Since late 2005, eight Chinese solar energy stocks have been listed in the U.S., creating a bright spot in the slow IPO market: Shares of Suntech Power (STP) and Trina Solar (TSL) have more than doubled from their IPO offering prices, bringing to investors a lot of excitement.
In this article, we will outline the three major business drivers of Chinese solar companies. Investors should watch these drivers closely when following solar stocks:
1. Global demand for solar energy. This factor is typically influenced by the pricing premium that solar energy has over other conventional types of energy. For example, if oil prices go up, then solar energy will become relatively cheaper, and demand for solar energy will likely increase. Rising demand for solar power will benefit the eight U.S.-listed Chinese solar companies, who produce solar cells and/or solar panels and sell them to providers of solar power systems.
2. Subsidies and incentives introduced by governments to encourage solar power usage. Solar power is a type of clean energy that can help fight global warming. However, currently, the solar industry cannot be profitable without government subsidies. As a result, the majority of the industry's revenues are generated from Germany (~40%), Japan (~30%), and California (~8%), where solar energy receives strongest support from the governments. The industry benefits from increasing subsidies and suffer from decreasing subsidies. Therefore, to gauge the outlook for solar stocks, it's essential to monitor the trend of government subsidies in major energy consuming countries such as U.S., China, Japan, and Germany.
3. Availability and pricing of key raw materials, mainly crystalline silicon. Shortages of raw materials drive up their prices and hurt solar cell producers' profit margins. Since late 2004, silicon supply shortages have been limiting production of solar cells worldwide. Therefore, when analyzing a Chinese solar energy stock, a key point to watch is how the company handles the shortage of silicon and defends its gross margin. Currently, securing long-term supply agreements and acquring silicion providers are two popular solutions.
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Related: Research on China Solar Stocks; China Solar Stocks Comparison Table
