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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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5 Energy Stocks At Biggest Risk From The Evergrande Implosion

Default fears have continued to stalk the China Evergrande Group (OTCPK:EGRNF) (OTCPK:EGRNY) despite efforts by its chairman to lift confidence in the embattled firm. The Evergrande Group, one of China's biggest real-estate developers, owes $305 billion to a number of lenders, with its interest liabilities rising by an average of $28 million daily. 

A major test for Evergrande comes this week, with the firm due to pay $83.5 million in interest to bondholders relating to its March 2022 bond on Thursday, and another $47.5 million payment due on Sept. 29 for March 2024 notes.

Analysts have mostly played down the threat of Evergrande's troubles becoming the country's "Lehman moment," with Beijing so far remaining quiet as one of the country's worst corporate snafus in modern history unfolds. The million-dollar question at this point is whether the Chinese government will intervene and bail out the giant property developer should it begin to default on its mounting debt.

According to S&P analysts, Beijing is likely to remain on the sidelines unless there's risk of "far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy." The analysts say the Chinese banking sector is capable of digesting an Evergrande default "with no significant disruption."

Deutsche Bank's Jim Reid reiterates that position saying there are no domestic signs of contagion yet, while Barclays' Ajay Rajadhyaksha says the business model of Chinese property firms is generally sound and that Evergrande is in worse shape than most, both in terms of leverage and its business model.

But those reassurances have not stopped jitters about the spillover risks of a messy collapse roiling the markets. 

Solar names have emerged as some of the worst-hit among the many sectors feeling the heat from growing contagion fears.

The Invesco Solar Portfolio ETF (NYSEARCA:TAN) fell as much as 6.5% on Monday, the most since early May, compared to a more tame 1.7% fall by the S&P 500.

One of the biggest trends that has been driving the phenomenal growth being witnessed in the renewable energy sector is falling costs. And nowhere has this been more evident than the solar sector. Indeed, solar photovoltaics (PV) has seen the sharpest cost decline of any electricity technology over the last decade, with the International Renewable Energy Agency (IRENA) finding that between 2010-2019, the cost of solar PV globally dropped by 82%.

But that bullish thesis is now in grave danger. 

According to a new report by the Solar Energy Industries Association and Wood Mackenzie, supply chain bottlenecks and rising raw materials costs have hit the U.S. solar industry, as solar prices rose Q/Q and Y/Y during Q2 across every U.S. market segment.

This marks the first time that residential, commercial, and utility solar costs have increased together since Wood Mackenzie began tracking prices in 2014. The most significant cost pressures came from rising prices for raw materials, including steel and aluminum.

Solar Energy Industries Association (SEIA) President and CEO Abigail Ross Hopper has warned that "Price increases, supply chain disruptions and a series of trade risks are threatening our ability to decarbonize the electric grid."

Nevertheless, the supply chain bottlenecks might only be mere speed bumps: The U.S. added 5.7 GW of solar capacity during Q2 for a 45% surge over 2020 levels that were held down by COVID-19.

Here are some of the biggest decliners in the solar sector.

#1. JinkoSolar

      Change: -10.2%

One of China's leading solar names, Jinko Solar (NYSE:JKS), has been feeling the full brunt of the said price inflation. In its latest quarterly results, JinkoSolar beat earnings and revenue expectations but saw its revenue decline 6.2% Y/Y to $1.23B. The lower revenues came despite a 16.4% Y/Y increase in total shipments

But even more worrying,  JinkoSolar has confirmed that some of its solar panels have been stopped at the U.S. border.

"We did have some modules stopped by the U.S. CBP and to request additional documentations," Jinko Director Haiyun Cao reportedly said on the call.

Company executives did not disclose how much product was detained by U.S. Customs and Border Protection officials, but said its profits and margins had suffered from the actions. Earlier this summer, the U.S. began to restrict imports of products that contain silicon metals sourced from China's Hoshine Silicon Industry Co., which is believed to use Muslim minority groups as forced labor.

#2.  Daqo New Energy Corp.

       Change: -9.1%

Daqo New Energy Corp. (NASDAQ:DQ), a leading Chinese polysilicon maker with a factory in Xinjiang, is one of the companies that have been hurt by the solar PV import ban.

Luckily, the company has something else going for it.

