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China¡¯s New Five-Year Plan and Solar Power
Time£º3/5/2011 2:49:42 PM

China’s New Five-Year Plan and Solar Power

It is official: China is now the world’s largest consumer of energy, surpassing the US in 2009, according to the International Energy Agency. According to internal statistics, Chinese energy consumption was up another 5.9% in 2010 and while the PRC has made strides in energy efficiency, China consumed 5.3% more coal, 12.9% more crude oil and 18.2% more natural gas than in 2009.

Additionally, the twelfth five-year plan will pass its final reading in early March. The plan, which emphasizes energy efficiency and renewable power sources, set annual GDP growth at 7.0% for the next five years. While this is undoubtedly good news for solar-panel manufacturers and alternative-energy companies, the plan also outlines a tectonic shift in the structure of the Chinese economy away from export-oriented manufacturing in the face of unstable external demand, towards a service-based economy with more domestic consumption.

In terms of solar power, China is projected to surpass Germany in 2013 as the world’s largest market for solar energy. While EU tax incentives for renewable energy are set to expire this year, solar-panel makers are betting on sales in the PRC to compensate for lower projected demand on the Continent. Chinese solar firms, as low-cost producers, are also well positioned in both the international market and in the PRC. For example, China-based LDK Solar, which lists ADRs in New York (LDK), recently completed a 1.65 GW project in Hefei, capital of Anhui Province. Kaufman Bros initiated coverage on LDK with a “buy” rating and a target price of $24.00, a full 67.8% upside from where LDK’s stocks currently trades. LDK’s PE ratio is currently 14.37.

Yingli Green Energy Holding (YGE) posted a 4Q 2010 profit following a poor showing in 2009 due to write-downs and falling sales. Yingli managed to improve gross margin from 29.7% to 32.9%, which is impressive in the face of rising Chinese labor costs and skyrocketing commodity prices. The company recently announced that it expects to ship roughly 60 – 65% more capacity in 2011.

Another China-based solar giant, JA Solar Holdings (JASO), recently released bullish 4Q 2010 earnings, however, investors proceeded to dump the stock on the back of lower gross margins, which were 20.6% compared to 19.2%. The solar-cell maker is down 10.37% since February 18th and is trading with a PE or 4.86.

For comparison, Arizona-based First Solar International (FSLR) declined 8.8% last week despite boosting fourth-quarter net income by 10.0%. The company also topped analysts’ estimates for earnings per share: $1.80 vs. $1.74. Despite stellar financials, UBS downgraded to “neutral” from “buy.” First Solar is currently trading with a PE of 20.27.

There are a couple different ways for ETF investors to play the increase in solar demand, but the two largest Solar ETFs are the Guggenheim Solar ETF (TAN) and the Market Vectors Solar Energy ETF (KWT). Year-to-date, both ETFs are showing impressive gains and both hold a diverse portfolio of solar companies.

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