New | China’s solar companies look like good bets as green energy gains momentum, analysts say
China’s solar companies are reshaping themselves for a brighter future
Solar glass manufacturer Xinyi Solar, and other leading solar energy-related companies, are garnering attention from analysts who say that they are likely beneficiaries of the massive push to embrace green energy in China and elsewhere around Asia.
These companies are reshaping their business models into what amounts to a better deal for investors, embracing a new direction that could make them worthwhile additions to an investment portfolio, according to Jefferies.
It’s an important shift for an industry that has been criticised by some analysts for cyclical earnings that tends to reward only those investors nimble enough to get in and out of the shares of solar companies at the right time.
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“The industry’s transition from a more commodity-like business to a more annuity-like business bodes well for investors,”Jefferies analysts said in a report dated October 17.
This year is set to mark a record for the roll out of solar panels in China. Things are also looking up for the long term, as China is likely to add 20GW to 25GW of photovoltaic capacity per annum through 2020, according to Jefferies.
The state-run Xinhua news agency reported earlier this month that Beijing planned to raise the national capacity target to 150GW from 100GW by the end of the 13th Five-Year Plan, which runs from 2016-2020.
Xinyi Solar, which is listed in Hong Kong, is the largest maker of solar cover glass in the world, with approximately 30 per cent global market share, according to JP Morgan Asia Pacific Equity Research.
The company set up Xinyi Energy (XYE), a subsidiary that holds solar farm projects that are at or near completion in July, and proposed the sale of a 25 per cent stake of the equity of XYE for HK$1.58 billion to a group of investors that include the controlling shareholders of Xinyi.
The JP Morgan report said the new XYE was essentially an investment vehicle in operational projects, which was a dedicated downstream operator with a more stable operating income and cash flow so as to be able to attract cheaper financing, compared to Xinyi, in the long run.
“The establishment of XYE would also put less pressure on Xinyi to raise new equity as XYE becomes the primary funding vehicle for downstream investments. We do not expect XYE to be separately listed until after the first quarter 2017,” the report said.
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The new shareholders would inject HK$1.58 billion into the new entity and this new cash would be consolidated into Xinyi. The report estimated the new cash invested into XYE would reduce the net debt-to-equity ratio from 61 per cent to 30 per cent for Xinyi. JP Morgan rated Xinyi “overweight” and set a target price of HK$4.5.
Jefferies said it might take time for the market to credit the companies for their solar farm assets.
“This should change over the next three to five years as solar power sales account for a larger portion of their earnings,,” the report said.
Jefferies named Xinyi Solar as its top pick in the Chinese solar sector. The investment advisory also reiterated their recommendation for investors to buy the shares of Hong Kong-listed GCL-Poly, and Trina Solar and Jinko Solar, both of which are listed in the US.
Jefferies estimates that solar power sales will account for 30 to 50 per cent of total earning at the three companies by 2017.
