GCL-Poly Energy, the entry point to the solar industry?

Is GCL-Poly Energy, the entry point to the solar industry?

  • Recently, the industry has experienced tariff threats.
  • Nevertheless, panel costs are decreasing and demand is growing.
  • Now might be a good opportunity to enter the industry.
  • After applying diverse filters to a market index, GCL-Poly Energy appears attractive.
  • Its high operating margin, low earning volatility, relative market discount and high ROE make it appealing.

In recent years, the solar energy industry has experienced troubles with governmental authorities. Recently, authorities have imposed tariffs on solar panels from China. During 2013, the European Union imposed anti-dumping tariffs. Also, Trump´s government announced tariffs on solar cells and modules imported from China. A few days ago, India was the latest with regulators planning a 70% tariff on solar parts made in China.   

Nevertheless, cost of new solar photovoltaics decreased 70% from 2010 to 2017. Also, the demand is expected to increase significantly in the following years lead by China. Therefore, I believe now is a good time to give a look at the sector and try to find out some solid stocks as an entry point.

I will use the members of the BI Global Large Solar Energy Valuation Peers and apply some filters. I will use qualitative data, operational efficiency, earnings stability and balance strength to clean the sample. High quality financial reports and earning stability are crucial to make educated forecasts. Balance strength is useful to avoid a thorough analysis of a company that might go bankrupt.     

First Filters: qualitative and operative profits

The first filter attempts to remove companies that do not offer opportune financial information and operative soundness. The companies removed were those:

  • With no financial information for 2017
  • Whose stock is not trading.
  • With consecutive 12-month operative losses since 4Q2016.

After the first filter the companies left were: First Solar Inc., JinkoSolar Holding Co. Ltd., GCL-Poly Energy Holdings Ltd., Canadian Solar Inc., Hanwha Q Cells Co. Ltd, and Shunfeng International Clean Energy Ltd.

 

 

Second Filter: volatility of results

For the second filter I removed the company with more variability in the 12-month net income margin and operating margin. I am using quarterly data, when available, since 4Q2013.

Standard deviation Net Income Margin Standard deviation Operating margin
First Solar 3.9% 4.4%
Jinkosolar 1.6% 2.6%
GCLPoly Energy 3.1% 5.1%
Canadian Solar 2.9% 3.2%
Hanwha Q Cells 2.4% 2.4%
Shunfeng Int. Clean Energy 46.8% 7.7%

After the second filter I removed Shunfeng International Clean Energy.

 

Third Filter: balance strength

Finally, I removed the company with the weakest financial strength as measured by the debt-to-equity ratio.

Debt-to-Equity Ratio

After the second filter I removed Canadian Solar for its increasing and highest Debt-to-equity ratio.

Target company: P/E, P/BV, ROE

select the companies that could be the entry to the solar energy sector, I selected the cheapest as measured by the P/E and P/BV against its peers and against its historical values.

 Company P/E P/E 500 days Vs Historic P/BV P/BV 500 days Vs Historic
First Solar 22.8 13.5 169% 1.4 0.9 161%
Jinkosolar 12.5 7.7 163% 0.6 0.7 83%
GCLPoly Energy 9.2 7.5 122% 0.8 0.8 96%
Hanwha Q Cells 44.8 16.8 267% 1.3 1.8 74%
Average 22.3 11.4   1.0 1.0  

 

To make a top pick, I utilized the ROE.

Company ROE
First Solar 6.2
Jinkosolar 5.2
GCL-Poly Energy 10.1
Hanwha Q Cells 3.2

 

The target company is GCL-Poly Energy. Its high operating margin, low earning volatility, relative discount and high ROE make the company worthy as an entry point to the solar energy sector. I would further recommend to model expected earnings and profitability and, if projections are optimistic, invest accordingly to each investment policy statement.

My conclusion could be wrong if:

  1. Regulation changes significantly.
  2. The company goes private.
  3. The low current ratio of GCL-Poly energy materializes into short-term operations disruptions.

 
 

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