China Solar: Long-Term Investors Will Participate This Year, Say

China Solar: Long-Term Investors Will Participate This Year, Says Deutsche

 

By Shuli Ren

Deutsche Bank, a solar bull, thinks this year solar will have a “second gold rush”, helped by long-only investors. The broker has a Buy rating on Trina Solar (TSL) and Yingli Green Energy (YGE), and Neutral rating on First Solar (FSLR) and SunPower (SPWR).

Solar shares outperformed in 2013 largely due to short covering and day traders, says Deutsche. But as global demand diversifies and new business models arise, the broker expects this year’s outperformance to be driven by long-only investors. Here is Analyst Vishal Shah:

Solar stocks have historically traded at a big discount to the market due to concerns about low entry barriers, low margin manufacturing businesses and high reliance on government subsidies. We believe evidence of more sustainable, diverse demand drivers along with emergence of new business models with high entry barriers could result in increased investor participation and valuation multiple expansion.

Shah also raised his global demand estimates:

We are raising our 2014 and 2015 demand expectations to ~46GW and ~56GW respectively. We believe upside demand surprises from the US, Japanese and Chinese markets could continue in 2014. We expect streamlined incentive programs in China, additional subsidy cut signals in end 2014, and decreasing financing constraints to act as catalysts for upside.

Tight financing in the more commoditized upstream segment means supply will be limited, which is good for margins:

We expect global project finance focus to remain skewed towards downstream as opposed to upstream, which in our view could limit capacity expansion and drive some supply tightness. We expect some tightness in the poly and wafer segments and see prices rising by ~10-20% from current levels. We believe cash costs of some of the tier 1 poly suppliers are in the high teens to low 20s, at or below the current price levels and prices would need to rise above $25/kg levels in order to drive some of the tier 2/3 poly suppliers to turn on their mothballed production capacities. More importantly, we also expect availability of working capital financing from Chinese banks to remain relatively challenging which in turn means supply tightness could persist through early/mid 2015 timeframe until new greenfield/brownfield projects come on line.