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China Kills Solar

Written by Briton Ryle
Posted June 5, 2018 at 8:00PM

I will admit at the outset: I am confused by China's sudden about-face on solar energy installations. China has been the global leader in adding solar energy capacity for years.

In 2017, it added 53 gigawatts of solar power generation capacity. It takes around 4.5 million solar panels to produce a gigawatt of power. 

That was half of what the entire world added last year, and it brought China's total capacity to 130 gigawatts. 130 gigawatts is enough to power approximately 4.3 million U.S. homes.

Given that the average U.S. home uses something like 10 times the amount of electricity that an average Chinese home does, China has enough solar to power 43 million homes for a day. (China also has close to 200 gigawatts of wind power, good for 4% of total electricity capacity.)

China has been trying to reach a goal of 20% renewable power by 2030. And it makes sense because China has serious air pollution problems. Plus, it doesn't have natural gas like the U.S. does.

China's commitment to solar energy has made Chin ese companies the biggest solar panel makers in the world, companies like ReneSola, Trina Solar, JinkoSolar, and China Solar. Combined, they exported nearly 40% of the world's panels last year. 

So why would China suddenly attack its own solar industry?

So China Hates Solar Now?

The South China Morning Post ran this on Friday:

A joint statement put out on Friday by the National Development and Reform Commission, Ministry of Finance and National Energy Administration said the allocation of quotas for new projects had been halted until further notice, and tariffs on electricity generated from clean energy will be lowered by 0.05 yuan per kilowatt hour, a cut of 6.7 to 9 per cent depending on the region, effective June 1.

The official reason for cutting subsidies is:

To promote the healthy and sustainable development of the photovoltaic industry, improve the quality of development, and accelerate the subsidy retreat... 

I'm not going to knock subsidies. We subsidize stuff all the time here in the U.S. I'm not going to criticize the abruptness of China's actions, either. At some point, solar companies have to be able to survive without the handouts.

Still, it's curious. Because from what I've read, China has already met its "allocation of quotas for new projects." So it's basically done for the rest of the year.  

I came across a couple interesting theories about all this. Here's a best-case scenario: 

The decision may be rooted in actions of the Trump Administration. Earlier this year, President Trump announced a 30% tariff on imported solar equipment that would last at least the next four years. The decision was a response to a couple of U.S. solar companies charging that China's solar subsidies were allowing Chinese solar companies to undercut U.S. solar manufacturers.

Because China is the world's leading consumer of solar power, I didn't expect this decision to have a huge impact on China's solar industry. But now that a larger trade war looms, China may have made a decision to signal to the U.S. that it will stop allowing Chinese solar panel makers to substantially undercut U.S. manufacturers.

Now, here's (perhaps) a more realistic outcome from Bank of America analysts:

China's decision to rein on its local solar industry poses the risk of an oversupplied Chinese solar market flooding the U.S. market, Dumoulin-Smith said in the downgrade note. This will naturally create "significant competition" in the U.S. market and result in price declines and margin declines for First Solar and its peers, the analyst said — and the problems could last until 2019 or even 2020.

Chinese solar companies likely have a lot of unsold panels lying around. The costs are sunk; companies may be in a position to take whatever they can get for their panels.

Blood in the Streets?

Solar stocks have been just crushed on this news, down over 20% across the board. Any time there's blood in the streets, you gotta think opportunity. So is there opportunity here? 

Clearly the first place to look is the best solar company in the world, First Solar (NASDAQ: FSLR). I affectionately refer to FSLR as "fizzler." But it's not so funny now that we've watched the 50% gain on the stock in The Wealth Advisory shrivel down to 8%. 

The risk is that the U.S. follows suit on removing subsidies sooner than the market expects. We all know subsidies will end at some point. It's just a question of when. 

A couple days ago, First Solar was a $7 billion company. Today, it's $5.6 billion and falling. But the company has $2.5 billion net cash and does ~$3 billion in annual revenue. So, not only is First Solar a survivor, but it may well thrive in this environment. It only gets 10% of its revenue from China. So that's a non-issue...

And if Chinese companies do try to dump panels in the U.S., I bet they get slapped with another round of tariffs and actually lose footing in the U.S. market. 

The stock is trading just above $53 today. Bank of America has a $63 target, down from $80 or so. Morgan Stanley dropped its target to $47 from $83. 

Either way, the stock is likely close to a buy point after investors have been furiously revaluing the company.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.


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