DQ shares jumped nearly 20% after its subsidiary, Xinjiang Daqo New Energy, completed its IPO process and began trading on the Shanghai Stock Exchange's Star Board.

Daqo says Xinjiang Daqo's shares closed at RMB61.11/share on the first day of trading, good for a massive 184% jump compared to the IPO price.

Although parent company Daqo was able to re-rate from the move, the gains appear to have been short-lived, cratering 25.3% from the post-IPO surge.

Nevertheless, the event is worth noting because Xinjiang Daqo is the first-ever listing in which a major subsidiary of a U.S.-listed entity has returned to the Star Board, with other solar names such as JinkoSolar and Canadian Solar (NASDAQ:CSIQ) expected to follow suit.

DQ shares have largely avoided the solar rout and are down only 1.1% in the year-to-date.

#3. Sunworks, Inc.

       Change: -8.9%

Roseville, California-based Sunworks, Inc. (NASDAQ:SUNW), formerly known as Solar3D, Inc., provides photovoltaic-based power systems for the agricultural, commercial, industrial, public works, and residential markets in California, Massachusetts, Nevada, Oregon, New Jersey, and Hawaii. 

SUNW is one of the few solar names flashing positive returns in the current year with 23.6% YTD return mainly due to expectations that the acquisition of Solcius, LLC will help the company become profitable.

The transaction will create a national solar power provider with a presence in 12 states, with the combined organization-generated net revenue of approximately $131.5 million in calendar year 2020. Sunworks expects the combined company to be profitable in the first full year after integration and after capturing strategic, operational, and cost synergies.

#4. Maxeon Solar Technologies, Ltd.

      Change: -8.9%

Maxeon Solar Technologies, Ltd. (NASDAQ:MAXN) designs, manufactures, markets, and sells solar panels and related solar system components worldwide. Maxeon Solar Technologies, a spin-off from SunPower (NASDAQ:SPWR), provides interdigitated back contact and shingled solar cells and panels under the SunPower brand to dealers, project developers, system integrators, distributors, resellers, and residential and small-scale commercial customers. Maxeon Solar Technologies is headquartered in Singapore.

Maxeon is one of the solar companies with highly differentiated products and also owns valuable IP protecting its high-efficiency solar panels. However, the current trend of rising solar installation costs does not augur well for a company whose products are considered premium quality but lacks any profits to show for it.

#5. First Solar

      Change: -8.4%

First Solar (NASDAQ:FSLR) is the largest solar manufacturer in America and the third-largest in the world. The Tempe, Arizona-based solar giant manufactures solar panels, photovoltaic power plants, and related services, including construction, maintenance, and recycling of solar products, and employs thin film semiconductor technology to achieve enhanced efficiency and sustainability in its solar modules. 

First Solar is one of the companies expected to benefit after the Biden administration was banned imports of polysilicon from Xinjiang, China, a region responsible for supplying ~45% of the world's solar-grade polysilicon, thanks to the company recently committing to building more solar panels in the United States.

Cowen analyst Jeff Osborne says the latest development is "a positive for First Solar" given the company does not use polysilicon and could lead to accelerating orders from utility-scale developers looking to avoid traceability issues in the future.

But that's just part of what makes this solar stock attractive right now.

Last month, First Solar committed to building a new 3GW per year panel factory in Ohio at a cost of $680M. The company says it seeks to "reshore" manufacturing that has moved outside the United States, bolstered by President Biden's ambitious clean energy goals. CEO Mark Widmar says the company's three Ohio plants combined would produce panels that could generate 6 GW of power annually by 2025, more than half of all solar panels the company estimates will be produced annually in the U.S.

But here's another big reason why American solar stocks like First Solar are soaring: Solar tax credits.

While the Biden administration has not named solar yet as a manufacturing priority, it supports extending tax credits for solar panel purchases or requiring federal contractors to purchase more solar panels from U.S. suppliers.

U.S. solar manufacturers are fully in support of the proposed tax credits saying they could boost domestic production of solar panels while also creating tens of thousands of new jobs.

First Solar has backed the tariffs saying they are essential to fight low-priced goods from abroad. However, industry specialists say tax credits are not enough, and hefty subsidies via tax breaks would be needed in addition to the tariffs to get the sector really going.

After a poor start to the year, FSLR shares have been on the mend, climbing 20% over the past six months and are now down a more palatable 3.3% YTD.

Alex Kimani for Oilprice.com

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