Solar Stocks Could Rally As China Annnounces 'Cap And Trade' Program

  • China will launch a cap and trade program in 2017.
  • The move is positive for all renewable energy stocks, but especially those in China.
  • The sector has been beaten down and the stocks are bargains.

While most Americans were focused on what Pope Francis said in Washington, and most investors were trying to deal with the traffic snarl he created in New York, bigger investment news was being made as Chinese President Xi Jinping said the country will launch a “cap and trade” plan nationwide in 2017.

The safe way to play this is probably with General Electric (NYSE:GE), which has both wind generation and electric system expertise that will be vital for China to meet its goals.

GE stock chart

Source: GE stock price data by

The more speculative way to play is with solar stocks of companies operating in China.

While these shares are beaten down, most of the companies are profitable. Their financial problems can be cured by growth. Xi’s decision, made in response to the terrible air pollution now choking northern Chinese cities, is going to bring that growth.

Trina Solar (NYSE:TSL), for instance, is a completely integrated supplier of silicon photovoltaics. That means it makes the ingots, the wafers, and the cells used in its panels. It also builds complete projects, and reports financials in dollars.

The financials show that, following large losses in 2012, the company is now profitable. During the most recent quarter, ending in June, it had net income of nearly $41 million on revenue of $723 million. That means 5.6% of revenue is already flowing to the bottom line. Growth should bring more. The balance sheet shows the amount of debt-to-assets has fallen from its 2012 peak, and now stands at 36%.

Thus the stock is dirt cheap. It opened for trade Friday at $8.77. That’s a Price/Earnings multiple of 11.39, with a market cap of $802 million.

JinkoSolar (NYSE:JKS) is another name that has weathered the Chinese solar shakeout. Jinko has a smaller market cap, $637 million, and is based in southeastern China. The company reports in Yuan, and is bringing just 2.3% of revenue to the net income line, but it is doing that steadily.

The balance sheet, however, shows a debt-to-asset ratio of almost 50%, and the quarterly trend is not as good. That may be why its P/E ratio is just 7.4. It’s more speculative than Trina, in my view, but may offer more potential. It opened for trading at $20.42/share.

An even smaller name to consider is JA Solar (NASDAQ:JASO). JASO is smaller, and even less profitable than its two rivals, but sports a P/E of 6.55 to compensate. During its most recent quarter it squeezed out earnings of about $5.7 million on revenue of about $387 million, but its balance sheet is roughly as healthy as Trina’s, a debt-to-assets ratio of about 31%. The company supplies modules under its own JA Solar brand and also delivers to OEMs.

There are many moving parts here. The U.S. Administration wants action on climate change but has failed to get the kind of cap-and-trade regime through the U.S. Congress that China has just endorsed. A Republican President could, in 2017, walk away from the agreements being signed today. But that might prove hard with the Pope having just endorsed action against climate change so forcefully.

I would say all these companies are reasonable speculations.

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  • I do not have any business relationship with the companies mentioned in this post.
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