Solar stocks react well to government incentives in Japan

By: Nicholas Stone

The power of governmental legislation in driving solar stocks was again brought to the fore this week, as prices rose sharply on the back of favorable information coming from Asia.

Chinese solar companies, like Yingli, are expected to benefit from the new Japanese FITs.

Yingli Green Energy

The Japanese Industry Minister, Yukio Edano set a premium price for solar electricity on Monday, June 18, at around three times what users now pay for conventional power. It is thought that the move could give rise to over US$9.6 billion in new installations with 3.2 GW of capacity.

Following the 2011 Fukushima meltdown, the Japanese Prime Minister, Yoshihiko Noda is looking to shift the country’s dependence on nuclear power, a source that accounted for 30 percent of the country’s total power production. The news could also provide a lifeline to a solar industry that is struggling in Europe, with opportunities in Japan and other parts of Asia growing for companies.

One of the big winners from the announcement was Suntech Power Holdings Co. (STP), whose share price jumped from $1.86 at the opening and has hovered around the $2.10 mark in trading since. The more than 10 percent rise took the Chinese photovoltaic module manufacturer to its highest point in about a month.

It should also be noted that Suntech, one of the major low-cost solar companies in China, acquired Japanese company MSK Corp. in August 2006. Its exposure to the Japanese market made the share an attractive proposition for investors and will likely provide a solid growth base into the future.

The new deal is also expected to create opportunities for companies like China’s Yingli Green Energy Holdings Co. (YGE), as they look to provide equipment to their East Asian neighbor. After opening trade at $2.78, in excess of half a million shares in Yingli were traded early driving the stock up rapidly to highs of over $3.00. LDK Solar Co. (LDK) also rose to its highest levels since late May, up 1.8 percent to $2.21.

Meanwhile, the Bloomberg Global Large Solar Energy index jumped 1.8 percent early in the day, bringing its two-day gain to 8.5 percent. This represents the largest two-session intraday rise since February.

Will prices keep increasing?

The reactionary jump in prices after the Japanese government’s announcement may be expected, but will it last?

In short, the growth in business in Asia should give rise to consistent growth in the share prices in the long-term. The specifics of the announcement by the Japanese Ministry of Economy, Trade and Industry provide some clues. Utilities will pay 42 yen (53 U.S. cents) per kilowatt-hour for 20 years to solar power producers, which gives solar companies a number of years of strong support.

The figure is also almost twice the rate in Germany, which has long been the world’s top country by installed capacity. The solar tariff was among a raft of incentive rates announced that will flood into the renewable energy market in Japan. These numbers suggest that solar companies in the East Asian powerhouse will be able to enjoy a number of years of strong business and favorable government support.

With China expected to supplant Germany and Italy as the world’s leader in solar capacity growth in the coming year, and due to its geographical location, the marketplace for Chinese solar companies is strong. The success of these Chinese solar stocks also pays significant dues to an overall upswing in the Chinese share market.

All of the Chinese Indexes have risen four-week highs after the announcement, despite giving back a little after some troubling news about Italian and Spanish bonds on Tuesday.

Disclaimer: The author does not own any stocks and will not be purchasing any in the near future. Furthermore, the information contained in this report is not intended to be investment advice. Investors should be cautious about any and all stock recommendations and should consider the source of any advice on stock selection.


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