Watch Out For The Solar Rally To Fade Today


Yesterday solar stocks took off, picking up big double digit gains, on the news that China was instituting a solar subsidy program. Today, those stocks could fade, as the truth about the Chinese program comes to light.

Chinese solar stocks like Trina Solar (TSL) and Yingli Green Energy (YGE) were both up over 40% yesterday. These pulled up American manufacturers too, with First Solar (FSLR) popping 12% or $16, and SunPower (SPWRA) rising 11%. Overall solar stocks rallied about 20% on average.

But the rally might be short lived. FBR Capital Research released a note this morning titled “Cap of 180MW Is Going To Ruin This One-Day Solar Party!” In the note, FBR says the the Chinese government announced a RMB20/watt ($3 per watt) subsidy for solar energy. However, there is only 2.5 billion of Chinese Renminbi allocated for the program, which implies the government will only support 180MW of installations.

That’s a small amount of installations. For instance, First Solar produces a giga-watt annually. That means this subsidy would only cover 15% of First Solar’s output. But it’s not aimed at them. It’s aimed at Chinese manufacturers, like Trina Solar who shipped 201MW in 2008 or Yingli who shipped 281MW last year. Spread amongst the various Chinese producers, this subsidy could be tiny.

Two other problems from FBR’s perspective:

2) not even the people in the government (that we contacted) know the details, implying that the details would still need to be worked out and no installation is going to take place tomorrow!;

3) there is a lack of colour and clarity on whether this ONE-TIME incentive would be extended next year. Our industry model suggests a best-case demand scenario of 6Gwatt in CY09, with China accounting for 100Mwatt (versus 70Mwatt in CY08), implying 80Mwatt upside, which, in our view, will not really matter much.

If investors wake up to this uncertainanty in the Chinese plan today, coupled with the standard profit taking, there’s a good chance the solar rally will be short lived.

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