Time to shine

Sunny outlook for panel makers

The electric vehicle (EV) sector is grabbing many of the headlines at the moment but there’s another industry that’s made a spectacular comeback over the past year. Solar stocks are sizzling – so much so that there are fears that some investors could get burned.

Solar power has been a turbulent choice for investors, particularly during phases of overcapacity, but the survivors have been rewarded by steep gains over the past year.

Solar cell manufacturer Longi has seen its Shanghai-listed shares quadruple and it is currently trading at 40.5 times forward EV/Ebitda, according to S&P Global Market Intelligence. Solar storage manufacturer Sungrow has done even better, up 9.5 times over the past year and trading at 72 times EV/Ebitda. Another strong performer is polysilicon materials supplier Tianjian Zhonghuan, whose shares have doubled to 63.5 times EV/Ebitda.

These ratios are high but the sector could still be in the early stages of a bull run if the previous frenzy is anything to go by. Back in 2014, Sungrow peaked at 187 times EV/Ebitda, while Longi hit 92 times.

Jiemian.com has taken note, describing the solar stocks as transforming from “ugly ducklings to white swans”. Of course, no one wants to see a swan of the blacker variety bringing an end to the boom. That said, local fund managers are divided about whether it’s time to take profits. Last week Ningquan Assets posted an update arguing that valuations were no longer “investor-friendly”, concluding that it isn’t the right time to invest in the solar sector. But others disagree, including Chen Yu from Shennong Investments, who told Sina Finance that companies in the solar sector are one of the economy’s “breakthrough industries”. That led Chen to add maganimously: “If they aren’t allowed to form a bit of a bubble then what is?”

As is often the case, part of the share surge is a reaction to policymaking priorities. Last September, President Xi Jinping announced new targets for China to become carbon-neutral by 2060. Solar is one of the key industries charged with achieving that goal within the new 14th Five-Year Plan.

Over the previous five years, the government had set a 105GW solar capacity target. However, by the end of 2020 there was installed capacity of 240GW, which commentators have taken as a signal that installations will continue to pick up speed as industry costs reduce. They also hope that solar power could hit parity with coal in terms of cost to the consumer within the next five years, which would act as a true tipping point for the sector.

Last year 40GW of new power came online – which was up a third on 2019. Liu Yiyang, president of the national photovoltaic industry association, is forecasting an even faster rate of new additions to the grid ­­– that an average of 65GW of power will be switched on each year through to 2025 (i.e. when the 14th Five-Year Plan concludes).

Technological developments mean that solar panels are getting more energy-efficient too. Here there’s a parallel with semiconductors, where it’s all about packing more computing power onto ever-smaller chips. Semiconductor firms measure progress in terms of the transition from one node to the next (TSMC, a leading foundry, just spent $19.5 billion building a 3nm fab, an upgrade from its existing 5nm factories). But in the solar industry, technical advances are instead making the panels larger (and thus more efficient), with the industry transitioning from M2 wafers (156.75 mm) to M6 (166 mm). Longi is even starting to produce M10 wafers (182 mm).

Critics caution that solar installations will slow if companies can’t achieve acceptable rates of return, although Longi’s Zhong told investors that this shouldn’t be an issue because China’s state-owned power companies are under pressure to support the market for economic and political reasons.

Indeed, a key trend in 2021 is likely to be a further shift by the country’s coal and oil giants towards cleaner forms of energy. In the last few weeks alone coal giant Shenhua announced plans to invest Rmb4 billion ($620 million) in a National New Industry Energy Fund, while oil refiner Sinopec convened meetings to discuss “cooperation opportunities” with four solar companies: GCL, Trina, Longi and Tianjin Zhonghuan.

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