PV industry has been a hot topic in recent years. Investors still remember the China EU solar war, which symbolized the recession of this ever sexy industry. Actually survivals bounced back before Europe and China found a solution for their mutual benefit. Investors who missed the rally of 2013 may have regretted. However it is not that late.
We are going to discuss several solar stocks in this article. The first one is a Chinese manufacturer Trina solar (TSL), a global leader in photovoltaic modules, solutions, and services. TSL has shipped about 2.6 GW modules and systems in 2013 and it has managed to make profit again in Q3 after a two and a half years’ money losing scenario. Q4 results were announced at March 4th as ASP and EPS remain quite stable. Its closing price today is 16.18$. Since I chose it as one of the bulk-holding stocks in my MarketWatch US market portfolio in December 9th, 2013, after a substantial correction, the stock price has risen by 27%.
Our question is why did TSL take the lead in regaining profit facing its peers? What advantages does it have?
Healthy balance sheet with cautionary expansion.
TSL has kept a relatively healthy debt asset ratio of about 69% and strong cash positions, which helped it to survive during the long recession. It did not take aggressive expansion strategy while paying attention to reducing cost.
If we take a look at TSL’s 2013 sales revenue breakdown by regions, we can found that it has a relatively balanced segmentation among the major solar markets: China 27.7%, US 15.4%, Germany 10.5%, UK12.1%, Japan 9%, ROW 16.4%.
TSL has made a stable gross margin of 15% for the last two quarters. We expect it to be increased towards 20% as the downstream strategy adopted will come up with much higher margin. Its manufacturing capacity will be added by at least 1GW while ASP is expected to be fairly stable. The revenue generated by projects is estimated to account for about 15% in total revenue this year and may surpass 25% in 2016. We give it a buy rating with an estimated EPS 0.90$/ADS, 25x P/E, target price 22.5$ for 2014.
The 2nd stock is another Chinese manufacturer JA Solar (JASO). It has a similar situation with a healthier balance sheet and stronger cash positions but less profitability. It has not turned back to profit earning track yet with a single digit gross margin, but it may get close to it when Q4 results to be announced March 17th, next Monday. It has lagged behind a little in the downstream trend. However it is on the right track. We also give it a buy rating with an estimated EPS 0.73$/ADS, 20x P/E, target price 14.6$ for 2014.
Meanwhile we should pay attention to the risk.
(1) Macro economy risk. China is now the leading solar market. Its crucial real estate industry is facing substantial downside pressure. Investors are worried about this long standing bubble.
(2) Quitting QE may drag down US solar market.
(3) Overproduction may reoccur.
In the end we will take a look at a US PV manufacture and services provider, First Solar (FSLR). It has just announced a disappointing 2013 Q4 result: revenue is much less than estimation, gross profit declined quarter to quarter. It seems that its project pipeline has encountered a little problem. Its CdTe-based modules have fewer advantages over silicon based modules than before and it has started trying silicon based technology after the acquisition of TetraSun. People may doubt that First Solar might change its strategy. Investors should avoid it until its future is more clear.