For Immediate Release
Chicago, IL – May 04, 2017 – Today, Zacks Equity Research discusses the Industry: Alternative Energy, Part 3, including Trina Solar Ltd. (NYSE: TSL – Free Report ), Yingli Green Energy Holding Co. Ltd. (NYSE: YGE – Free Report ) and JinkoSolar Holding Co., Ltd. (NYSE: JKS – Free Report ).
Industry: Alternative Energy, Part 3
President Trump’s plans to shift focus to the traditional energy businesses such as coal, oil and gas and his skepticism around global climate change have cast a shadow over the future of solar companies. Trump has promised to call off the landmark Paris deal and boost coal production. Not only has he called climate change a Chinese hoax, but also pledged to repeal former President Obama’s Clean Power Plan.
A comparative analysis of the alternative energy industry’s historical EV/EBITDA ratio reflects a relatively gloomy picture that might be a cause for investor concern. The industry currently has a trailing 12 month EV/EBITDA ratio of 17.38. This level seems unfavorable when compared with what the industry saw in the last 12 months. The ratio is higher than the average level of 15.53 and is near its high end of 17.50 over this period.
Moreover, the industry seems overvalued when compared with its broader industry Oil/Energy sector’s EV/EBITDA ratio of 8.07 in the same time period. This shows that the industry is overvalued when compared to its broader industry.
While the long-term potential of the space is undeniable, the industry is faced with a number of near-term challenges that will likely keep these stocks under pressure. We discuss some of these below.
The Trump Effect: The present administration doesn’t have a friendly stance toward the space. There is nothing concrete in policy terms, but ideas like closing down the EPA, discarding the Clean Power Plan, and pulling out of the Paris Agreement have been talked about in the past. We will see how the policy landscape evolves, but the focus will likely be on incentivizing the coal and natural gas industries.
Since 2014, as utilities closed a large number of aging coal-fired generators, wind and solar have been the two biggest sources of electricity in the U.S. The aforementioned policy changes will likely reverse this trend in the coming years.
China Factor: China’s solar industry is not immune to the ongoing slowdown in its economy. According to theOrganization for Economic Co-operation and Development (OECD), China's economic growth is likely to slow down to 6.5% this year and further decline to 6.3% in 2018.Gross domestic product, or GDP, of the world’s second-largest economy grew 6.7% in 2016 — the weakest in the last 26 years. Considering these numbers, it is clear that the decelerating trend is likely to continue in the near term.
The country’s economic situation has sparked apprehensions that the government could shift asset resources away from investments in renewable energy in order to fuel its stock market. One of the most prominent effects of the economic slowdown in China has been relatively weak demand for electricity.
At the end of 2015, China had set a target of installing 150 GW of solar energy by 2020. But in 2016, the figure was cut by 20% to 110 GW. Though the Asia Europe Clean Energy Advisory (AECEA) raised optimism by stating that the figure could exceed the revised target, uncertainties continue to persist.
In fact, despite being the world’s largest solar market, China is expected to see solar installations to decline to 17.5 GW in 2017, well below its expected number of more than 30 GW.
Trina Solar Ltd. (NYSE: TSL – Free Report ), the largest Chinese manufacturer, derives about two-thirds of its revenues from China. Over the last one year, its share price dropped 99.9%, while Yingli Green Energy Holding Co. Ltd. (NYSE: YGE – Free Report ) saw its shares plummet about 26.1%. Again, shares of JinkoSolar Holding Co., Ltd. (NYSE:JKS – Free Report ) tumbled 22.6% over the same period.
Fed Rate Hike: On Mar 15, the Federal Open Market Committee raised the federal funds rate by 25 basis points to 1%. Fed lifted the key interest rate for the second time in three months, citing an improving labor market and greater confidence in consumers. Future rate hike expectations scaled higher as well and two additional rate hikes are anticipated this year only. Additionally, the Fed expects key interest rate to be around 1.4% by the end of 2017.
The federal funds rate is a benchmark interest rate that determines the rate for financial institutions to lend to each other. A rise in this rate translates to higher borrowing costs for banks that pass on these raised costs to consumers in the form of higher interest rates on loans, mortgages and other financial products. Since financing is an inherent requirement of the alternate energy sector, rising interest rates are a major growth deterrent for this space.
While companies in this space have been benefiting from a low interest rate environment so far, rate hike makes this industry far less appealing. This is because the resulting increase in cost of capital will increase cost of operations for the alternate energy companies, thereby reducing their profitability.
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