In the past month since we recommended taking profits on our Tier One Chinese Solar trade, the sector has been hit heavily – largely driven by margin erosion and a generally less than encouraging earnings season. The key question from here is whether or not we are once again at prices which offer a buying opportunity. The answer is probably not quite yet.
The chart above shows the percentage change in three Chinese tier one solar stocks plus the solar ETF TAN in the period since our last buy recommendation on Nov 28th of last year (see the original article here). In what continued to be a very volatile period for solar our basket rallied heavily and by the time of our recommendation to take profits on Feb 10th Suntech Power (STP) was up +82.5%, Trina (TSL) +67.4% and Yingli (YGE) +54.9% (see our original take profit recommendation here).
That happened to be the high of the year for those three stocks and they have fallen significantly since. Indeed, at the time of writing, STP has fallen -27% from its February highs, whilst TSL is down -32% and YGE has declined by -37%.
So is it now time to buy once again? The very volatile price action in the market reflects a genuine and very intense debate with regard to the extent to which 2011′s very damaging supply imbalance has been eroded. Moreover, this level of volatility is likely to be with us for a while as the industry continues to undergo an intense period of creative destruction as it consolidates and transitions to a more stable environment.
So where are we in this transition process? To feel comfortable that we have a solid buy opportunity once again we need to see progress on five main factors:
- The clear emergence of visible new demand, particularly in China and the US, to replace the demand the industry is losing in Europe.
- A halt in capacity expansion plans amongst tier one solar players and clear evidence of significant capacity shedding amongst tier two and three players.
- A resultant stabilization of average selling prices (ASPs) across the supply chain.
- Further progress amongst module makers in blending in lower polysilicon costs. Clearly, the preponderance of long-term contracts in the industry has meant that actual poly costs to module manufacturers have lagged behind the significant fall in spot polysilicon prices.
- Similarly, further progress in lowering non-silicon costs in order to secure gross margin stabilization.