Have Yingli Green Energy and Trina Solar Become Toxic Solar Stocks?

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Just a few months ago, Yingli green energy (NYSE:YGE) and Trina Solar (NYSE:TSL) were two of the hottest names in the solar industry, and the hope was that the explosion in demand would bring a flood of profits to two of the world’s biggest solar panel makers. But since March, stocks have fallen and recently announced tariffs have done little to stem the bleeding.

YGE given by Y-Charts.

The question is, where are these two companies at today, and whether or not investors should run for the hills or stock up on cheap stocks?

US solar tariffs hurt
Trina Solar and Yingli Green Energy saw an opportunity last year in a booming U.S. solar market and made strenuous efforts to increase sales. The strategy worked and in the first quarter, Trina shipped 31.9% of its panels to the United States and Yingli shipped 24% of its panels here. At the time, taking advantage of one of the most attractive solar markets in the world seemed like a good decision, but the story has changed.

U.S. demand likely dried up earlier this month, when the U.S. announced tougher tariffs on solar panel imports. As it stands, Yingli is hit with a standard tariff of 26.89% while imports from Trina pay a slightly less damaging tariff of 18.56%.

In a world where basic solar panels are easy to find and pennies separate the cost structure from company to company, these rates are a big deal. A few hours from the tariffs, SolarCity (SCTY.DL)which was once a major buyer of panels from both companies, signed a supply agreement with REC Solar and last week bought its own panel maker, Silevo.

Chinese solar manufacturers were once the main suppliers of residential installations like SolarCity, but they are now excluded. Source: SolarCity.

Other U.S. buyers will likely follow suit, and much of the demand will dry up. It’s a big blow, if only because the number of customers interested in buying panels from Chinese manufacturers has just dropped dramatically, worsening the imbalance between supply and demand.

Differentiation wins
The other thing that works against Trina Solar and Yingli Green Energy is that competitors differentiate themselves through technology instead of making commodity panels. For example, Sun Power, Kyoceraand LG all differentiate themselves by higher efficiency than their competitors in China, who manufacture modules with an efficiency of around 15%.

SolarCity has differentiated itself with financing that builds solar with $0 down payment for homeowners and integrating shelving and recently solar panels into its supply chain to reduce installation times. The recent acquisition of Silevo also shows that efficiency, not just cost, matters in solar. In terms of efficiency, Trina Solar and Yingli Green Energy both lag behind. This will only get worse as new generation equipment is installed and 20% efficient panels become the norm.

Companies that find ways to differentiate themselves and reduce energy costs for customers win in solar, not just those that can manufacture a panel for less than the competition. More is needed in today’s solar industry.

A large-scale solar project built in Quinghai, China by Trina Solar. Source: Trina Solar.

A rising tide lifts Yingli and Trina
So far, I have mainly focused on the challenges facing Trina Solar and Yingli Green Energy, but there are also opportunities. Industry experts predict that by the end of 2014 there could be a shortage of high quality solar panels due to the explosive growth in demand. This is due to the rapid reduction in the cost of installing solar energy, and now that the cost of solar energy is lower than the grid in many parts of the world, the demand will grow exponentially.

If that happens, not only are Trina Solar and Yingli Green Energy potentially selling panels in the second half of the year, but prices could rise, leading even Yingli Green Energy to make a profit.

There’s also not a lot of new capacity coming online at the end of 2014 or 2015, so if demand exceeds supply this year, it will probably do the same next year. This could give both companies the financial flexibility to build new, more efficient capabilities and access a new market, addressing the challenges I highlighted above.

Insane result
Trina Solar and Yingli Green Energy both face major challenges, and while there is upside potential if all goes well, the downside risk is too great for me. There are higher quality manufacturers who are not subject to tariffs and who make consistent profits, and they will also benefit from higher demand. Investors simply don’t need to throw a Hail Mary to profit from solar power, and that’s what I think these two stocks are right now.

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