Doug Young
After a massive rally over the last year, shares of solar panel makers could be set for a few months of winter following a disappointing earnings announcement from superstar Canadian Solar (Nasdaq: CSIQ) and a debt default from second-tier player Chaori Solar (Shenzhen: 002506). Such a correction was almost inevitable after last year’s huge rally and shouldn’t be cause for concern among long-term buyers of shares in top players like Canadian Solar. But shareholders of second-tier firms like Chaori might think strongly about selling their stock, as these smaller companies could easily end up getting wiped out or sold for bargain prices in the sector’s ongoing consolidation as it emerges from a 2-year downturn.
Before we look more closely at Canadian Solar’s latest earnings and why they disappointed, it’s important that we first review just how much the company’s shares have soared over the last year. Canadian Solar’s stock traded as low as $2 as recently as late 2012, before embarking on a massive rally that saw it top the $40 level this year. Other solar panel makers also surged as their sector began to rebound, but Canadian Solar led the rally by becoming the first major player to return to profitability after most players reported 2 years of losses.
All that said, Canadian Solar’s latest earnings report looks respectable enough on the surface, but clearly wasn’t strong enough to support the huge expectations that it has created among investors. The company’s fourth-quarter shipments shot up 53 percent from a year earlier, easily beating its previous guidance, and revenue also jumped 76 percent. (results announcement) Canadian Solar also managed to stay profitable, though the profit was slightly below market forecasts.
But investors were clearly spooked by Canadian Solar’s outlook for the current quarter, in which it expects shipments to reach around 480 megawatts and revenue to hit about $425 million. Both of those figures are down significantly from the fourth quarter, when the company shipped 621 megawatts worth of panels and posted $520 million in revenue. That weak outlook, which Canadian Solar blamed partly on seasonal factors and severe weather in North America, sparked a sell-off in the company’s shares, which fell nearly 11 percent after it announced its results.
Meantime, the solar sector got some more bad news when Shenzhen-listed Chaori announced it would default on an interest payment for some of its domestic bonds. (English article) The amount of the default was relatively small, with Chaori saying it couldn’t fully make a payment of 89.8 million yuan ($14.7 million) due earlier this week. It added that it could only pay 4 million yuan of the interest payment.
The fact that Chaori couldn’t make such a relatively small payment reflects the fact that many solar panel makers currently have little or no access to new financing. Most lenders and investors are reluctant to give more funds to these money-losing companies right now, and that’s unlikely to change until they return to profitability. But many smaller companies like Chaori lack the scale and resources to compete, meaning they may never return to profitability and we could see more defaults from this group in the year ahead.
At the end of the day, I do expect that shares of the largest companies are likely to take a breather for the next 6 months, following their huge run-up in 2013. That doesn’t mean we may not see one or two rallies for individual companies, especially as others follow Canadian Solar in returning to profitability. Meantime, I wouldn’t hold out too much hope for smaller players like Chaori in the year ahead, as many could face similar cash crunches due to persisting losses and lack of access to new financing from banks and private investors.
Bottom line: Shares of major solar panel makers are set for a correction this year after a 2013 rally and as their growth slows, while smaller players are likely to face a growing cash crunch.
Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.
