If you are holding a sluggish basket of solar stocks, you may be inclined to seek higher growth elsewhere. In the face of oversupply, even the Chinese market has slowed down. Hold on. Consolidation activity is expected to boom in the world’s most active solar market. Speaking with analysts in China and Hong Kong this morning, we found a clear consensus on more consolidation activity.
So rather than gloat over your solar portfolio, why not invest in some potential targets. “For small- to mid-tier companies, the prices are at a point at which it is pretty much unsustainable for them,” says Jamie Soo, an analyst at UOB KayHian, who expects a lot more consolidation in response to the 2011 oversupply that has not yet been addressed.
Another point the analysts agree on is that the oversupply in the global solar market is not likely to clear up before 2013.
There are several clear trends in the solar merger and acquisition activity.
New gearmakers: Chinese solar companies with older equipment, much of which was purchased from the United States, are having a hard time competing with newer manufacturers reaping production and cost efficiencies with advanced technology. Just a few years ago, aging Intel semiconductor chip technology was a good bargain for companies making solar cells. Today, solar cell makers are competing alongside the Intels with leading nanotechnology materials (notably, the thin film CIG players). With the decline in solar gear prices, the earlier players can no longer compete.
Hold outs: While the US market has experienced a number of bankruptcies, Chinese solar companies are choosing to place production on hold. In fact, only one Chinese solar company declared bankruptcy in 2011. With the oversupply not expected to lift until next year, it will be a long wait for some. Many of these companies have attractive technology and margins in a business as usual environment. Inevitably, some of these hold outs will give in and choose to sell.
Strong balance sheets: For both big and small players in the Chinese solar market, margins are under pressure. The large companies will continue to look for potential acquisitons as part of their expansion strategies but they may eschew debt and fire sales.
Meanwhile, China’s Yingli Green Energy is expanding manufacturing capacity by 50 percent in 2012 to meet demand. In addition to supplying polysilicon and cells, Yingli assembles solar modules. Those involved in assembly and installation are benefiting from the lower prices. Long term, the rapid build out of China’s power infrastruture and the demand for solar roofs from China’s burgeoning middle class will keep domestic demand strong.
The real question over the next year comes down to demand, says Soo, citing the uncertain macro picture. In such an environment, acquisitions provide a lower risk and cheaper expansion route.