Finally, enough said already that PV is still a heavily subsidies dependent business, which means, producers suffer a lot from political volatility and subsidy cut offs. As result, payment performance along the supply chain is very poor. It’s especially so when it comes to exposure of Chinese PV projects, haunted by rapid accumulation of capital needs and delayed FiT payments. Therefore, piling A/Rs are another big concern for investors when looking into financial report of PV producers.
In short, this is likely an industry ridden with all negative prospects a professional investor could find. A fraction of these features would be scary enough to drive investors far off, such a stark contrast to exuberance in norms these days toward solar energy and renewables.
Someone would argue that this is not a long last situation. Not like other long established insipid industry, PV has got its pilgrimage down the way right before a truly great flourish. It’s grid parity with any other forms of energy sources (or free of FiT support and under same subsidy schemes with other sources). Check out my previous posts to see how far away we are from grid parity. When that day comes, it will be like many turning point of lifestyle in human being history, like motor cars replacing horses and carriages, smart phones replacing talking phones, to name some of those. When that day comes, all demand supply metrics will be restructured. Prices should be relatively fixed as it’s directly connected to electricity consuming market, unless disruptive technology appears to eliminate current c-Si technology (this could be a great risk for both producers and investors but it needs more than a report to address). And demand will skyrocket for years, along with fossil fuels retreating. A fixed price plus surging revenue outlook would be an combination most attractive for investors. We all know many PV companies are “gambling” on arrival of this great turning point, many having fallen on the road but even more coming up to join the fanatic. There is no way of telling who will be the last stand among these current No.1s. But it’s clear that they are laying the foundation for the future, and the gain having been that the day would come almost a decade earlier than expected. What’s even clearer, investors would soon find themselves faced with much more expensive stock price in PV industry which they abandoned just a few years back.
Author:Xiaodong(Bond) Wang Former Director Int'l Business Development